In this issue STOP PRESS. State pension reform. Budget focus: rescue, reform and recovery

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1 Quarterly update April 2011 In this issue Budget focus: rescue, reform and recovery Budget focus: speed read Behind the scenes Other recent developments Publications round-up Dates for your diary STOP PRESS The Government is just about to publish its Green Paper on state pension reform. We will be providing a full analysis of the Green Paper, and its implications for contractedout defined benefit pension schemes shortly. Budget focus: rescue, reform and recovery In his second Budget delivered on 23 March, George Osborne indicated that the Government had set out on the route from rescue to reform, and reform to recovery. This is undoubtedly a nice piece of alliteration but is it also an apt description of the Government s policy for pensions? After three Budgets in which pensions tax reform has featured strongly, this year s speech was refreshingly short on pensions surprises. State pension reform It must have been one of the most open secrets in political history that the Government was planning to introduce a 140 per week state pension, with rumours dating back as far as October last year. The consultation promised for 2010 failed to materialise, amid stories of vehement disagreements between HM Treasury and the Department for Work and Pensions (DWP). The Chancellor has now confirmed the Government s intentions. Little detail is available so far, but the following points seem to be clear: The Government is looking at a single flat-rate pension to be set above the level of the means-tested Guarantee Credit (a level of 140 per week is currently estimated). The new state pension would only apply to future pensioners and will continue to be contributory (rather than, for example, being based on residency within the UK). A Green Paper will be issued shortly to consult on options for reform. This rather vague wording may suggest that the Government is still not entirely committed to a single proposal. The Budget report acknowledges that one of the major obstacles to a move to a single flat-rate pension is that it would end contracting out for defined benefit pension schemes. The Government has indicated that it will investigate the potential impact on employees and schemes in both the private and public sectors. Visit for all the latest pensions news, information and events

2 pensionsbulletin Speed read Government to issue Green Paper shortly on flat-rate state pension of 140 per week State pension reform to lead to end of contracting out for defined benefit schemes Proposals expected on linking future changes in state pension age to independent review of changes in longevity Consultation on possible merger of income tax and National Insurance expected this year Finance Bill 2011 published on 31 March 2011, confirming details of changes to annual and lifetime allowances Consultation expected on tax relief on non-cash employer funding to defined benefit pension schemes Lord Hutton s recommendations for public service pensions reform accepted as the basis for consultation Discount rate for unfunded public service pensions schemes to be based on long-term expectation of GDP growth There has been much comment along the lines that the removal of defined benefit contracting out will be the final nail in the coffin for defined benefit schemes; however, as with so many of the previous nails, the warnings may be premature. For those private sector schemes that are still open, the removal of the contracted-out rebate may lead to a reduction in the future accrual of benefits to reflect the fact that the rebate is no longer coming in. The challenge will be for the Government to create a legislative environment in which schemes and employers feel able to make this change with the minimum effort and disruption. From a public sector perspective, now is probably a good time to grasp this particular nettle the reforms proposed by the Hutton Commission may provide a useful opportunity to end contracting out for the public sector. Another key area that will have to be resolved is the treatment of existing contracted-out benefits. The Budget report says that the Government will honour contributions to the current system, but it is not entirely clear what this means. If it means that benefits already acquired in occupational pension schemes through contracting out of the state pension would not be affected, this would satisfy those who have contracted-out benefits, but could lead to complaints from those who have never contracted out and who could now receive the same state pension as those who have additional pensions from contracting out. The current complex means-tested structure of state pensions is undoubtedly in need of rescue and reform. However, in order to achieve this, the Government is going to have to accept a considerable amount of criticism and complaint, both from those current pensioners who will be unable to benefit from the new system and from future pensioners who feel that they would have made different decisions in respect of contracting out or making additional National Insurance (NI) contributions if they had known that a flat-rate pension was in the offing. State pension age The Pensions Bill currently going through Parliament contains the necessary legislation to accelerate the rise in the state pension age to 66 for both men and women by The previous Government had legislated for further rises to 67 by 2036 and to 68 by In what was one of the few genuinely new pensions announcements in the Budget, the Chancellor indicated that the Government will bring forward a more automatic approach to future changes in state pension age, which could include a regular independent review of longevity changes. This recalls one of the ideas of the original Turner Commission for a permanent Pensions Advisory Commission to consider (amongst other things) developments in longevity and the implications for the state pension age. Merger of income tax and National Insurance Whilst many of the measures affecting pensions contained in the Budget are points of detail, one of the biggest ideas was the promise of a consultation on the integration of the operation of income tax and NI contributions. As with the state pension reform, achieving this could be a highly complex process involving winners and losers; however, unlike the state pension reform, it is hard to see where the political benefit from such an upheaval lies.

3 The thinking is still at an early stage and the Government is only promising a consultation this year which suggests that it is some months distant. However, it seems likely that any merger would be primarily on the collection side and would preserve some of the existing differences in treatment between tax and NI. For example, the Budget report indicates that the Government wishes to maintain the contributory principle underlying NI and also that NI would not be extended to individuals over state pension age or to forms of income such as pensions, savings and dividends. It is therefore much too early to say what the effects on pensions might be. One possible casualty could be salary sacrifice, which is generally undertaken in order to make NI savings. However, the only thing that is certain at this stage is that the route to reform of the income tax and NI system would be a very long and arduous one. Pension scheme taxation As expected, the Government s plans for reforms to the annual and lifetime allowances have been confirmed. The removal of the requirement to annuitise by age 75 and restrictions on disguised remuneration will also go ahead largely as planned. However, the Budget confirmed that the Finance Bill (published on 31 March) would contain a number of amendments to the draft legislation previously consulted on. One new announcement in the Budget relates to the tax treatment of non-cash funding of pension schemes (such as through limited liability partnerships holding employer assets). The Government has indicated that it will consult this spring on limiting the tax relief available to employers making such asset-backed contributions to ensure that the relief reflects the increase in the fair value of pension plan assets. No further details are available. Public sector pensions The Chancellor indicated that the Government accepts the recommendations of the Hutton report as a basis for consultation with public sector workers, trades unions and others and that it will set out its proposals for public sector pensions in the autumn. He also indicated that there should be no cherrypicking of the proposals. In addition, the Budget report indicates that, in future, when assessing the contribution rates for unfunded public service pensions, the Government will use a discount rate based on the long-term expectation of GDP growth. In practice, this means that a discount rate of 3% above CPI will be adopted for future valuations. This is lower than the current rate of 3.5% above RPI and will lead to higher employer contribution rates. It will not lead to an increase in member contribution rates beyond those already announced at the 2010 Spending Review. Reform, recovery or rescue? Of the Chancellor s three Rs, it is reform that features most in the pensions sphere. Whilst the Budget is light on detail on the new flat-rate state pension, it is plain that this would be one of the most significant reforms in UK pensions for many years, if fully implemented and a reform that could well lead to a recovery in the understanding and appreciation of state pensions. Behind the scenes Mike chairs Punter Southall's Taxation of Benefits technical committee. Over the last year, Mike and the committee have spent a large amount of time analysing the impact of the reduced annual and lifetime allowances, to ensure that clients are ready for the changes. This work has included the survival guide series of briefing notes and developing the Tax Projection modeller, together with our Power Hour series of seminars. Mike also represents Punter Southall on the Taxation committee of the Association of Consulting Actuaries, which has enabled us to lobby for clarification of some of the complexities in the legislation and guidance. Tel: mike.richardson@puntersouthall.com I think the most striking thing about these changes has been the sheer speed. This is the biggest shake up in pensions taxation in five years, and yet it has gone from proposal to implementation via consultation in around nine months. This speed, together with the scale of the changes, has made keeping clients informed of the latest developments very challenging, but ultimately very rewarding. Mike Richardson

4 Quarterly update April 2011 Other recent developments TPR consults on DC schemes The Pensions Regulator (TPR) has published a consultation (which closes on 22 April) on its strategy for defined contribution (DC) schemes. It recognises that its DC strategy will become even more important as the new employer duties (auto-enrolment) regime will bring many more individuals into DC pensions. The focus of the strategy is on enabling good member outcomes, in particular in the following six areas: appropriate contribution decisions, appropriate investment decisions, efficient and effective administration, protection of assets, value for money and appropriate decumulation decisions (i.e. decisions on drawing benefits). In addition, in the light of the introduction of employer duties in 2012, the DWP has issued its own consultation (closing a few days earlier) on anomalies between the rules applying to trust-based occupational DC schemes and contract-based workplace personal pensions, particularly in the context of the availability of refunds where a member withdraws with less than three months service. Default retirement age abolished With effect from 6 April 2011, employers will no longer be able to require their employees to retire on reaching a default retirement age (unless they are able to provide objective justification for such a practice). Under draft regulations laid before Parliament, where notification has been given before that date, employees who reach age 65 before 1 October 2011 may still be compulsorily retired, so long as the statutory procedures are followed. These rules do not apply directly to pension schemes, which can continue to operate normal pension ages for the purpose of calculating benefits. However, the prospect of more employees working later may lead many employers and trustees to review their policy and practices in respect of flexible and late retirement from the pension scheme. TPR admin campaign TPR has issued a number of short statements aimed at improving pension scheme administration. This includes a statement clarifying that trustees cannot rely on their statutory scheme audit to inform them of the quality and accuracy of their member data, or the controls around that data, and that trustees will need to take additional action to satisfy themselves of their data quality. Window on the world: news from our international team Last year s European Commission Pensions Green Paper contained the suggestion that an equivalent solvency regime to that applying in the insurance sphere should be applied to pensions. Any such solvency regime could be implemented through the European directive relating to pensions (the IORP directive), which is to be reviewed in December this year. In a recent speech, Michel Barnier, the European Commissioner for the Internal Market, recognised that there were differences between pensions and insurance and confirmed that he would not impose all the rules of the Solvency II insurance directive on pensions; however, his words left the way open for some of the principles of the insurance regime to be applied to pensions. A resolution of the European Parliament in February responding to the Green Paper considered that the qualitative elements of Solvency II would be a valuable starting point for enhancing the supervision of pension schemes, but did not make any direct reference to quantitative funding requirements. It also sounded a welcome note about the need for a high degree of security to be achieved at a reasonable cost to the sponsoring employer. We expect that there will be considerable debate on this issue over the next year, and we look forward to contributing to and influencing that debate. GMP equalisation Following further legal advice to the Government that confirms its view that pension schemes must equalise GMPs, consultation on draft regulations in respect of GMP equalisation is expected around Easter. The consultation is also likely to ask how the Government can assist schemes in fulfilling these obligations. Separately, the Pension Protection Fund (PPF) has consulted on the precise calculation methodology it will use in equalising GMPs when calculating the appropriate level of benefits from the PPF and the Financial Assistance Scheme. Contracted-out rebates The Government has decided to set the level of contracted out rebates for defined benefit schemes for the period at 4.8% (3.4% employer and 1.4% employee), compared to the current rate of 5.3%.

5 pensionsbulletin Publications round-up If you have missed any of our publications over the last quarter, they can be found on our website: Briefing notes: Pension scheme levies 2011/12 A summary of the various levies payable by pension schemes, including the pension protection levy, PPF administration levy, the Pensions Regulator s general levy, fraud compensation levy and FRC levy. Recovery plans: the fourth analysis An overview of the Pensions Regulator s fourth analysis of recovery plans, including comparisons of the assumptions used for technical provisions, details of recovery plans and information on how many of those recovery plans failed the trigger tests. High earners & contributors survival guide: 6: What do the annual allowance changes mean for pension schemes? An analysis of the draft information regulations with which pension schemes and employers will have to comply and of the draft scheme pays legislation under which schemes may be required to meet members tax liabilities above a certain threshold by reducing their pension benefits. Countdown to employer duties: 1: 2012 an overview The first issue in a new series of bulletins on the new employer duties, this is an overview of the employer duties regime, issued alongside a handy timetable for the staging in of employers by size. Public sector outsourcing services pensions update: Lord Hutton s final report: public sector pension reform A review of the final report of the Independent Public Service Pensions Commission, which recommended introducing a career average scheme for future accrual and a normal pension age linked to the state pension age. News alerts: EU sex discrimination ruling could increase pension scheme costs for sponsors An update on the Test-Achats judgment which found that insurance companies will have to use the same factors for men and women with effect from December 2012 and on the possible implications for occupational pension schemes. PPF confirms intention to implement levy changes from 2012/13 A news flash confirming that the PPF is planning to implement significant changes to the pension protection levy with effect from 2012/13, including a reduction in the number of insolvency risk bands and the inclusion of an allowance for investment risk. Pensions Bill published An update on the various measures contained in the Pensions Bill, including adjustments to the employer duties regime and legislation to prevent schemes having to offer pension increases that represent the better of CPI and RPI. Punter Southall Transaction Services news alert: Uniq sheds its pension scheme An analysis of the deal reached by Uniq with the Pensions Regulator and the PPF to place the Uniq pension scheme into a PPF assessment period. Where can I get further information? To discuss any of the issues covered in this edition, please get in touch with Jane Beverley on or by to jane.beverley@puntersouthall.com or your usual Punter Southall contact. This briefing note is provided for general information only and is based on our understanding of the position as at the date shown. It should not be relied upon as advice on your specific circumstances Punter Southall Group

6 pensionsbulletin Dates for your diary Key dates (April July 2011): 5 April End of transitional period for A-Day modification regulations 6 April Annual allowance reduced to 50,000 6 April Default retirement age abolished 6 April Requirement to purchase an annuity at age 75 abolished 7 April Deadline for certification of deficit reduction contributions for 2011/12 pension protection levy April? Consultation on state pension reform expected shortly after Budget 18 April Closing date for DWP consultation on regulatory differences between occupational and workplace personal pensions 22 April Closing date for tpr s consultation on enabling good member outcomes in work-based pension provision 26 April Closing date for the call for evidence by the Workplace Retirement Income Commission April Spring Spring DWP consultation on GMP equalisation expected PPF policy statement on levy policy from 2012/13 onwards Consultation on tax relief on employer asset-backed contributions 15 June Closing date for the consultation on the Fair Deal policy July Finance Bill expected to receive Royal Assent Events: Employer masterclass Getting ready for your next pension scheme valuation 20 September, London 22 September, Birmingham Auto-enrolment: In action or inaction? 12 April, Birmingham 15 April, Newcastle Auto-enrolment: Something to shout about June, Nationwide Surrey Pensions Conference 17 May, Guildford Annual allowance workshop 25 May, London London Pensions Conference 6 October, London Debt, politics & pensions A general round up of topical issues 6 July, London 8 December, London Event booking: To find out the latest dates for all our events or to find out more about our trustee training programme, please contact Sarah Tolson: Tel: events@puntersouthall.com NEWS PS Planner We are pleased to announce the launch of PS Planner, Punter Southall s web-based retirement planning assistant for members of trust-based defined contribution pension schemes. It has been designed to answer the key questions members ask in a visual and interactive way. It will be made available to all our trust-based defined contribution administration clients shortly, but if you would like to find out more in the meantime please contact Lindsay Heeley on or by lindsay.heeley@puntersouthall.com Find out more at Punter Southall is a trading name of Punter Southall Limited Registered office: 126 Jermyn Street, London SW1Y 4UJ Registered in England and Wales No A Punter Southall Group company