Pensions and Employment

Pensions and Employment Legal and regulatory developments in Pensions and Employment NO. 14 9TH NOVEMBER, 2006 Time for Action **AGE DISCRIMINATION** The final version of the Amending Regulations to the Employment Equality (Age) Regulations 2006 must be in force by 2nd December, 2006. Schemes have 3 weeks from now to ensure either that they are non-discriminatory or that their practices come within the pensions exemptions in the Regulations. Clients who have addressed the issue to date fall into 4 categories: Category 1: those for whom any further increase in cost is unacceptable: such clients will execute interim amending deeds levelling down benefits and may recycle any cost savings on a non-discriminatory basis, Category 2: those who have: (i) (ii) identified specific age discriminatory provisions (for example contributions to a money purchase section which vary by age but which do not fall within the exception for age related money purchase contributions) where the interim amending deed will implement the solution decided on in relation to these points, and include the general sweeper wording from the interim amending deed used by those clients falling with Category 1. Category 3: those clients who proceed as for the first limb of Category 2 but do not include the general levelling down provisions under the second limb of the interim amending deed referred to in relation to Category 2, and Category 4: those who have opted to wait and see, either because they perceive their risk as being low or because, even though their scheme is discriminatory, they are prepared to pay the cost of levelling up temporarily, and to equalise within the next 3 to 6 months once the final Amending Regulations are available and their impact analysed. Action point 1: Those schemes that have yet to complete an age discrimination review should do so without delay. Contact the person you normally deal with at Slaughter and May on pension matters for a checklist. Action point 2: Discuss, and decide whether to pursue, the interim amending deed route as a matter of urgency. If going down that route, ensure trustee meetings, and board meetings for the employer, are arranged on or before 30 th November, 2006 (or the necessary delegated authorities are put in place). Action point 3: For contracted-out schemes, ensure that the Scheme Actuary is available to give the required Regulation 42 certificate. Draft Amending Regulations On 11 th October, 2006, the DWP published for consultation draft Regulations 1 amending the pensions provisions in the Employment Equality (Age) Regulations 2006. In particular they are intended to clarify and add to the pension exemptions in Schedule 2. Proposed changes include: an amendment to Regulation 11 so that it will apply to employers as well as trustees, requiring employers, when carrying out their functions in relation to a pension scheme to ensure that members and prospective members are not discriminated against and not subject to harassment (but only in respect of rights accrued or benefits payable in respect of service on or after 1 st December, 2006), a change to the definition of section to ensure that it can consist of groups of members defined by reference to the date they joined a scheme or became eligible to join, including those transferred into a scheme as a result of a transfer, Comment: Unfortunately, this particular change to include an explanation of what a section of a scheme was made matters worse (since the separate section had to be closed to future service accrual except in respect of a TUPE transfer). 1 The Employment Equality (Age) (Amendment No. 2) Regulations 2006

introduction of a length of service exemption for trustees and employers. Where the member who is discriminated against has more than 5 years service, the difference must, however, be justified by the employer, clarification that the existence of an exemption within Schedule 2 does not necessarily mean that, but for the exemption, the rule, practice, action or decision is unlawful, replacement of the existing exemptions to reflect more closely scheme practices in relation to (i) the deduction of lower earnings limits and (ii) bridging pensions, introduction of a new exemption allowing different accrual rates for active or prospective members in comparable situations where the aim is that they will, on retirement, get the same fraction of pensionable pay as a pension, introduction of a new exemption to allow employers to limit their contributions to money purchase schemes by reference to a maximum level of pensionable pay, new exemptions relating to personal pension schemes are added: in particular, employers are allowed to limit contributions to personal pension schemes by reference to a maximum level of contribution, to set a minimum age for commencement of payment of contributions to personal pension schemes and to make equal employer contributions. **PENSIONS ACT 2004** Lump Sum Death Benefits: Regulator s Guidance On 12 th October, 2006, the Pensions Regulator announced that it has updated its guidance on providing lump sum death benefits. Section 255 of the Pensions Act 2004 limits the activities of schemes that have their main administration in the UK to retirement benefit activities. The definition of retirement benefit activities is such as to exclude schemes that provide death benefits only. a change to the definition of early retirement pivot age, in relation to benefits, the exemptions in paragraphs 12 and 13 are replaced in their entirety with new provisions allowing schemes to set a minimum age from which an age related benefit is paid: it is made clear that there can be different minimum ages for different groups or categories of members and that the exemption applies to both money purchase and defined benefit arrangements. A new exemption allows schemes to set a minimum age from when an age related benefit is paid in the event of retirement on the grounds of redundancy: the exemption in paragraph 15 is replaced and a new exemption (15A) added, allowing schemes to set a minimum from when an age related benefit is paid when retirement is on the grounds of ill-health and allowing employers to enhance any such age related benefit. Comment: The position on early retirement will need to be looked at very carefully in the light of the final regulations as it remains unclear whether the various exceptions will work (particularly in relation to cases where unreduced early retirement is offered in some circumstances or added years are granted in some circumstances) a new exemption allows schemes to calculate any death benefits by reference to prospective service the member could be treated as having completed if he had not died, and The guidance sets out under what circumstances (i) lump sum death benefits can be provided for members of occupational pension schemes and (ii) lump sum death benefits can be provided in the absence of the provision of pension benefits. Minor amendments have been made to the previous guidance, including making the scenarios clearer and clarifying the Regulator s role. In this regard, the Regulator accepts that, in determining whether a scheme is in breach of Section 255, there may be a legitimate range of legal opinion on particular facts. Where a potential reporter has been advised that a breach is possible, but not likely, the Regulator does not consider that the reporter would have reasonable cause to believe that a breach of Section 255 has occurred. Further, where reporters do have reasonable cause to believe a breach has occurred, they should note that not every breach is likely to be of material significance to the Regulator. The guidance is available at http://www.thepensionsregulator. gov.uk/trustees/lumpsumdeathbenefits/index.aspx Comment: As before, the Regulator s guidance is to be welcomed for taking a sensible approach to Section 255 after an initially very cautious interpretation from the DWP. PPF Administration Levies Regulations setting the administration levy for 2007/08, and making changes to the legislation governing it, were published in draft for consultation on 26 th October, 2006. 2

The administration levy, which is calculated and payable based on the number of members in a pension scheme, funds the operating costs of administrating PPF compensation. Changes include: removal of references to the PPF Ombudsman s levy. No such levy has been imposed in respect of the years 2005/06 or 2006/07 and no such levy will be collected in 2007/08, the rate of the administration levy for 2007/08 will be as follows (2006/07 rates in brackets) Number of members Rate of administration levy % increase 2 11 35 ( 24) per scheme 46% 12 99 3.70 ( 2.50) per member 48% 100 999 2.66 ( 1.80) per member 48% 1000 4999 2.07 ( 1.40) per member 48% 5000 9999 1.57 ( 1.06) per member 48% 10,000 + 1.10 ( 0.74) per member 49% Comment: A 48% proposed increase in 1 year! the Levies Regulations 2005 are amended to provide that when a pension protection levy is waived in respect of a scheme, any amount payable in respect of an administration levy for the same financial year is also waived. The provisions for the waiver of a pensions protection levy are set out in the draft PPF (Waiver of Pension Protection Levy and Miscellaneous Amendments) Regulations 2007, the consultation period for which runs until 5 th December, 2006. Regulator News On 30 th October, 2006, the Pensions Regulator announced the appointment of Martine Trouard-Riolle as permanent head of Corporate Risk Management (CRM). Ms Trouard-Riolle is an experienced insolvency lawyer and qualified insolvency practitioner who joined the Regulator in August, 2005 as senior lawyer in the CRM team. She takes over from interim head of Corporate Risk Management, Fiona Crisp, who will remain with the Regulator until January, 2007 as support to the Delivery Directorate. Newsletter No. 21 **TAX SIMPLIFICATION** This was published on 31 st October, 2006. It deals with: taxation of lump sum payments attributable to pre-6 th April, 2006 surpluses in annuity policies purchased from an occupational pension scheme, the classification of pre-a-day pensions payable by insurance companies i.e. the circumstances in which they constitute scheme pension, the definition of block transfer for purposes of maintaining transitional protection. In order for a transfer to be a block transfer, all of the sums and assets in a pension scheme relating to that member must be transferred in a single transaction. In order to qualify as a single transaction, all of the sums and assets must be transferred from the transferring scheme to only one receiving scheme. The transaction must be made under a single agreement for a single transfer between the two schemes. It is not, however, necessary that all of the sums and assets are physically passed from the transferring scheme to the receiving scheme on exactly the same day. Comment: In our view, a series of group transfers can be made under a single agreement, and each of these form a separate single transaction and therefore a block transfer. For example, it is common on a scheme merger for different groups of members to transfer on different dates. We consider that there is no requirement to document each of these transfers under a separate agreement, and are seeking confirmation of this view from HMRC, 3

provision of non-cash benefits under unapproved schemes, noting that all non-cash benefits will, from 6 th April, 2006 be taxable as employment income on the recipient, reporting of scheme wind-ups to HMRC, using form APSS300 (the event report). This form should be used even if the winding-up was completed before 6 th April, 2006. When the winding-up completed on or after 6 th April, 2006, the form should be completed by the person(s) who was the scheme administrator immediately before the winding-up and filed within 3 months of the winding-up. The newsletter gives detailed guidance on completion of the form, and notes that APSS will reject any forms which are not completed correctly, and noting that the contracting-out manuals CA14C, CA14D, CA14E and CA16A have been revised and will be put on HMRC s website shortly. Note that it is intended to replace the manuals with contracting-out guidance in the Registered Pension Schemes Manual in due course. The newsletter is available from HMRC s website (www.hmrc. gov.uk/pensionschemes/newsletter21.htm). Change of Participating Employer: Form APSS152 Form APSS152 is used to inform HMRC of changes in registered information, including changes to the scheme sponsor. HMRC has confirmed to us that sponsor for these purposes is the principal employer of a pension scheme and does not refer to participating employers in a multi-employer scheme. There is no longer any requirement to report the adherence of participating employers. Further, there is no legal obligation to submit the form APSS152 and no time limit for its submission, but it is, nevertheless, good practice to do so promptly. NICs on contributions to and payments from overseas schemes Regulations 2 coming into force on 16th November, 2006 exempt from NI: contributions to, and payments from, foreign government schemes, and benefits from overseas schemes to the extent that they relate to contributions been made before 6 th April, 2006, benefits that are subject to an unauthorised payment income tax charge, and contributions to, and pensions payable by, section 615(3) schemes. Comment: HMRC s previous amending Regulations only removed the NI liability on pensions from Section 615(3) schemes if the recipient was not UK tax resident. This omission has now been addressed, and there will be no NI liability on pensions paid from a Section 615(3) scheme, regardless of the recipient s residence. There is no specific NI exemption for lump sums paid from Section 615(3) schemes in the latest Regulations but further advice on this issue can be obtained from your usual contact at Slaughter and May. **CASES** Enhanced Redundancy Payments: Keeley v. Fosroc International Limited By its judgment dated 5th October, 2006, the Court of Appeal overturned the High Court s decision that Mr. Keeley (the appellant ) was not entitled to an enhanced redundancy payment on his dismissal for redundancy by Fosroc International Limited ( Fosroc ). The appellant s employment contract consisted of a written Statement of Employment Terms, incorporating by reference the staff handbook. He sought to rely on the following wording found in the section of the handbook entitled Employee benefits and rights under the heading Redundancy : Those employees with 2 or more years of continuous service are entitled to receive an enhanced redundancy payment from the Company, which is paid tax free to a limit of 30,000. Details will be discussed during both collective and individual consultation. The appellant asserted that his entitlement to the enhanced payment was an express term of the contract or, alternatively, was implied from custom and practice (it was undisputed by Fosroc that such redundancy payments had been calculated in the past by reference to a particular formula). The Court of Appeal held that as a matter of construction, the enhanced redundancy payment provision was apt to be an express contractual term (thus it was not necessary to consider the implied argument). Where a document is incorporated into a contract by reference, it does not follow that all the provisions in that document are apt 2 The Social Security (Contributions) (Amendment No. 5) Regulations 2006 (S.I. 2006/2829). 4

to be terms of the contract. When considering each provision, of high relevance are its importance to the overall bargain (here the employee s remuneration package); the wording of the provision (the clearer the terms of any entitlement the more likely it would be contractual); and the context in which it is found. The provision s language of entitlement and its inclusion in the Employee Benefits and Rights part of the handbook were strong pointers that it was intended to have contractual effect, as was the fact that other provisions under the Redundancy heading such as the right to paid time off to seek alternative employment were also of a contractual nature. The enhanced redundancy payment provision was also not vitiated by uncertainty as it identified the means of reference by which the payment would be calculated when the time came. As an aside, Auld LJ commented that even if the formula or the amount paid were entirely a matter for discretion, the case of Horkulak 3 shows how far the courts will go to give practical effect to the reality of the bargain struck between employer and employee... as a matter of construction of express terms or by way of implication. Comment 1: The case emphasises the importance of clarity of drafting as to which provisions of a staff handbook are intended to confer legal rights and which are not. Comment 2: The same point applies to pension scheme booklets, benefit statements and other communications to members. The inclusion of appropriate legal boilerplate helps. So does the curbing of the desire to oversimplify the message in the employee communication. **POINTS IN PRACTICE** Statutory Money Purchase Illustrations As part of the requirement to provide members with a statutory money purchase illustration ( SMPI ) introduced with effect from April, 2003, trustees are required to produce a projection once a year showing the amount of annuity that an individual pension fund might buy at retirement. The projection is based on a single set of assumptions that are set out in a document known as Technical Memorandum 1 ( TM1 ). On 17 th October, 2006, the Faculty and Institute of Actuaries released version 1.2 of TM1. Version 1.2 contains technical amendments to the existing version 1.1 and is intended to take account of the civil partnership legislation and changes to contracting out rebates and Revenue limits. The opportunity was also taken to bring the ages used for SMPI projections of protected rights in line with those used in FSA point of sale projections. Version 1.2 must be used for all illustrations with illustration dates on or after 1 st November, 2006. DTI Consultative Document on a proposal for a Directive on the exercise of voting rights by shareholders On 26 th October, 2006, the DTI published a consultation paper on a proposal by the European Commission for a Directive to establish requirements in relation to the exercise of voting rights by shareholders of companies with a registered office in a member state and whose shares are admitted to trading on a regulated market. The key proposals are: the abolition of share blocking (the process where, on a specific date prior to a company meeting (usually a number of weeks ahead), shareholders are required to notify the company of their identity and intention to vote. After this date the shares involved cannot be traded). The EC instead proposes a record date system under which, on a date prior to the meeting shareholders are validated for voting at the meeting. The date must not be earlier than 30 calendar days before the meeting and member states will not be permitted to impose excessive shareholder identification requirements, sufficient advance notice for meetings: a minimum notice period of 30 days is proposed. In the UK, the minimum notice periods are currently 21 days for AGMs and 14 days for EGMs, the removal of legal obstacles to electronic participation, and the ability to vote without attending the meeting. Responses on the proposal are requested by 19 th January, 2007. The paper is available from the DTI website (www. dti.gov.uk). Pensions White Paper P & E Update 06/09 referred to the publication, on 25 th May, 2006, of the Government s White Paper Security in Retirement: 3 Horkulak v Cantor Fitzgerald [2005] ICR 402, CA 5

towards a new pensions system. It proposed a three pronged approach to a new pension system, comprising: the introduction of a new system of personal accounts, reforming state pensions so that they are simpler and more generous, and streamlining the regulatory environment for private pension provision. In October, 2006, the DWP published a summary of the responses received. The report outlines how the Government will take forward the proposals set out in the White Paper. The Government intends to introduce a Pensions Bill in the next Parliamentary session (beginning on 15 th November, 2006) to start legislating for the reforms. The summary of responses is available from the Stationery Office (CM6960). Comment 1: Yet more legislation. Comment 2: Assume that the approach to streamlining the regulatory environment will only make it worse until the contrary is proven. Parliamentary Ombudsman s report into misselling of occupational pension schemes: Government Response Previous Updates have referred to the Parliamentary Ombudsman s report on her investigation into the actions of the DWP, HM Treasury, OPRA and NICO in relation to the security of final salary occupational pensions. The DWP refused to accept the Ombudsman s finding of maladministration, which decision was subject to criticism by the Public Administration Select Committee. On 2nd November, 2006, the Government published its response to the Select Committee s report, commenting: although the Government does not accept liability for the losses caused, it agrees that there should be a significant package of support, and has committed an additional 2 billion to the Financial Assistance Scheme (FAS), which will benefit around 40,000 people, it estimates that about 10,000 people who suffered losses could be fully or partly reinstated into the state additional pension through the process of deemed buy-back, and it believes that all defined benefit occupational pension schemes should complete the key activities of winding-up within 2 years. It has published a paper on speeding up the winding-up of occupational pension schemes. In order to help achieve the 2 year target, the Pensions Regulator will: target administrators and/or providers that hold significant portfolios of schemes that are winding-up, and where those schemes seemed to have been winding-up for the longest amount of time, where appropriate, make public information on the time schemes are taking to wind-up, when the scheme returns cycle is complete, and provide appropriate guidance and regulatory support to trustees and administrators by introducing an e- learning module on wind-up and by issuing regulatory guidance. In addition, the Government will bring forward legislation requiring schemes in wind-up to report to the Regulator after 2 rather than 3 years and giving trustees more discretion to discharge trivial pension rights through lump sum payments. The paper, Speeding up the winding up of Occupational Pension Schemes, is available from the DWP website (www. dwp.gov.uk/publications/dwp2006/pensions/speedup-winduppens.pdf). Comments are required by 14 th December, 2006. Miscellaneous Amendments to DWP Pensions Legislation On 3 rd November, 2006, the DWP published for consultation draft regulations making amendments to a number of DWP regulations, including: amending the Preservation of Benefit Regulations 1991 to allow short service benefits to be paid by means of a lump sum before normal pension age where the lump sum is one permitted by HMRC rules (for example to allow a lump sum to be paid in certain circumstances where a scheme is winding-up), and amending the Cross-border Regulations 2005 to ensure that the more stringent full funding requirement only applies to those sections of a multi-employer scheme to which employers involved in cross-border activity 6

contribute, and to allow schemes that were operating on a cross-border basis prior to 23 rd September, 2005 to apply for authorisation if they missed the 29 th March, 2006 deadline. The draft regulations, on which comments are required by 15 th December, 2006, are available from the DWP website (www. dwp.gov.uk/consultations/2006/index.asp). Client Seminars 2007 **MISCELLANEOUS** Our Client Seminars for 2007 will take place on 6th February, 26th June and 30th October. Details of the subjects to be covered at the February seminar will follow shortly. PN063100054 For more information, or if you have a query in relation to any of the above items, please contact the person with whom you normally deal at Slaughter and May or Rebecca Hardy. This update is intended to give general information only. It does not seek to give legal advice or to be an exhaustive statement of the law and readers should take specific legal advice on any particular matter which concerns them. Published to provide general information and not as legal advice Slaughter and May, 2006 One Bunhill Row, London EC1Y 8YY, United Kingdom Telephone: +44 (0)20 7600 1200 Fax: +44 (0)20 7090 5000 www.slaughterandmay.com