Developments in Employee Benfits law and practice

25 May 2015

Weeking ending 24 May: Date set for 'Stability Budget'| Aegon UK Readiness Report| 15% set to retire in 2015 with no pension

Date set for ‘Stability Budget’

The Chancellor of the Exchequer has announced that there will be a Stability Budget on Wednesday, 8 July.

In terms of what we might expect from a second Finance Bill, their manifesto included proposals to reduce tax relief on pension contributions paid by those earning more than £150,000. The intention is to reduce the annual allowance to £10,000 once an individual's income reaches £210,000 (so they lose 50p for every additional £1 of income between £150,000 and £210,000). The saving will be used to pay for the increase in the inheritance tax allowance for married couples and civil partners to £1 million.

Aegon UK Readiness Report

The third UK Readiness Report from Aegon looks at how engaged people are in saving for retirement and how they are interacting with their Workplace Pension. This report also indicates how much of an impact the ‘Pension Revolution’ is having in it’s early stages, how people are thinking about their retirement, what people do when they reach retirement and finally how employers can help them to reach better outcomes. Some points that stand out are:

  • Just 7% of the UK population are on track for the retirement they want, meaning 97% still need to adjust their savings or expectations in order to achieve the retirement they would like and only 16% of people feel very confident about being able to retire at their selected retirement age.
  • The UK scored least favourably in the Financial Section, followed by Awareness and Behaviour, where 55% of people admitted to never having checked the performance of their retirement savings.
  • The average age people in the UK expect to retire is 63, despite the estimated state pension age for someone who is currently 30 years old being 68.
  • Over 57% of UK employees say that they are not, or do not know if they are eligible to be auto-enrolled into their company pension scheme, with 41% of employed people saying that they do not know how much their employer is contributing.
  • 62% of UK employees believe that a good company pension is influential in their decision to apply for a job, meaning that employees continue to value their pension and employers who can demonstrate the value of their pension offer can use it as a driver to recruit and retain staff.
  • 79% of employees believe that their workplace pension is their main method of saving for retirement.
EC Ageing Report

The European Commission's 2015 Ageing Report looks at the impact of ageing demographics over the next 50 years.

15% set to retire in 2015 with no pension

In its eighth annual ‘Class of’ study, tracking the future plans and aspirations of people who plan to retire this year, the insurer also found that 16 per cent of the ‘Class of 2015’ will be retiring with expected incomes below the Joseph Rowntree Foundation’s (JRF) minimum income standard for an adequate standard of living for a single pensioner of £9,500. A single pensioner exclusively relying on the full State Pension of £115.95 a week has a total annual income of just over £6,000 – well below the JRF standard.

A retired couple both qualifying for the full State Pension receiving a combined income of £231.90 a week, but with no further pension income, are getting by just above the ‘poverty line’. The most common measure of the poverty line is 60 per cent of the median household income, and based on this assumption the Department of Work and Pensions calculates the household poverty line (after housing costs) to be an income of £224 a week.

Prudential’s research also highlights the importance of the State Pension to all people planning to retire this year – even those who have other forms of pension savings. On average the State Pension will provide 36 per cent of a 2015 retiree’s income. However, despite the important role it will play in providing their future income, a significant proportion of the ‘Class of 2015’ are unsure what the State Pension is actually worth – 37 per cent think it is worth more than its current value and a further eight per cent admit to having no idea what it is worth.

Women are more than twice as likely to have to rely on the State Pension or other savings – 21 per cent of women say they have no pension savings compared with nine per cent of men. Women anticipate the State Pension will account for 41 per cent of their expected retirement incomes compared with 31 per cent for men.

Of those that do have a pension and will not be relying solely on the State Pension, 56 per cent have a final salary scheme as their main pension compared with 44 per cent who have variants of defined contribution as their main pension scheme.

Despite the large number of people retiring with no pension, 54 per cent of this year’s retirees feel financially well prepared for retirement, up from 47 per cent in 2014. However, women (50 per cent) are less likely to feel well-prepared than men (59 per cent).

Cap on pensionable paper not a breach of implied duty - Bradbury v British Broadcasting Corporation

In this case, the High Court found that the conduct of the BBC, when it imposed a 1% cap on increases to pensionable salary, did not give rise to a breach of its implied duties.

Mr Bradbury had complained that, when considering whether the BBC's conduct was in breach of its implied duties, the Pensions Ombudsman had failed to engage in an exercise of overall assessment of the question and had instead considered whether the individual factors amounted to a breach in themselves. However, the court found that the Ombudsman was entitled to conclude that the BBC did not breach its implied duties and that it was necessary to look at the individual factors to determine if the BBC's actions overall gave rise to a breach of those implied terms.

Legal opinion must post-date contingent asset agreement for purposes of PPF levy

In this determination, concerning the trustee of the Action for Children Pension Fund, the trustee failed to submit valid documentation when recertifying a contingent asset that had been put in place in a previous levy year. The PPF Ombudsman found that the confirmation that must be given (that a charge over assets in favour of the scheme is not subject to any prior or pari passu interest) must be based on a legal opinion that post-dates registration of the charge.

On the facts, the matter was remitted to the PPF with the Ombudsman's direction that the reconsideration committee vary its decision and set out the correct reasoning for not recognising the contingent asset. Click here for more details.

2015 DB funding statement

The Pensions Regulator has published its 2015 annual defined benefit (DB) funding statement, setting out its analysis of current market conditions and how sponsoring employers and trustees of DB pension schemes can agree appropriate funding plans which protect members’ benefits without undermining the sustainable growth of the employer.

The annual statement is relevant for trustees and employers of all DB pension schemes, but is primarily aimed at those undertaking valuations with effective dates in the period 22 September 2014 to 21 September 2015.

The statement acknowledges that many schemes are likely to experience larger deficits than at their last triennial valuation due to changing market conditions.

The regulator says schemes with capacity to take additional risks should be able to address higher deficits through appropriate changes to their funding strategy – such as a modest extension to their recovery plans, a modest increase in deficit repair contributions and/or changing their assumptions relating to investment returns.

Other schemes with less capacity to take risk should seek higher contributions with a view to maintaining the same recovery plan end date – where this is affordable to the sponsor without adversely impacting its plans for sustainable growth. Where constrained affordability results in lower deficit recovery contributions than trustees think the scheme needs, they should maintain a higher level of due diligence and put in place strategies for managing the risks to the scheme.

Alongside the statement, the regulator has also published:

  • Scheme funding analysis: A look forward to schemes with valuation dates between September 2014 and September 2015 (Tranche 10). 
  • Scheme funding analysis: A review of valuations and recovery plans for scheme with valuation effective dates in the period September 2012 to September 2013 (Tranche 8).

The regulator says it will be continuing its approach of selecting a number of schemes for proactive engagement ahead of their valuations being submitted. It has already contacted all the schemes with valuation dates between September 2014 and September 2015 selected for proactive engagement.

As part of its work to help trustees understand the DB funding code, the regulator is planning to publish, in the coming months, practical guidance on assessing the sponsoring employer’s ability to support the scheme (covenant), an integrated approach to managing risk, and setting an investment strategy.

PMI launches new DC governance qualification

The Pensions Management Institute has launched its latest qualification, the Certificate in DC Governance. The qualification will provide an understanding of the requirements and standards of governance relating to defined contribution workplace pension schemes.

New made simple guide: Securities Fraud and Investor Remedies

This latest guide from the NAPF, sponsored by Robbins Geller Rudman & Dowd LLP (RGRD), introduces the topic of securities fraud and investor remedies. The cost of financial misconduct can be significant to pension funds and it’s important schemes understand what securities litigation is and how claims can be pursued, so that should schemes find themselves the victims of securities fraud they are in a position to make informed decisions on behalf of their members.

Ex-wives may lose split pension

According to the Daily Telegraph, 20 May 2015, divorced savers that have agreed to share a pension pot with an estranged spouse can now keep the entirety by cashing it in under new rules.

Many couples that divorced before 2000 signed agreements (earmarking orders) to share the income benefits built up by the main breadwinner. However, new rules that allow individuals to withdraw their entire funds from the age of 55 have created a loophole. Pensions experts claim that a large number of women may be left with nothing in old age.

The new defined contribution (DC) pensions freedoms, allowing a member to cash out his entire fund, could deprive a divorced partner of benefits under an earlier earmarking order, experts have warned. Earmarking orders were available between 1996 and 2000 in divorce settlements to divert the member's pension income to a former spouse. They were succeeded by pension-sharing orders at the end of 2000. If the pension pot is withdrawn in its entirety without taking an annuity under the new freedoms this could now effectively override an earmarking order.

Desmond & Sons section 89 report confirms settlement

The Pensions Regulator has issued a report under s89 of the Pensions Act 2004 in relation to the Desmond & Sons Ltd 1975 Pension and Life Assurance Scheme. The report confirms that an agreement has been reached between the trustee of the scheme and three former shareholders, which will result in a payment being made to the scheme to assist the Financial Assistance Scheme in providing member benefits.

The regulator will accordingly not be issuing CNs to Mr or Mrs Desmond or Mr Gordon.

PPF issues insolvency practitioner guidance

The Pension Protection Fund’s (PPF) approach to all payments made to insolvency office holders is set out in guidance on insolvency practitioner remuneration. The PPF expects office holders to provide information sufficient to enable the PPF to make the informed judgement required of creditors.

Payments to office holders are of paramount importance to the PPF and its levy payers, as recoveries from the estate have a direct effect on its funding.

The office holder is expected to be capable of providing a concise and cogent explanation of how the proposed remuneration reflects the value provided to creditors, while not simply seeking to reimburse the practitioner for time expended and cost incurred.

In addition, the office holder is expected to recognise the PPF as the likely fee-approving body and to consult on the fee basis and quantum at an early stage.

Contact:

John W Wilson LLB(Hons) FPMI ACII, Head of Technical, JLT Benefit Solutions| Email: john_wilson@jltgroup.com