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The UK Pensions Update : Clifford Chance

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Clifford Chance – In September, amendments to the proposed reforms to IORP II were published in the First Presidency compromise text as the proposal moves through the EU’s co-decision legislative process.
The European Commission had published its proposal to revise the IORP Directivei in March this year. The revised directive, the so-called IORP II Directive, is expected to focus on governance, transparency and reporting requirements.

In particular, the proposals are likely to require EU member states to implement minimum governance standards for pension schemes in their countries, including a “fit and proper” test for those running an IORP. Schemes may also be obliged to disclose information to members about their pension entitlements in the form of a new EU-wide standard- form annual pension benefit statement.

While existing UK legislation appears to be largely compliant with the new provisions in many respects, the modified “fit and proper” requirements may be a cause of concern as this is some doubt as to whether non-professional trustees (such as lay “member- nominated” trustees) can still be appointed to run pension schemes in the UK. Guidance is likely to be required from the DWP/Pensions Regulator on this (for example, there is some suggestion that the Regulator’s “Trustee Toolkit” could form a suitable professional qualification).
Slightly more positive, is the removal of the requirement for cross-border schemes to be fully funded at all times, although it should be noted that full

2 1. IORP II
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funding would still be required at the start of cross-border activities. This may make it somewhat easier for a multinational to merge its schemes from different EU countries, although there are still significant hurdles.
The implementation date of 31 December 2016 for the recast directive to be transposed into national law has also been removed, with the date left blank.

2. European Court Holiday Pay Ruling – Impact on Pensionable Pay?

A recent ruling by the Court of Justice of the European Union (“CJEU”) may result in employers facing potentially substantial bills for miscalculated holiday pay. Pension schemes with rules that include bonus, overtime or commission payments within the calculation of pensionable pay could potentially, as a result, be subject to back dated claims for loss of pension benefits.

The case of Lock v British Gas Trading Ltd2 was referred to the CJEU by the Leicester employment tribunal for clarification on whether contractual commission should be included within holiday pay calculations. The right to paid annual leave is derived from the Working Time Directive3, however the Directive does not specify how holiday pay should be calculated. The Working Time Regulations4 which implement the Directive in the UK set out various formulae for calculating holiday pay. There has been doubt in recent years about whether the UK’s approach to calculating holiday pay is in accordance with the Directive.

The CJEU has clarified that commission should be taken into account when calculating holiday pay – this may well also have implications for employers who pay overtime and/or bonuses, for example, if those elements form part of pensionable pay in any particular scheme, there may be a knock on effect for pension liabilities (employers and trustees may wish to consider how this affects their particular rules).
Employers may want to consider whether, if they face such claims, it may impact on pension liabilities. Trustees may want to, at least ask employers, about the potential for such claims in case they need to factor it into funding decisions.

3. DC flexibility changes

George Osborne announced on 29 September 2014 the government’s intention to abolish the 55% tax charge (deemed too high) on pension savings in a drawdown account at death from April 2015. Under the new system, those with a drawdown arrangement or with uncrystallised pension funds will be able to nominate a beneficiary to pass their pension to if they die. In the event that the individual dies before the age of 75, their remaining DC pension will pass to the nominated beneficiary as a tax free lump sum. If the individual is aged 75 or over when they die, the nominated beneficiary will pay tax at their marginal rate of income tax.

This follows on from the publication by HM Treasury on 21 July of the government’s response to “Freedom and choice in pensions”, the consultation document that had been issued on 19 March alongside the 2014 Budget.
The principal thrust of the government’s consultation was to give
individuals greater flexibility and choice in how they could access their defined contribution (“DC”) pension savings at retirement after April 2015. In particular, the government sought views over a range of issues which included the design of the new tax system, the guidance guarantee and whether to continue to allow transfers from defined benefit (“DB”) to DC schemes.

The key points worth noting in the response are:

The new tax system
 a permissive statutory override will be introduced to enable (but not oblige) all DC schemes offer their members increased flexibility
 individuals will also be able to transfer between DC schemes, up to the point of retirement, if their scheme does not offer flexible access
 the tax rules will be changed to facilitate the creation of new and innovative products by providers which more closely meet consumers’ needs, including allowing annuities to decrease and allowing lump sums to be taken from annuities
 new tax rules will be put in place to ensure that individuals do not use the new flexibilities to avoid tax on their current earnings by diverting their salary into their pension with tax relief, and then immediately withdrawing 25% tax-free. Those who choose to draw down more than their tax- free lump sum from a DC pension will be able to benefit from further tax-relieved pension.

Download the full report at Clifford Chance Here

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