SPC UPDATE MAY, 2004 

SPC has been very supportive of the work to simplify the tax treatment of pensions. We are therefore studying the relevant parts of the Finance Bill, to identify where there appears to be inconsistency between what was proposed in consultation and the Bill itself. Unfortunately, this is proving to be heavy going, because the Bill is difficult to understand at many points. However, there are already a number of key points, at which it seems apparent that simplification seems to be at serious risk from the Bill as it currently stands. These are as follows :-

Buying out of scheme pensions

Taken together, clause 155 (pension rule 3), clause 157 (pension death benefit rule 2) and schedule 28, paragraphs 2(1) and 16(1) seem to indicate that benefits under a defined benefit scheme with less than 50 members, including pensioners and beneficiaries, must be bought out with an insurance company. We see no reason why such a requirement should be incorporated into the requirements for tax approval.

Trivial commutation lump sum

Changes to the original proposals on trivial commutation, in schedule 29, paragraph 7, mean that a much greater number of small pensions will be left uncommuted than under Inland Revenue's earlier proposals. This arises because it is now a requirement to consider the value of funds across all arrangements and schemes rather than just the schemes with small pensions. It is generally accepted that administering small pension amounts is one of the greatest cost inefficiencies in the current system and we would therefore strongly urge that the Bill be amended to reflect Inland Revenue's earlier proposals. We also believe that the adjustment to the value of crystallised rights, in paragraph 8 of the same schedule, is a further inappropriate complication of the original proposals.

Money purchase pensions at retirement

The requirement to apply a 20:1 conversion factor at retirement in money purchase schemes, where a scheme pension is paid, will cause major complication if, as will very often be the case, that is not the factor which is actually applied when pensions are being bought. The issue is further complicated by the fact that, where the member chooses a lifetime annuity, the purchase price is regarded as the amount crystallised. Some of the feedback which we have received on this point suggests that, if it is not addressed, it would be very doubtful whether the net outcome of the current exercise will be simplification at all.

Primary protection

This concern relates to schedule 34, paragraph 8(5) (which cross-refers to clause 201(6) among others). The valuation methodology set out in the December 2003 consultation paper has been changed. Instead of an accrued rights approach, it appears that the valuation will proceed as if at A-day the member has an actual right to the benefits (making the assumption that the member is 50 if he or she is in fact younger). This therefore appears to introduce early retirement factors and thus significantly reduce the amount which can be carried forward on the 20:1 test. Additionally, if the member does not have a right to take the benefit at A-Day, as would be quite common, for example in relation to deferred pensioners, one interpretation is that it appears that no value can be carried forward into the new regime. If this interpretation is correct, the whole purpose of transitional protection is undermined. We would welcome your clarification. There are related difficulties with the wording of the Bill on the annual allowance testing for defined benefit arrangements. This applies to both clause 223 and 224. In clause 224 the application of early retirement factors may result in deferred members having a pension input value even where the deferred benefit is not revalued in excess of 5% or RPI if greater. We understand that the reason for the change on primary protection might be to close a possible loophole, under which some schemes might have moved to a very high normal retirement age before A-Day. The associated "late retirement" increases would then result in a significantly higher scale pension being valued at 20:1 than the pension which would be available at the intended retirement age. If this is the reason for the change in approach, could this not be addressed through a Pensions Update and changes to IR 12, since schemes would need to carry out the artificial inflation of normal retirement age before A-day, at a time when discretionary approval still applies?

SPC has been considering Government amendments to the Pensions Bill during its passage through Parliament. We welcome the proposal to relax Section 67 of the Pensions Act, 1995, but the actual changes proposed are lengthy and burdensome. It is not clear, for example, that the proposed changes deal satisfactorily with a list of minor modifications to scheme rights, brought to the Government's attention by various parties over time, which cannot be dealt with under Section 67. Any easement in the Section appears to be at the expense of much red tape on member communication. The Government has created uncertainty in relation to corporate transaction work, as a result of its anti-avoidance provisions in relation to employers who might seek to use company restructuring and business transactions to avoid any debts due from the employer under Section 75 of the Pensions Act 1995. In particular, it is not clear what the Government intends to do in relation to regulations governing the calculation of the debt when an employer ceases to participate in a multi-employer scheme comprising associated employers.

After extensive discussions, a new Pension Sharing Annex to Form E has been agreed by the working party set up by SPC, the Law Society, PARAG and the Solicitors' Family Law Association. This should be a major improvement from an administrative point of view and addresses a number of concerns raised by the SPC's Administration Committee. Once the judiciary has agreed the format of the new Annex, we will be providing more detailed information to SPC Members. Members of the Administration Committee have been taking part in road shows on pension sharing on divorce for family law practitioners. These have taken place, or are planned, in Bristol, Cambridge, Cardiff, London and Preston.

SPC is in close dialogue with FSA and the Treasury on the practical impact of the FSA's consultation paper 179, setting out draft perimeter guidance on activities related to pension schemes. We are discussing a number of case studies with FSA, designed to pinpoint exactly how the guidance applies to various pension related activities, and in particular to third party administration.