What to expect in pensions law in 2012

Wheels/NAPF VAT case. This case seeks to determine whether defined benefit (DB) schemes should pay VAT on their investment management services. Following the publication in August 2011 of an order made by the First-tier Tribunal (Tax Chamber) specifying several questions that have been referred to the ECJ, it is anticipated that these questions will go before the ECJ in 2012 although no hearing date has yet been announced. (See Legal update, Wheels/NAPF VAT case: details about ECJ referral.)

Bloom v Pensions Regulator. In October 2011 the Court of Appeal rejected an appeal by the administrators of the Nortel and Lehman Brothers group companies against a High Court decision that contribution notices issued by the Pensions Regulator following non-compliance with financial support directions ranked as expenses in the two administrations. It is expected that the Court of Appeal's decision will go before the Supreme Court, although it may not be heard until Michaelmas 2012 at the earliest. We understand that any appeal to the Upper Tribunal against the FSD issued against the six Lehman Group and 25 Nortel Networks group companies is stayed pending the outcome of this case. (See Legal update, Ranking of liabilities under Financial Support Directions and Contribution Notices in Nortel and Lehman administrations (Court of Appeal).)

Pitt v Holt. No dates have been fixed but the Supreme Court is expected to hear an appeal against the Court of Appeal's March 2011 decision. The Court of Appeal allowed HMRC's appeals and held that the principle in Hastings-Bass had been incorrectly applied and that previous judicial decisions had misstated the rule. The Hastings-Bass principle had previously been considered as potentially providing a remedy for trustees to avoid the full consequences of their mistakes. (See Legal update, Hastings-Bass: HMRC succeeds in Pitt and Futter appeals (Court of Appeal) and Practice note, Hastings-Bass: RIP?.)

Seldon v Clarkson Wright and Jakes. The Supreme Court is due to hear an appeal from the Court of Appeal's decision that a rule requiring partners in a firm of solicitors to retire at 65 was a proportionate means of achieving legitimate aims of workforce planning and providing associates with promotion opportunities. The Court of Appeal did not subject the retirement age of 65 for partners to much scrutiny on the basis that the default retirement age (DRA) of 65 "supported the choice of 65 as a fair and proportionate cut-off point" for employees. However, the DRA has since been abolished by the Employment Equality (Repeal of Retirement Age Provisions) Regulations 2011 (SI 2011/1069) and so the choice of cut-off point might be more closely examined by the Supreme Court. (See Legal update, Compulsory retirement at 65 can be proportionate means of achieving legitimate aim.)

BT Pension Scheme Trustees v British Telecommunications and another. In the ongoing litigation concerning the scope of the Crown guarantee of BT's pension liabilities, judgment handed down by the High Court in October 2010 led to further "stage two" first-instance issues, which were heard by the High Court in November 2011. This judgment was listed to be handed down on 16 December 2011 but a transcript has not yet been made available. Meanwhile, permission to appeal to the Court of Appeal on the "stage one" issues has been granted but is understood to be on hold pending the outcome of the latest High Court hearing. (See Legal update, High Court rules that BT Crown guarantee covers post-privatisation new joiners.)

Police Negotiating Board and others v Secretary of State for Work and Pensions. In December 2011, the High Court held that the government's decision to adjust public service pensions in line with the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI) was lawful. However, the High Court granted permission for the public-sector claimants to appeal against its decision on one ground (whether the relevant statutory provisions permit the switch to CPI). The appeal is expected to be heard by the Court of Appeal in 2012. (See Legal update, Government's adjustment of public service pensions to take account of inflation using CPI declared lawful (High Court).)

Woodcock v Cumbria Primary Care Trust. In December 2011 the Court of Appeal heard the employee's appeal against the Employment Appeal Tribunal's (EAT) decision. The court's judgment is awaited. The EAT found that the fact that the employee's notice period expired before he qualified for enhanced pension payments did not constitute unlawful age discrimination, as the treatment could be legitimately justified. (See Legal update, Age discrimination: notice of dismissal before redundancy consultation was justified to prevent "windfall" pension (EAT).)

DC contracting-out. From 6 April 2012, pension schemes will no longer be able to contract out of the state second pension (S2P) on a protected rights basis. Broadly all DC contracting-out certificates will be cancelled and scheme members will be contracted back into the state additional pension to build up rights under S2P. There will be a three-year transitional period from 6 April 2012 until 5 April 2015, during which HMRC can continue to pay contracted-out rebates arising for the 2011/12 tax year and make adjustments to individuals' National Insurance contribution records if necessary.

Abolition of protected rights restrictions. From 6 April 2012, as a consequence of ending DC contracting-out, the statutory restrictions that apply to existing protected rights will be removed and schemes will no longer need to make special provision for protected rights in their rules. Protected rights will then be treated the same way as other rights under pensions legislation.

In November 2011 consultation closed on the draft Occupational Pension Schemes (Contracting-out and Modification of Schemes) (Amendment) Regulations 2012. These regulations will introduce a statutory modification power allowing trustees to amend their rules by resolution to reflect the abolition of protected rights. For more information, see Legal update, DWP consults on easement for amending scheme rules on the abolition of protected rights.

Implementation process. From 1 October 2012, new statutory duties will come into force requiring employers to auto-enrol workers in a pension scheme and make minimum contributions. Employers will not all become subject to the new duties on the same day, as the government is staging implementation over several years. Following an announcement in November 2011 that staging dates will be delayed for small employers, a new staging timetable is anticipated in early 2012 (see Legal update, auto-enrolment delay for small businesses).

Auto-enrolment thresholds. The DWP is currently consulting on proposals to fix the level of earnings which will trigger a requirement on an employer to auto-enrol an eligible jobholder in 2012/13, along with the band of qualifying earnings on which contributions must be calculated (see Legal update, Auto-enrolment: DWP consults on updating earnings trigger and qualifying earnings band). Under the DWP's plans, the earnings trigger would be set at £8,105 and the band of earnings on which contributions must be calculated would run from £5,564 to £39,853. Consultation on the proposals runs until 26 January 2012.

Pensions Regulator role. Among several pieces of secondary legislation coming into effect on 1 October 2012, the Employers’ Duties (Registration and Compliance) Regulations 2010 (SI 2010/5) will enable the Pensions Regulator to monitor and enforce compliance with the employer duties and safeguards.

Stakeholder pension requirements removed. Given the new auto-enrolment requirements, from a date in 2012 to be confirmed the statutory duty on employers under the Welfare Reform and Pensions Act 1999 to designate a stakeholder pension scheme (and most of the related provisions) will be abolished. For further information, see Practice note, Pensions Act 2008: a guide: Removal of the stakeholder pension requirements.

Review of the IORP directive. The European Commission requested a response from EIOPA by 2 January 2012 to its call for advice in connection with the planned review of the IORP directive. EIOPA published two draft responses during 2011. Chief among EIOPA's concerns are worries that the Commission is looking to introduce Solvency II-style capital adequacy requirements for pension schemes (see Legal update, EIOPA publishes draft response on IORP directive review).

White paper on adequate, sustainable and safe pensions. A white paper is anticipated in early 2012 to follow the European Commission's green paper Towards adequate sustainable and safe European pensions systems, which reviewed the current European framework for pensions and considered the possible areas for change (including the solvency regime, portability and disclosure requirements). (See Legal update, EU pensions green paper: responses reveal little appetite for further EU-wide regulation.)

Portability tracker. In November 2011 in the pre-final draft of its Work Programme 2012, the Commission confirmed that improving portability protection was one of its "legislative initiatives" for 2012, (see Legal update, European Commission and EIOPA to press on with pensions regulation reforms). Portability proposals are also expected to be addressed in the Commission's white paper due in early 2012.

Solvency II. Currently the Solvency II Directive must be implemented by member states by 31 October 2012, but this date is expected to be put back by the proposed Omnibus II Directive. Due to a delay to Omnibus II, and concerns over the preparation of some member states and the EU insurance industry, it is increasingly likely that implementation of Solvency II will be split, with member states' transposition in January 2013 and implementation for firms in January 2014. The Solvency II regime does not apply to pensions covered by the IORP directive. For more information, see Practice note, An introduction to Solvency II.

Disclosure: DC schemes. The Commission's Work Programme 2012 released in November 2011 referred to "legislative initiatives" to address disclosure requirements for complex investments, to achieve higher levels of investor protection. These are scheduled for the third quarter of 2012 (see Legal update, European Commission and EIOPA to press on with pensions regulation reforms).

Asset-backed pension contributions. Restrictions will be introduced on the amount of tax relief available for employer asset-backed pension contributions (ABCs) (see Legal update, Asset-backed pension contributions: HMRC consults on tax changes). In November 2011 the government published draft legislative provisions to be inserted into the Finance Act 2004 (FA 2004) by the Finance Bill 2012 (see Legal update, Asset-backed pension contributions: draft Finance Bill 2012 provisions). These provisions will affect ABCs made on or after 29 November 2011 but may also affect the tax treatment of income deriving from pre-existing arrangements.

Pensions funds infrastructure investment. There may be greater investment by pensions funds in infrastructure projects following the government's decision to sign a memorandum of understanding with the NAPF, the PPF and a group representing pension plans and infrastructure fund managers to support investment in UK infrastructure, reportedly worth up to £20 billion. (See Legal update, 2011 Autumn Statement: pensions implications.)

Pensions consultation requirements. Draft regulations published for consultation by the DWP in June 2011 will modify the requirements on employers to consult with affected members before making pension changes. The regulations will introduce an additional "listed change" that will require consultation where an employer plans to amend the basis of indexation or revaluation to a basis that "would be less generous" to members (typically, from RPI-based to CPI-based increases). The regulations are expected to be finalised and laid in 2012.

No CPI underpin. On 3 January 2012, section 19 of the Pensions Act 2011 (PA 2011) came into force. This provision ensures there will be no CPI underpin where scheme rules provide for indexation or revaluation by reference to RPI.

Cash balance schemes. Also on 3 January 2012, section 21 of the PA 2011 came into force. This provision exempts cash balance schemes from statutory indexation requirements altogether.

Deadlines for levy-reducing measures. The 2012/13 levy year starts on 1 April 2012. In December 2011 the PPF published its final levy determination for the year. The overall amount the PPF plans to raise in 2012/13 from the risk-based levy and the scheme-based levy will be £550 million. Some important changes will take effect to the current contingent asset procedure, bringing in more stringent requirements. The rules governing the levy framework are intended to apply for a three-year period to promote stability in the future rates of the levy (see Legal update, Final PPF levy determination for 2012/13). In April and March 2012 there are specific deadlines that schemes must meet for levy-reducing measures to be taken into account by the PPF in the levy calculation (see Practice note, How schemes can reduce their risk-based levy).

GMP equalisation. In November 2011 the PPF began a six-month pilot study that will use its proposed "underpin" method for equalising GMPs in schemes undergoing an assessment period, as well as for equalising the compensation payable by the PPF once schemes transfer. Schemes entering or currently in an assessment period will be asked to submit a GMP questionnaire, requiring collation of extensive historical benefits data. For further information see Legal update, PPF GMP equalisation plans: pilot study.

PA 2011 changes. Schedule 4 of the PA 2011 (which came into force on 3 January 2012) amends provisions in the Pensions Act 2004 (PA 2004) that govern how the PPF operates. These changes are intended to allow the PPF greater flexibility and autonomy in the way it performs its functions. Key changes include removal of the obligation that the PPF must obtain an actuarial valuation to determine whether a scheme is in deficit on a section 143 basis and removal of the requirement that an assessment period must last for at least 12 months. For further information, see Practice note, Pensions Act 2011: overview.

Look-back period. Section 26 of the PA 2011, which came into force on 3 January 2012, has extended the "look-back" period that applies in relation to a financial support direction (FSD) so that it ends on the date the Regulator issues a warning notice. Section 26(7) of the PA 2011 contains a regulation-making power for a time limit (starting with the date the warning notice is issued) in which the Regulator must make its determination to issue an FSD or contribution notice. For further information see Practice note, Pensions Act 2011: overview: Pensions Regulator's powers.

Hybrid schemes. The Regulator is expected to develop its regulatory supervision of hybrid schemes as a result of research published in October 2011 that revealed widespread non-compliance with expected standards of administration and governance by hybrid schemes. From November 2011 additional questions have been included in scheme returns to enable the Regulator to collate further relevant information (see Legal update, Hybrid schemes: Pensions Regulator statement warns about risks).

Improving governance of DC schemes. The Regulator is expected to focus on the governance of DC schemes following its publication of Six principles for good workplace DC in December 2011. The principles focus on good administration and governance, adequate communication with members, accountability of those involved in running the schemes and prudent scheme design. For more information, see Legal update, Regulator publishes six principles for improving DC governance.

Hutton reforms. The government accepted the changes put forward by the Hutton Report and these are due to come into force from April 2012. Since March 2011, negotiations with unions and public-sector groups on the details of the reform have been ongoing and, in December 2011, heads of agreement were reached in relation to the NHS Pension Scheme, the Principal Civil Service Pension Scheme, the Teachers' Pension scheme and the Local Government Pensions Scheme. Further negotiations on the details of the schemes are expected in 2012 and work will then begin on legislation to implement the changes to the schemes. For more information, see Legal updates, Public-sector pensions: consultation begins on increase in employee contributions and Public sector pensions: Government consults on increasing employee contributions under LGPS cost-saving review.

Fair Deal. The consultation on the Fair Deal policy closed in June 2011. In December 2011 the government confirmed that Fair Deal would be continued as a result of the agreement between the government and the unions to establish new public-sector schemes on a career average basis (see above). An official statement to this effect is expected early in 2012. (See Legal updates, Fair Deal policy to stay as government reaches heads of agreement on public-sector pensions reforms and Consultation launched on the future of Fair Deal.)

Lifetime allowance. The lifetime allowance will be reduced from £1.8 million to £1.5 million from 6 April 2012. Among several consequential changes, the current limit for a trivial commutation lump sum or a winding-up lump sum of 1% of the standard lifetime allowance will be amended to a fixed £18,000 with effect from the 2012/13 tax year. For more information on the changes to the lifetime and annual allowances, see Practice note, Restricting pensions tax relief by reducing the annual and lifetime allowances.

Fixed protection deadline. The deadline for individuals to register for fixed protection from the reduced lifetime allowance is 5 April 2012. Fixed protection is available for individuals who have planned their retirement savings in the expectation that the lifetime allowance would remain at its previous level. By claiming fixed protection, an individual will continue to be entitled to a protected lifetime allowance of £1.8 million provided he makes no further pension saving among other things. For more details, see Practice note, Pensions tax: transitional protection: Fixed protection: mitigating the reduced lifetime allowance.

Overseas pension schemes. Changes will be made in two areas:

Small lump sum commutation. Consultation on proposals to extend commutation rules covering occupational pension schemes to personal pensions runs until 31 January 2012. Amendments to the Registered Pension Schemes (Authorised Payments) Regulations 2009 (SI 2009/1171) are likely to come into force on 6 April 2012. The changes will allow individuals aged 60 or over with personal pension pots of £2,000 or less to take a maximum of two authorised small lump sum payments in their lifetime. Further guidance from HMRC is also expected in 2012 (see Legal update, Small lump sum commutation to be extended to personal pensions).

ETVs. A new code of conduct on enhanced transfer value (ETV) exercises is due to be published in summer 2012, requiring employers to offer to pay for independent financial advice for staff. The Pensions Minister, Steve Webb, has said that the new code would be policed jointly by the Financial Services Authority and the Pensions Regulator. But legislation might follow if the code is not seen to provide enough protection to members. The new code is reportedly being drafted by the ABI, the Association of Independent Financial Advisers and the NAPF. See News round-up for the week to 27 October 2011: Minister announces ETV code of conduct. For more information about ETV exercises, see Practice note, Liability management exercises and inducements.

Small pots. In December 2011, the DWP launched a consultation exercise aimed at finding ways to reduce barriers to transferring small pension pots. Consultation runs until 23 March 2012. Given the expected increase in pension savers with small pots following the introduction of auto-enrolment, the DWP hopes to implement a long-term solution by 2014. This will include abolition of the existing right for an early leaver from an occupational DC scheme to take a cash refund or transfer sum if he leaves service with between three months and two years' service (see Legal update, DWP confirms end of short-service refunds and new small pension pots consultation).