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Essential pensions news

Introduction

Essential pensions news covers the latest pensions developments each month in an ‘at a glance’ format.

Chancellor announces changes to taxation of inherited pension funds

Of universal interest is the unexpected announcement at the Conservative party conference on September 29, 2014, well ahead of the Autumn Statement, from George Osborne that from April 2015, individuals will have the freedom to pass on their unused defined contribution (DC) pension fund on death to any nominated beneficiary, rather than paying the 55 per cent tax charge which currently applies.

In addition, on October 14, 2014 to coincide with the publication of the Taxation of Pensions Bill, the Treasury highlighted the uncrystallised funds pension lump sum under which individuals over age 55, who are not in flexi-access drawdown, will be able to withdraw lump sums from DC pension funds. A quarter of each withdrawal will be tax-free, with the remainder taxed as normal pension income at the individual’s marginal rate.

Taxation of inherited pension fundsFrom April 6, 2015, for scheme members who die before age 75, there will be no tax charge on lump-sum death benefits paid from a drawdown pension or uncrystallised funds to a nominated beneficiary. The beneficiary will no longer need to be a dependant of the late member (that is, a spouse, civil partner, child under 23 or other financial dependant). As before though, lump sums passed on to a beneficiary will be tested against the deceased’s lifetime allowance (LTA), currently £1.25 million, with the excess being chargeable at 55 per cent. However, any pension wealth that a person inherits will not count towards his own LTA.

Updater

October 2014

Contents

01 Introduction

01 Chancellor announces changes to taxation of inherited pension funds

04 PPF confirms levy policy for 2015/16 – 2017/18 and consults on new draft determination

08 DWP publishes ‘Better workplace pensions: Putting savers’ interests first’

11 Auto-enrolment: DWP consults on 2015/16 earnings trigger and qualifying earnings band

12 Restrictions on NEST to be removed

12GriffinvPlymouthHospitalsNHSTrust [2014] – Court of Appeal allows employee’s appeal against pension loss calculation

12 Summary

14 Department of Health publishes guidance on outsourced employees rejoining NHS scheme for future service

02 Norton Rose Fulbright – October 2014


For scheme members who die on or after age 75, with either a drawdown fund or uncrystallised funds, these too may be passed on to any nominated beneficiary and the 55 per cent tax rate will no longer apply. Tax will be payable on lump sums from either crystallised or uncrystallised funds by the recipient at a rate of 45 per cent (reduced from 55 per cent) from April 6, 2015. From 2016/17, the Treasury intends to apply the recipient’s marginal-rate tax to lump sum payments in place of the 45 per cent rate, although the relevant legislation has not yet been published and will be subject to consultation before being finalised.

A summary of the changesThe current and future tax charges are summarised in the table below:

Current system Crystallised UncrystallisedBelow age 75 55 per cent tax charge if paid

as lump sum. Marginal rate if dependant draws down.

Lump sum may be passed on tax free to dependant (up to deceased’s LTA).

Age 75 or above 55 per cent tax charge if paid as lump sum. Marginal rate if dependant draws down.

55 per cent tax charge if paid as lump sum. Marginal rate if dependant draws down.

New system from 6 April 2015 Crystallised UncrystallisedBelow age 75 Pension fund may be passed on

to any beneficiary as lump sum or drawdown pension tax free.

Pension fund may be passed on to any beneficiary as lump sum or drawdown pension tax free (up to deceased’s LTA).

Age 75 or above Pension fund may be drawn down by any beneficiary at their marginal rate. 45 per cent tax charge if paid as a lump sum (or marginal rate from 2016/17).

Pension fund may be drawn down by any beneficiary at their marginal rate. 45 per cent tax charge if paid as a lump sum (or marginal rate from 2016/17).

The proposed new tax concessions do not apply to income from annuities or scheme pensions, which will continue to be taxed at the beneficiary’s marginal rate.

Lump sum death benefitsThe following lump sum death benefits will be tax free where the member dies before age 75, and taxed at 45 per cent (or marginal rate from April 2016/17) where the member dies at age 75 or above:

• pension lump sum death benefit• annuity protection lump sum death benefit• drawdown pension fund lump sum death benefit• defined benefits lump sum death benefit• uncrystallised funds lump sum death benefit.

Deaths before April 2015The changes will apply to payments made on or after April 6, 2015, rather than deaths on or after that date, so beneficiaries may wish to ask scheme administrators to delay payments until the new regime is in force. Beneficiaries of members whose death pre-dated the announcement on September29,2014 will also be able to benefit from this change. However, tax free lump sums (where the member died before age 75) must still be paid within two years of the scheme administrator being notified of the death.

Norton Rose Fulbright – October 2014 03


The changes will apply to payments made on or after April 6, 2015, rather than deaths on or after that date, so beneficiaries may wish to ask scheme administrators to delay payments until the new regime is in force. Beneficiaries of members whose death pre-dated the announcement on September 29, 2014 will also be able to benefit from this change. However, tax free lump sums (where the member died before age 75) must still be paid within two years of the scheme administrator being notified of the death.

Uncrystallised funds pension lump sum (UFPLS)A new type of lump sum, the uncrystallised funds pension lump sum (UFPLS), will be available from April 6, 2015. Individuals over age 55 (or younger, where the ill-health condition is met) will be able to withdraw a UFPLS directly from a DC scheme, without designating the funds for flexi-access drawdown. Income tax at the member’s marginal rate will be payable on 75 per cent of the withdrawal amount, with the remaining 25 per cent being tax free each time.

There is no limit to the amount that may be paid as a UFPLS, subject to the member having sufficient lifetime allowance. However, payment of an UFPLS on or after April 6, 2015 will trigger the new annual allowance of £10,000 for tax-free pension contributions.

A UFPLS is not available to certain individuals who enjoy enhanced or primary protection.

HMRC has issued new draft guidance on pensions flexibility, including the flexibility relating to death benefits.

View the draft guidance.

CommentsThe Chancellor’s announcement on inherited pension funds took the industry by surprise, as the tax changes to unused DC pension pots on death were not expected to be disclosed fully until the Autumn Statement scheduled for December 3, 2014. The announcements could have significant impact on scheme members’ choices at retirement, as there will no longer be an incentive to dissipate pension savings in an attempt to avoid the former punitive tax rates which applied to unused pension funds on the member’s death.

However, members should be encouraged to complete their ‘expression of wish’ forms to indicate to whom pension funds should be paid on death, and to ensure those nominations are kept up to date.

Where no such nomination has been made, and where there appears to be no obvious beneficiary to whom the payment could be made under discretionary trusts, scheme administrators may choose to pay the pension into the deceased’s estate as a lump sum. In these circumstances, the fund would be subject to a 45 per cent tax charge where the member was age 75 or over on death, before being paid to the estate. Where the member dies under age 75, the lump sum would be paid to the estate tax free, but in either case the member’s entire estate would be subject to inheritance tax if it exceeds the relevant tax threshold.

As regards the UFPLS facility, DC schemes will need to decide whether to allow their members to access their DC pots in this way, either through scheme amendments or by using the permissive statutory override. However, the potential complexity of some calculations, for example in relation to the pension input amounts in hybrid schemes, may deter some schemes from adopting the full range of flexibilities. In these circumstances, members would need to transfer their DC pension savings to another arrangement which offers the UFPLS form of pension fund access.



PPF confirms levy policy for 2015/16 – 2017/18 and consults on new draft determination

Of interest to all schemes providing defined benefits, is the Pension Protection Fund’s (PPF’s) publication of several draft documents for consultation, including its proposed new levy determination and contingent asset guidance. The PPF has confirmed that the levy estimate for 2015/16 will be set at £635 million, which is almost 10 per cent lower than the 2014/15 estimate. Consequently, the majority of schemes will see a reduction in their risk-based PPF levy.

The deadlines for submission of scheme information have also been confirmed and affected schemes should take the opportunity to diarise these. The new draft levy determination is expected to be finalised in December 2014.

We will be looking in detail at the new risk-based levy scoring process and other PPF issues for schemes in one of our upcoming client briefings.

BackgroundIn May 2014, the PPF published for consultation the outline of its proposed new regime for calculating the risk-based levy, following the appointment of Experian to replace Dun & Bradstreet as its insolvency risk score provider. A new ‘PPF-specific’ risk scoring system was introduced, based on a system of ‘scorecards’ to segment employers.

The consultation on the new Experian model, which was developed solely using information on employers sponsoring defined benefit (DB) schemes, noted that the total change in levy would be an overall reduction of approximately £200 million. While the majority of schemes would see a reduced levy, over 600 would see their levy rise. A separate scorecard has been developed for not-for-profit organisations.

Documentation for the new risk-based levy scoring processOn October 6, 2014, the PPF published the following documents:

• TheTrienniumPolicyStatementand2015/16PensionProtectionLevyConsultationDocument

• the draftDeterminationforthe2015/26levy and the draft appendices, which can be accessed here.

The policy statement confirms the results of the May 2014 consultation and the draft Determination sets out the proposed practical application of the new policy in calculating the risk-based and scheme-based levies.

The policy statement also sets out the levy structure for the three years 2015/16 – 2017/18 and confirms that the PPF-specific risk model outlined in the consultation will apply for those three levy years, starting from October 31, 2014:

• draft guidance is also available for each class of contingent asset

• draft updated standard form contingent asset documentation is also available, although the final versions of the forms will not be published until December 2014. Schemes wishing to enter into a contingent asset agreement before then should use the existing forms.



The new levy-scoring processThe policy statement provides detail of what the PPF-specific risk model for calculating levy scores will involve:

• Averaging of insolvency probabilities. Employer insolvency probabilities will continue to be averaged over 12 months. However, scores will be collected for use in the 2015/16 levy only from October 31, 2014, with a six month average used in the levy calculation. For future levy years, starting from 2015, the average month-end scores over the 12 months from March 31 will be used.

• Segments. Organisations will be placed in one of eight different segments based on the availability of financial information for each of these groups. The information contributes towards the production of a ‘scorecard’ to predict an organisation’s likelihood of failure. The model is based on financial information from a range of sources including Companies House, the Charity Commission, and Experian’s trade payment system.

• Scorecard arbitrage. The PPF will take steps to prevent ‘scorecard arbitrage’, by which it means organisations attempting to change their allocated scorecard by producing consolidated accounts or making corporate changes. The PPF considers that the ‘large and complex’ scorecard is most at risk of manipulation. As a result it has altered the entry conditions to exclude companies that file consolidated accounts but do not meet any of the other criteria (for example, being an ultimate parent).

• Bands and rates. The policy of allocating a levy rate to different insolvency bands will continue. Scheme employers will fall in one of ten levy bands, according to their insolvency-risk probability. The first band contains the lowest 20 per cent of risks, descending to the last two bands that contain five per cent each. Minor changes have been made to the bands and the risk probabilities since the last consultation.

• Not-for-profit (NFP) organisations. These will be assessed using a single separate scorecard. Employers on the scorecard will be scored using Experian’s insolvency risk data from both within and outside of the PPF-employer universe. This contrasts with the previous Dun & Bradstreet method which automatically allocated NFPs to the lowest risk band.

• Last-man standing schemes. The last-man standing discount will continue to apply. However, a larger discount will apply to schemes with more participating employers and where the allocation of members between those employers is more even. For levy year 2015/16, TPR will write to all schemes identifying themselves as last-man standing schemes on Exchange to ask them to confirm that they have taken legal advice that supports that conclusion. Only schemes that have supplied the appropriate confirmation by May31,2015 will benefit from the discount. The changes reflect that such schemes have more than 80 per cent of their members located in only one employer.

• Type A contingent assets. Trustees will be required to certify contingent assets with a fixed value, known as the ‘realisable recovery’, which they are confident the guarantor can pay if required. The trustee certification has been changed to reflect this.

• No transitional protection. This proposal in the consultation for transitional protection has been dropped. The majority of respondents were not in favour of it, with the PPF stating that respondents expressed the view that they no longer wished to cross-subsidise those who, it now turned out, were worse risks than previously thought.



• No credit-rating override. Similarly, this will not be taken forward as the majority of stakeholders’ responses were not in favour of its use.

Consultation issuesThe PPF is seeking views on two significant areas in the draft levy rules: asset-backed contributions (ABCs) and mortgage age. Consultation on these two issues forms part of the broader consultation on the new draft rules and runs until November13,2014.

ABCsThe PPF’s previous proposals to change the treatment of ABCs for levy purposes were criticised by several respondents, particularly regarding the proposed limiting of recognition to UK property-based ABCs. The PPF’s revised proposal is that:

• There will be no restriction on the type of underlying asset that can be used, ‘provided the ABC is valued in a way that reflects the value to the PPF in the event of insolvency’.

• The PPF expect trustees to certify the lower of

— the insolvency value of the interest in the special purpose vehicle — the fair value reported in the most recent scheme accounts.

The lower of the two values will be used in the risk-based levy calculation. Trustees will also have to confirm the fair value as at the section 179 valuation date.

• The asset will need to be valued by ‘an appropriate professional’ on an insolvency basis, meeting certain basic requirements prescribed by the PPF and ‘prepared on a basis on which the trustee and the PPF can rely’.

This will need to be supported by a legal opinion on the contractual arrangements that attach to the asset, and the trustees’ rights under those contracts. The report produced (and any advice which has fed into it) must state explicitly that the valuation ‘can be relied upon by the Board for levy calculation purposes’. The PPF considers that this will create a duty of care to the PPF.

Draft guidance on ABCs has been produced along with a sample ABC certificate.

Mortgage ageThe variable in the Experian model which received the most comments in the consultation was that based on the age of the most recently secured charge, referred to as the ‘mortgage age’ test. The PPF states that Experian’s analysis showed this to be a highly predictive variable, illustrated by the fact that companies without a charge have around a third of the failure rate of companies with a charge. New charges represent a particular risk.

Although the variable will be retained, the PPF is consulting on whether certain mortgages will be regarded as material for the purposes of the model, and what evidence should be adduced to show this. The PPF proposes to exclude from consideration certain charges that are less likely to be reflective of heightened risk, such as rent deposit deeds and charges in favour of the pension scheme. The consultation proposes a number of situations where mortgage charges should not be taken into account in the risk-based levy calculation.



The PPF proposes two methods to assess materiality:

• a test comparing the size of the charge with the resources of the business. The PPF proposes to set a threshold of 0.5 per cent of total assets as shown in the chargor’s latest filed accounts. Where there is more than one mortgage, the consultation proposes that it should be possible to certify more than one mortgage as immaterial provided that, collectively they are within the materiality threshold of 0.5 per cent of total assets. However, each charge that an employer wishes to exclude would need to be identified and considered individually; and

• a test focused on access to capital markets through an investment grade credit rating.

Employers will be able self-report and inform the PPF of relevant charges at any time between the end of December 2014 (when it is likely the new proposals will be finalised) and March 31, 2015.

Issues for schemes and information deadlinesThe PPF has improved the web facility by which schemes can track their score. This will enable them to engage with Experian to understand their score, before the scores are used from October 31, 2014. The majority of the levy management tools which were available under the ‘old’ system continue to apply. Any scheme wishing to use a contingent asset between now and December 2014 should use the existing version of the relevant contingent asset form.

The PPF recognises that the move to Experian, and the change in employer and guarantor levy rates, may negate the levy advantage for certain contingent assets, potentially leading to a reduction in the number of recertifications for 2015/16. In addition, the proposed strengthening of the Type A contingent asset wording could also give rise to reduction in recertifications (similar to the position in 2012/13, when the current wording was introduced).

The PPF is considering a possible extension to the type C contingent asset class to include surety bonds. Currently, this class is limited to letters of credit or bank guarantees. The PPF state that it possible that such a new asset class could be included within the current type C(ii) contingent asset documentation, which it could modify.

The PPF has confirmed the dates by which relevant information should be submitted:

Action DeadlineMonthly Experian Scores to be used in 2015/16 levy.

Between October 31, 2014 and March 31, 2015.

Deadline for providing updated information (to Experian) to impact on monthly Experian scores.

One calendar month prior to the score measurement date (apart from the October score for which the cut off will be October 31).

Deadline for scheme data to be updated via Exchange.

5pm on March 31, 2015.

Reference period over which funding is smoothed.

The five year period to March 31, 2015.

Deadline for trustees to submit contingent asset certificates to the PPF for certification/re-certification (including any documents required in hard copy form) for these to be reflected in the 2015/16 levy.

5pm on March 31, 2015

Certification of mortgages (to Experian). March 31, 2015.



Action DeadlineCertification of asset backed contributions. 5pm on March 31, 2015.Deadline for trustees to provide the PPF with certification of deficit-reduction contributions.

5pm on April 30, 2015.

Deadline to confirm legal advice on last-man standing status to TPR.

May 31, 2015.

Deadline for trustees to provide the PPF with certification (and any hard copy documents) relating to full block transfers.

5pm on June 30, 2015.

Invoicing being in Autumn2015.

CommentSchemes should check as soon as possible that their Experian score is what they expected, using the PPF’s new online system. Changes related to the new model, together with updated data obtained by, or provided to Experian, may have resulted in changes in scores for some employers. The changes have been included in information available on the portal when it re-launched on October 7, 2014.

The PPF has confirmed that over 75 per cent of schemes have accessed their score information so far. In addition, scores may change as schemes and employers provide new data. Schemes and employers can elect to receive updates automatically from Experian when their score changes. Where there is an area of concern, addressing this earlier in the process is a much easier option than contesting a levy invoice once it has been issued.

The overall impact of the changes appears to have been positive, and is reflected in a reduced levy estimate. However, although some schemes will benefit from this new structure, those who will see an increase in their levy bill could be significantly worse off with some 600 schemes seeing an increase of over £50,000. In that event, it is essential that those schemes access their scheme data as soon as possible and take advice on whether action could be taken to improve their score.

As always, schemes wishing to certify, or re-certify, contingent assets should start the ball rolling as soon as possible, so as to avoid a last minute rush to meet the relevant deadlines.

DWP publishes Better workplace pensions: Putting savers’ interests first

In our April 2014 update, we reported on the DWP’s publication of Better workplace pensions:Furthermeasuresforsavers. This command paper set out the Government’s proposed scheme governance measures which were intended both to complement the Budget 2014 provisions in respect of DC pension reforms and to bolster the implementation of auto-enrolment. The paper included consultation questions which sought views on the governance standards in personal and occupational DC schemes, the charging structures in schemes used for auto-enrolment and the independence requirements for master trusts.

On October 17, 2014, the DWP published its follow-up command paper Better workplace pensions:Puttingsavers’interestsfirst. This publication provides a response to the March 2014 consultation and launches a new consultation on the draft Occupational Pension Schemes (Charges and Governance) Regulations 2015.

The current consultation ends on November14,2014.



The essential elements of this paper are:

• The Government’s response to the March 2014 consultation on minimum governance standards. Comments are sought on the draft Occupational Pension Schemes (Charges and Governance) Regulations 2015, which will introduce the relevant requirements for occupational schemes, and which are included at Annex C. The Financial Conduct Authority (FCA) will place requirements on providers of contract-based schemes to establish Independent Governance Committees (IGCs) to oversee the governance standards in those arrangements.

• The Government’s response to the March consultation questions on the transparency of costs and charges. From April 2015, trustees and IGCs will be required to report on costs and charges to TPR or the FCA, as appropriate. Details will be published by each of these governing bodies in due course and TPR will update its DC governance Code of Practice accordingly.

• The Government’s proposed approach to DC scheme charges in both trust-based and contract-based arrangements. This is considered in more detail below.

• The proposals in relation to how TPR will oversee occupational DC schemes, with the annual scheme return incorporating additional questions to identify the chair of trustees, gather information on governance standards and confirm compliance with the charging measures. The FCA will produce its own proposals for consultation in relation to contract-based schemes.

• An implementation timetable for the new regime.

Minimum governance standardsNew quality standards will apply across all DC schemes and also in relation to the DC elements of non-DC schemes. IGCs, introduced under new FCA rules from April 2015, will oversee contract-based schemes. Trustees of occupational schemes will be required to design default arrangements in members’ interests and to keep them under regular review. Trustees will also be required to assess the value of costs and charges and their chairperson will be responsible for signing off an annual statement on how the governance standards and charge compliance measures have been met.

Occupational schemes will be prevented from requiring trustees to use particular service providers and this requirement will override any conflicting provisions of the scheme.

There will be additional requirements to strengthen the independent oversight of master trusts, which must have a minimum of three trustees, the majority of whom, including the chair, must be independent of any company providing advisory, administrative, investment or any other services to the trust. These independent trustees (or directors) are to be subject to limited term appointments of up to five years with a ten year cumulative maximum. The process for trustee (or director) recruitment must be open and transparent, and trustee boards must encourage members to make known their views on scheme matters.

Costs and charges – AMDs and the charge cap on default fundsWith auto-enrolment now in place for all but the smallest employers, the Government is keen to ensure that members who are enrolled in membership of a pension scheme are protected from high and unfair charges in default funds.



The Government intends that any employee member who contributes to a qualifying scheme (that is, a scheme which qualifies for use as an auto-enrolment scheme) after April 2016 must not be charged more when they cease contributing than they were as a contributing member. This practice, which until these proposed changes, has meant that deferred members often experience higher management charges than active member investors in the same fund, is known as the active member discount (AMD). From April 2015 to April 2016, any AMD structures remaining in qualifying schemes must not charge members who cease contributing more than the default arrangement charge cap of 0.75 per cent.

However, the ban on AMDs will not prevent employers subsidising or paying the member-borne deductions of active members. The practice of employers paying charges on behalf of employees will not be banned, as long as the total charge level imposed is the same for contributing members and non-contributing members.

The intention is that a charge cap of 0.75 per cent (excluding transaction costs) for default funds will apply from the relevantdate, which is the later of April 2015 and the date from which the scheme begins to be used as a qualifying scheme. The charge cap will continue to apply for as long as the member’s funds remain invested in the default arrangement, including where the individual becomes a deferred member and stops contributing.

Where a scheme is not being used as a qualifying scheme, it will not be subject to the charge cap.

Does the charge cap have retrospective effect?As noted above, the 0.75 per cent cap on default fund charges will apply from the relevant date (April 2015 or the date from which the scheme is used for auto-enrolment purposes, whichever is later). However, it is possible that the charge cap could apply going forward to a default arrangement that is already in existence at the relevant date. This is because the term ‘default arrangement’ covers:

• Any arrangement into which workers’ contributions are directed without them making an active choice.

• An arrangement into which 80 per cent of the employer’s workers are actively contributing on the relevant date. A one-off assessment is carried out at the relevant date, and there is no ongoing requirement to monitor the proportion of active members, although the proportion is likely to change over time.

• An arrangement into which 80 per cent of the employer’s workers who first made contributions after the relevant date are contributing. This will require trustees to monitor on an ongoing basis the proportions of members invested into the employer’s various funds to see whether any arrangement meets the default fund definition at any point.

The intention is that members of the same scheme in the same organisation enrolled in the same arrangement should also pay the same charges. Where members’ contributions have been redirected to a new fund without them making any active choice, this fund will be considered a default arrangement. However, where a member made a recent active choice to remain invested in a particular fund, despite an alternative cap-compliant fund being on offer, the fund in which they have chosen to remain invested is not classified as a default arrangement. If at any time in the three month period ending with the relevant date a charge cap-compliant default is offered to all the members who are actively contributing to such an arrangement, where a worker agrees in writing to remain in that arrangement (i.e. in the fund with higher charges than the cap) then it would not be subject to the cap.



The consultation paper provides detailed examples which clarify how these provisions apply in practice.

The proposed changes set out in the command paper will be the subject of one of our future briefings once the consultation is complete and the detail of the changes is finalised.

CommentFollowing the spotlight on DC provision arising after the surprise focus in the Budget 2014, and the recent further announcement relating to inherited DC pension funds at the Conservative party conference, there is now clear momentum to improving the way these schemes are run, with the second command paper focusing chiefly on governance and administration rather than risk issues.

With DC pension benefits firmly positioned centre-stage since auto-enrolment commenced, the Government’s view is that member confidence in the way their schemes are managed is essential. Requirements for transparency and standardised mandatory disclosure should enable trustees, members and regulators to make easier comparisons between schemes, and this is to be welcomed.

The way that default funds have been defined in the draft regulations will require schemes to assess their current default offering to ensure it is compliant with the charge cap from the scheme’s relevant date. Where the current default fund is not charge cap compliant, action will be needed to notify members where it is necessary to put in place a different fund as a default arrangement.

In what feels like a recent whirlwind of change for DC pension provision, it is also good news that the new requirements are to be implemented in phases. The first wave of changes should be in place by 2015, followed by more in 2016. The level of the charging cap is then to be reviewed in 2017.

These intended changes, together with the governance controls proposed in IORP II, should be watched closely by all involved in DC pension provision.

View the Command Paper.

Auto-enrolment: DWP consults on 2015/16 earnings trigger and qualifying earnings band

The Department for Work and Pensions (DWP) is consulting on the earnings thresholds for auto-enrolment for the 2015/16 tax year. Views are sought on the factors it should take into account when revising the earnings trigger and qualifying earnings band.

Regarding the earnings trigger, a key question is whether it is inappropriate to continue the alignment of the trigger level with the income tax threshold, considering that the tax threshold is due to rise more quickly than had been anticipated although earnings growth has been lower than expected. The alignment might exclude people who would otherwise benefit from pension saving. The DWP is considering four options, examined in the consultation paper:

• freezing the earnings trigger at its current level of £10,000



• raising the trigger by indexation (CPI or growth in earnings), up to about £10,183

• increasing the trigger to £10,500 in line with the income tax threshold

• using the Pension Commission’s benchmark replacement rate to set the trigger, at about £9,876.

As to the qualifying earnings band, the DWP proposes to follow broadly the same approach as in previous years, where the lower and upper ends of the band are set in line with the National Insurance lower and upper earning limits respectively. Views are sought on whether such alignment has caused issues in practice and whether other factors should be taken into account.

The consultation runs until November25,2014. The DWP will issue its response in December around the time of the Autumn Statement and the final thresholds are expected to come into effect on April 6, 2015.

View the consultation paper.

Restrictions on NEST to be removed

The DWP has announced that the Government will legislate to remove the annual contribution limit and transfer restrictions on the National Employment Savings Trust (NEST). This follows a recent confirmation that the European Commission will not oppose the move.

Draft legislation has been published for consultation and comments are sought by October29,2014. The intention is to remove both the annual contribution limit of £4,600 and the restriction on bulk transfers in and out of NEST with effect from April 1, 2017. The Government will retain the option to remove the individual transfer restrictions earlier, from October 1, 2015.

These changes are intended to put NEST on a more equal footing with other master trust providers in the same market, and also to enable NEST to be used as a transfer vehicle under the new pensions flexibility changes.

View the consultation paper and draft legislation.

Griffin v Plymouth Hospitals NHS Trust [2014] – Court of Appeal allows employee’s appeal against pension loss calculation

Of interest to all employers where pension loss may be calculated as part of an employee’s unfair dismissal compensation are the recent comments from the Court of Appeal (CA).

In this case, the CA overruled both the Employment Tribunal and Employment Appeal Tribunal on the issue of calculating pension loss after constructive unfair dismissal. However, the CA also commented that the guidelines for calculating the amount of pension loss which should be awarded as compensation were in urgent need of review.



Summary

Ms Griffin worked at Derriford Hospital, Plymouth and brought a successful claim in the Employment Tribunal (ET) against the NHS Trust for constructive unfair dismissal and disability discrimination, following a period of illness. The ET assessed her future loss of earnings on the basis of her finding an alternative job within a year of the hearing. Her pension loss was calculated using the ‘simplified approach’, which calculates pension loss on the basis that, effectively, the employee will be able to enter another open final salary scheme.

Ms Griffin appealed the ET’s decision on remedy, both for loss of earnings and for pension loss. She conceded that she would be able to enter another pension scheme in time, but not that it would be a final salary scheme. The Employment Appeal Tribunal (EAT) remitted the decision back to the ET to review the level of compensation. The ET did increase Ms Griffin’s loss of earnings award but maintained the pension loss calculation, worked out on the simplified basis, was correct. Ms Griffin’s second appeal to the EAT failed, and she appealed to the Court of Appeal (CA).

The CA dismissed her appeal on future loss of earnings issues. However, the CA overruled both the ET and the EAT on the issue of the pension loss calculation. The CA held that the simplified approach did not provide adequate compensation for the loss of enhanced rights in the NHS final salary scheme, and instead applied the ‘substantial loss’ approach. According to the 2003 Compensation for Pension Loss Guidelines, which provide recommendations on pension loss calculations, the substantial loss approach may be used:

‘… in cases where the person dismissed has been in the respondent’s employment for a considerable time, where the employment was of a stable nature and unlikely to be affected by the economic cycle and where the person dismissed has reached an age where he is less likely to be looking for new pastures.’

Although Ms Griffin was relatively young, her job (as a bone densitometrist) was highly specialised, and (the CA held) she would have been unlikely to have left her job but for the discrimination, and all the factors pointed to a career-long pension loss. The CA invited the parties to reach a compromise on the pension loss figure, although Lord Underhill, who gave the leading judgment, commented that the 2003 guidelines were in urgent need of review, as ‘the extent to which [their] recommendations on particular points remain valid will increasingly need to be carefully considered.’

CommentFrom a pensions point of view, this case is interesting principally for the CA’s comments on the 2003 pensions loss guidance. The substantial loss approach to pension compensation was taken in this case as the CA considered, for various reasons, that the claimant would probably have stayed in her job until retirement. However, it is likely that the compensation guidance could be open to future attack from one of the parties on the basis that it is out of date, depending on whether the ET concerned chooses the simple or substantive loss approach to the calculation.

Since 2003, many final salary schemes have switched to the career average basis, and many others have closed to new membership or to future accrual altogether, with employers offering defined contribution benefits going forward. The substantial loss approach is therefore already uncommon and may become more rare as final salary membership



diminishes. With this in mind, respondent employers could well argue that those parts of the guidance supporting substantial loss should be ignored, as this approach assumes final salary benefits will feature in a claimant’s future remuneration package.

Department of Health publishes guidance on outsourced employees rejoining NHS scheme for future service

Of interest to employers who have been party to relevant outsourcing exercises under the old Fair Deal guidance, is the Department of Health’s recently issued guidance on how affected employees can return to the NHS scheme in respect of future service.

In order to start the process to transfer employees back to the NHS scheme for future service, employers must make an application to the Department of Health (DoH) for a Pensions Direction to allow the contractor to participate in the NHS scheme in relation to the transferred staff. Such applications will be considered on a contract-by-contract basis and, in general, participation will not be backdated. Rejoining the NHS scheme will be available only to previously transferred staff, who must also be employed by the contractor at the proposed date of the transfer back. In addition, if the exercise results in a cost saving to the contractor, for example by reduced employer contribution rates, the DoH expects this also to be passed back to the relevant contracting health authority.

The guidance provides that staff should be given the opportunity to request a bulk transfer of their accrued rights from the contractor’s scheme to obtain day-for-day service credits in the NHS scheme, including NHS credits transferred as part of the original outsourcing. However, where eligible employees elect not to transfer their accrued rights, the contracting authority is expected to check whether there are potential section 75 consequences for its own scheme if a rejoining exercise would result in the contractor ceasing to employ any active members, or where a section 75 debt could arise on winding-up.

Employers considering making use of the transfer-back facility should consider the effect on employees, as the terms of the NHS scheme may have changed since the employees’ previous period of membership (for example, there may have been an increase in member contributions). This will be especially relevant if the transfer takes place after April 2015, when major changes to the NHS scheme are scheduled. It is also likely that amendments will be required to the original NHS commissioning contract and the outsourcing contract to reflect the transfer of pension provision back the NHS scheme.

View the DoH guidance.

IORP II – revised text published

Recent changes to the draft IOPR Directive will be of interest to all cross-border employers. On September 17, 2014, a revised version of the proposed IORP II Directive was published by the Italian Presidency of the Council of Ministers following ongoing negotiations over its contents. The so-called compromise text makes detailed and extensive technical changes to the provisions in the original draft in relation to cross-border requirements, dealing with governance standards and disclosure of information.



Most notably, the compromise text removes the current requirement in the IORP Directive that pension schemes operating cross-border must be fully funded ‘at all times’, though such a scheme must still be fully funded at the start of its cross-border operations. If an IORP ceases to be fully funded, it must prepare a recovery plan and submit this to the relevant supervisory authority.

The highly prescriptive measures in the original draft proposal regarding the planned pension benefit statement that IORPs will have to provide to members have been modified to an extent. In particular, the requirement that the statement should be no longer than two sides of A4 paper when printed has been replaced by an obligation that it must be ‘written in a concise way’.

A minor change has been made to the proposed rule that individuals running an IORP must satisfy a ‘fit and proper person’ test, though its effect is unclear and it does not help clarify the impact of this provision on the position of lay trustees in the UK. Neither is it clear whether the knowledge and experience requirements apply to each individual trustee or to the trustee body as a whole.

The European Commission’s original plan to ensure the recast IORP II is transposed into member states’ national law by December 31, 2016 seems to have been abandoned, with no substitute timetable yet proposed.

CommentThe removal of the requirement for cross-border schemes to be fully funded ‘at all times’ is significant and may encourage greater pension provision under cross-border schemes in future. However, it is unfortunate that the minor changes to the ‘fit and proper person’ test for trustees still appear to make the requirements incompatible with having member-nominated trustees (or directors).

As for the amended disclosure obligations, current provision under the relevant UK regulations would need to be compared to the finalised IORP requirements to confirm whether changes to the relevant legislation would be required in future.

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