April 2016
Annual Allowance Information Changes for 2015/16
Independent Review of State Pension Age Announced
Final Preparations for the End of Contracting-out
An Inundation of (Statutory) Instruments
New Duties Affecting Corporate Trustees
Retrospective Barber Equalization Ineffective
GMP Increases in Public Service Schemes
Annual Allowance Information Changes for 2015/16
Her Majesty’s Revenue and Customs (HMRC) has made changes to the annual allowance ‘pension
savings statement’ rules for the 2015/16 tax year.1
Background
The annual allowance will taper down from £40,000 to as low as £10,000 for ‘high-income individuals’,
beginning in 2016/17. In preparation for the introduction of tapering, the ‘pension input period’ (PIP) over
which the value of pension savings is measured is being aligned with the tax year. This will mean a move
away from diverse individual pension input periods to a single, universal reference period for annual
allowance calculations, effective from 2016/17.
To manage the transition, the Government has provided for the 2015/16 tax year to be split in two for
annual allowance purposes: the first running from 6 April 2015 to 8 July 2015 (‘the pre-alignment tax year’);
and the second from 9 July 2015 to 5 April 2016 (‘the post-alignment tax year’). All pension input periods
open on 8 July 2015 were closed with effect from that date, and a new input period is deemed to run from 9
July 2015 to 5 April 2016. The annual allowance for 2015/16 is set at £80,000, subject to a maximum
allowance of £40,000 for the period from 9 July 2015 to 5 April 2016.
Provision of information
A scheme administrator would ordinarily have to provide a pension savings statement (PSS), automatically,
to any member whose savings within the scheme exceed the annual allowance for the tax year in question.
For the 2015/16 tax year, the statement will be triggered if the member’s aggregated pension input
amounts (in-scheme) for the whole of that year exceed £80,000, or if the pension input amounts for the
‘post-alignment tax year’ exceed £40,000. As usual, administrators only have to consider the value of
savings within their own scheme, and can ignore any other registered pension schemes of which a person
might be a member. When a PSS includes information for 2015/16, the administrator will need to provide
details of the member’s pension input amounts for the pre-alignment and post-alignment tax years
separately; however, the usual requirement to state the annual allowance for a tax year does not apply for
1
The Registered Pension Schemes (Provision of Information) (Amendment) Regulations 2016 (SI 2016 No. 308).
Current issues 01
April 2016
2015/16 (the complications brought about by alignment would make it hard to state it succinctly).
Analogous provisions apply to members who have flexibly accessed pension rights and are therefore
affected by the reduced money purchase annual allowance.
The deadline for automatic provision of 2015/16 pension savings statements will be 6 October 2016.
The Government had originally intended to include as an additional trigger the case where the member’s
earnings exceeded £110,000 (the ‘threshold income’ necessary for a person to be a ‘high-income
individual’). This would not have become relevant until the PSSs for 2016/17 onwards. The proposal has
been delayed because commentators (Hymans Robertson included) pointed out that the required
information is not necessarily available to scheme administrators.
Independent Review of State Pension Age Announced
The Department for Work and Pensions (DWP) has announced an independent review of State
pensionable age (SPA) to be chaired by John Cridland CBE, a former Director General of the
Confederation of British Industry.2
Under the Pensions Act 2014, the Government is required to carry out a regular review of the SPA and to
publish a report on the outcome.3 As part of the review, the Government Actuary (or their Deputy) must
report on what proportion, on average, of a person’s adult life can be expected to be spend in retirement
(after reaching SPA) and how the SPA rules should be changed in order to achieve a specified proportion.
The Government is also required to appoint a person (or persons) to prepare a report on other factors that
it considers relevant to the review. The Government’s report on the outcome of this first review must be
published by 7 May 2017 and subsequent reports must be published within six years of the publication of
the previous report.
The purpose of the independent review is to make recommendations to the Government on future SPA
arrangements.4 The Pensions Minister has, however, said that the timetable up until April 2028, by when
SPA will have reached 67, is not within the scope of the review. Any recommendations should be
affordable over the long term, fair to current and future pensioners and help support fuller working lives.
The review will be required to consider what SPA should be in the ‘immediate future’ (presumably postApril 2028) as well as over the longer term; whether the current system of a common SPA increasing in line
with longevity still meets the above objectives and, if not, what changes are required. Variations in SPA
between different groups must be taken into account. Lastly, in coming up with its recommendations, the
review will have to gather evidence and views from a wide range of interested parties.
Mr Cridland must submit his report to the DWP by January 2017.
Further increases in SPA seem inevitable and it is perhaps more a question of ‘how much’ and ‘how
quickly’. It will be interesting to see how the review considers variations in SPA between different groups
and whether that extends to regional variations reflecting any significant differences in longevity throughout
the United Kingdom. One outcome that we would in principle welcome is the introduction of greater
flexibility around taking State pension benefits, in particular the introduction of an early retirement option,
although this would come rather too late to be of help to the Women Against State Pension Inequality
2
<www.gov.uk/government/news/john-cridland-cbe-appointed-to-lead-the-uks-first-state-pension-age-review>.
Section 27 of the Pensions Act 2014.
State Pension age Independent Review: Terms of Reference <www.gov.uk/government/publications/state-pension-age-reviewterms-of-reference>.
3
4
Current issues 02
April 2016
(WASPI) campaign. Of course, as recent reforms show, greater flexibility tends to be accompanied by an
increase in complexity, and it unclear whether the social security system is up to the task.
Final Preparations for the End of Contracting out
The Department for Work and Pensions (DWP) has laid several statutory instruments to prepare for the
abolition of contracting out on 6 April 2016.
Fixed-rate revaluation—scheme modifications
The DWP has, as proposed, created a new statutory modification power that will allow trustees to amend
their fixed-rate revaluation rules as necessary to comply with the legislation that will come into force upon
the abolition of contracting out.5 To use the power, trustees will have to pass a resolution by 6 April 2017.
The resolution can be retrospective, but cannot take effect before 6 April 2016; and there will be no need
for prior consultation by employers.
State scheme premiums
Legislation currently provides for the payment of a contributions-equivalent premium (CEP) upon cessation
of contracted-out employment for a scheme member with less than two years’ service. The CEP is
generally compulsory if the member has no accrued right to scheme benefits.
An Amendment Order will provide, instead, that where a member’s contracted-out employment ceases
automatically on 6 April 2016, payment of a CEP will be triggered by the person leaving the employment,
transferring out of the scheme, or dying leaving a surviving spouse; or by the commencement of winding
up.6 The CEP will again be compulsory, in most cases, if at the relevant time the member has no accrued
rights.
Updated references
Another Order makes a long list of changes, to numerous statutory instruments, so that they continue to
make sense7 once no-one is contracted out.8 In many cases the changes are essentially grammatical: for
example the amended legislation will refer (in the past tense) to schemes that were salary-related
contracted-out schemes.
The contracted-out legislation is so extensive and complex that these statutory instruments will certainly not
be the last word on the matter; they are just the last that the Government can squeeze out in time for the 6
April 2016 abolition date. Issues that the DWP will return to include the restrictions upon alteration of
scheme rules about section 9(2B) rights, harmonization of the DWP and pensions tax legislation on
commutation on triviality grounds, and the conditions for transferring contracted-out rights without consent.9
5
The Occupational and Personal Pension Schemes (Modification of Schemes—Miscellaneous Amendments) Regulations 2016 (SI 2016 No. 231). For more detail,
see our 60 Second News Summary, DWP Proposes Power to Amend GMP Revaluation Rules (February 2016), or the corresponding article in Current Issues March
2016.
6
The Pensions Act 2014 (Contributions Equivalent Premium) (Consequential Provision) and (Savings) (Amendment) Order 2016 (SI 2016 No. 252).
7
In so far as the contracted-out legislation ever did.
8
The Pensions Act 2014 (Abolition of Contracting-out for Salary Related Pension Schemes) (Consequential Amendments and Savings) Order 2016 (SI 2016 No.
200)
9
<www.gov.uk/government/uploads/system/uploads/attachment_data/file/504437/government-response-pensions-act-2014-abolition-of-contracting-outorder_2016.pdf>.
Current issues 03
April 2016
An Inundation of (Statutory) Instruments
We have been hit by a deluge of new legislation from the Department for Work and Pensions, most of it
coming into force on from 6 April 2016.
The Occupational and Personal Pension Schemes (Automatic Enrolment) (Miscellaneous Amendments)
Regulations 2016 (SI 2016 No. 311)
Easing the compliance burden
An employer that wishes to bring forward its AE staging date but will have no eligible jobholders on the new
date no longer has to reach an agreement with the trustees or managers of a pension scheme, and has the
choice of any day of the month for its early staging date (the choices were previously confined to the first of
each month). It may notify the Pensions Regulator about its decision to bring forward staging at any time
before the chosen early AE date (it was in the past necessary to give at least one month’s notice) and can
submit its declaration of compliance at the same time.
The deadline for a declaration of compliance with the triennial automatic re-enrolment (AR-E) obligation is
now five months after the employer’s AR-E date, regardless of whether the employer has anyone to reenrol on that date or not.
Proposed further exceptions to the AE duty
Auto-enrolment has been made optional for jobholders who are directors of the employing company; and
for members of limited liability partnerships who are not treated as employees for income tax purposes, but
who nevertheless have sufficient ‘qualifying earnings’. An existing exception relating to members who have
been paid ‘winding-up lump sums’ has been amended to clarify that it applies only to those who cease to
be employed, are re-employed by the same person, and meet the criteria for auto-enrolment, all within
twelve months of the day on which they received their WULS.
Abolition of contracting out: transitional measure for DB schemes
A temporary measure has made it slightly easier for DB schemes with members who were contracted out
on 5 April 2016 to continue to be used for auto-enrolment. The easement applies on the condition that the
scheme’s rules have not been amended in a way that would have prevented it from contracting out
(ignoring the abolition of contracting out). It means that the cost-of-accruals test that the Government has
introduced as an ‘alternative quality requirement’ can be conducted for those still in contracted-out
employment on 5 April 2016 as a group: that is to say, without having to conduct separate assessments for
sub-categories of members with different benefit structures. The easement applies until 5 April 2019 or, if
earlier, until the effective date of the first actuarial report investigating the materiality of differences in the
cost of accruals for members with different benefit terms.
The benchmark cost-of-accrual rate that a scheme must meet (or beat) in order to satisfy the alternative
quality requirement varies depending upon the scheme’s definition of ‘pensionable earnings’. There are
five possibilities set out in the legislation. It is now clearly possible to test the cost of the benefits accruing
under the scheme against the rate corresponding to one of those possibilities on the basis that the
scheme’s definition is at least as generous (the original drafting implied that an exact match was
necessary).
These changes are attempts to make auto-enrolment compliance easier, and should be welcomed as such.
However, the finalization of the new test for DB schemes came at the eleventh hour—10 March 2016—
even though employers need to know that their schemes remain suitable after 5 April 2016. Guidance on
the practicalities was published shortly before we went to press with this issue.10 We have also seen
10
<www.gov.uk/government/uploads/system/uploads/attachment_data/file/511119/automatic-enrolment-quality-requirements-guidance.pdf>.
Current issues 04
April 2016
commentators grumbling that the exception for LLP members affects people who were already likely to be
ineligible for auto-enrolment.
The Occupational Pension Schemes (Scheme Administration) (Amendment) Regulations 2016 (SI 2016
No. 427)
The governance changes that came into force for defined contribution (DC) schemes on 6 April 2015
require the chair of the trustees to sign an annual governance statement, on their behalf, within seven
months of the scheme year-end. The Amendment Regulations allow an acting chairperson to sign instead,
if the chair’s position is vacant.
The DC governance changes included special rules for ‘relevant multi-employer schemes’—master trusts,
in common parlance. They must have at least three trustees, the majority of whom, including the chair of
trustees, must be independent of any provider of services to the scheme. The DWP subsequently realized
that its definition of ‘relevant multi-employer scheme’ was too broad, and would cover more sets of
circumstances than it had intended. It has narrowed the scope of the legislation by making the promotion
of the scheme to unconnected employers more central to the definition, and by providing for an employer
that is not part of a corporate group to be ‘connected’ to an employer within the group if they are engaged
in a joint venture or jointly employ scheme members, or if it employs active members following a transfer
from the group employer, or if it has part control of (or is partly controlled by) the group employer.
It has made the minimum trustee requirement overriding, to resolve possible conflicts with scheme rules.
In November 2015, the DWP asked for suggestions of changes that would ‘make life easier for pension
scheme trustees and professionals’. In hindsight, we wish that we had said that the quality of our lives
would be immeasurably improved if the Government would stop writing things like,
‘a participating employer is "connected" to another employer where… both employers… are…
partnerships, each having the same persons as at least half of its partners.’
Is it just us, or is that gobbledygook?
The Pension Protection Fund and Occupational and Personal Pension Schemes (Miscellaneous
Amendments) Regulations 2016 (SI 2016 No. 294)
The change most likely to be of interest is the introduction of a legal requirement for trustees to issue
‘retirement risk warnings’ to members who are considering action in relation to their flexible benefits (so this
will affect anyone with money purchase funds). The obligation will arise when the member is supplied with
the means to access the benefits to purchase an annuity, obtain a lump sum, or designate funds for
drawdown (but not to transfer). This means for example that a risk warning will have to be given along with
any application form that the member must complete to take any of those steps. A ‘retirement risk warning’
is defined as a generic statement about those characteristics of the annuity, lump sum or drawdown
pension that could adversely affect the retirement income of the member and surviving beneficiaries; and
the factors that might affect its appropriateness, such as the member’s state of health, lifestyle,
responsibility for dependants, level of indebtedness, or reliance upon means-tested benefits. The trustees’
communication must encourage the member to read the risk warning and obtain guidance or advice. The
legislation allows trustees to provide personalized risk warnings instead: if they meet the conditions for
doing so (by encouraging members to seek guidance or advice if they have not already), generic retirement
risk warnings need not be given in addition.
The Regulations include some amendments that update the Pension Protection Fund (PPF) rules to take
account of the Freedom and Choice (pension flexibility) reforms. They also allow the PPF to take over
Current issues 05
April 2016
responsibility for UK schemes with employers that are based elsewhere in the European Union and subject
to insolvency proceedings there, but are insufficiently ‘established’ in the UK for insolvency proceedings to
take place in this country. This unintended gap in the PPF safety net was exposed by the Olympic Airlines
case, prompting the Government to make special arrangements in 2014 to allow payment of PPF
compensation to the UK employees of the Greek company concerned.
The haste with which the retirement-risk-warning legislation has been developed and introduced left
trustees and administrators with almost no time to adapt their processes. The DWP’s impetuosity shows in
the quality of the drafting: one might reasonably interpret the new legislation as requiring that risk warnings
are given twice; although that does not appear to be the Government’s intention.
The Pension Sharing (Miscellaneous Amendments) Regulations 2016 (SI 2016 No. 289)
Amongst other things, these Regulations
 extend the requirement for ‘appropriate independent advice’ to those who have gained ‘safeguarded
benefits’ (mainly defined benefits) as a result of pension sharing on divorce, and who wish to transfer or
convert them in order to obtain flexible benefits;
 clarify that a member’s right to a cash transfer sum or contribution refund, where he or she has no
accrued rights but has at least three months’ pensionable service, is not a ‘shareable right’ for the
pension sharing purposes; and
 eliminate some potentially confusing duplication from the legislation about the calculation of pension
credits for ex-spouses (it provides in two places for the reduction of the pension credit on account of
scheme underfunding);
The Government has postponed plans to oblige scheme trustees to notify a member’s ex-spouse if the
member applies to take flexible benefits from rights that are subject to an earmarking (attachment) order
that was granted during divorce proceedings. The notification requirement has been delayed to allow more
time for consideration of the 'complex issues' that were raised in consultation responses.
We have contacted the DWP to question two changes that have been made by the Amendments
Regulations. The first is that a pension sharing order for an active member will now assume that the
member left service on the ‘valuation day’, rather than the ‘transfer day’. The effect of the change is that
the benefits accrued after the member’s divorce could be shared.
The second concerns Scottish divorce valuations for members with pensions in payment. It seems to us
that one of the changes is to make it possible for the valuation to be done at the ‘relevant date’ (which is
usually the date of the couple’s separation). It will make a significant difference to the amount taken into
consideration in Scottish divorce proceedings, in some cases.
The Occupational Pension Schemes (Charges and Governance) (Amendment) Regulations 2016 (SI 2016
No. 304)
The Government has banned businesses that provide administration services directly to the trustees of
schemes with money purchase benefits from recouping costs from members, where those costs relate to
commission paid to advisors who provided services to the members or the scheme’s employer. Services to
trustees and payroll and IT ‘middleware’ services for employers are not covered by the ban. The scope of
the legislation encompasses businesses that are both service providers and advisers (in the senses
described).
Current issues 06
April 2016
The ban applies to occupational pension schemes that provide money purchase benefits and that are being
used as qualifying schemes for auto-enrolment purposes for at least one jobholder; however, once the ban
applies to a particular scheme it will continue to do so even if the employer stops using it as a qualifying
scheme. All money purchase funds (not just default arrangements) are affected, including those used for
additional voluntary contributions. The ban applies to all members of a scheme who are, or were,
employed by an employer that is using it as a qualifying scheme; in a multi-employer scheme, the ban does
not affect any members whose employer (or former employer) is not using the scheme for auto-enrolment
purposes. Small self-administered schemes, executive pension schemes and schemes with only one
member are not within the scope of the legislation.
The ban affects only commission arrangements entered into on or after 6 April 2016, or existing
commission arrangements that are varied or renewed on or after this date. A consultation exercise later
this year will consider the extension of the ban to commission arrangements entered into before 6 April
2016.
Trustees are required to notify the service provider that the scheme is a qualifying scheme for autoenrolment purposes. The deadline for doing so is three months from the latest of the following dates: 6
April 2016; the employer’s staging date; and the date that the service provider becomes a service provider
for that scheme. The ban takes effect one month after the service provider is informed by the trustees that
the scheme is within its scope. The service provider then has one month in which to confirm to the trustees
that charges related to adviser commission payments are not being imposed on members. Service
providers must notify trustees as soon as practicable (and in any case within one month) if there is any
change to that position.
Members can choose to pay for advice and services. A formal written agreement with the adviser is
required, setting out the services to be provided, the total amount to be taken from the member’s fund to
pay for it and the period over which it will be deducted. The trustees and service provider must each
receive a signed copy of the agreement. Where the 0.75 per cent charge cap applies to the member, and
the cost of the advice or service is likely to result in the charge cap being exceeded, the trustees may notify
the member, adviser and service provider within one month of receiving their copy of the agreement that a
separate charge-cap opt-in agreement will be needed if the agreement is to have effect. The agreement
cannot be implemented if the trustees notify the other parties within one month of receiving the copy of the
agreement that the cost is likely to exceed the value of the member’s rights in the scheme.
The Pensions Regulator is responsible for enforcing the ban. Trustees, through the annual scheme return,
will be responsible for confirming that the service provider has indicated its compliance with the
requirements.
In theory, all members working for an employer are sheltered, forever, as soon as one of their number is
auto-enrolled into the scheme. At the same time, the scheme could have members employed by other
participants that are not covered by the ban because they are not using the scheme for auto-enrolment.
The difference in treatment could be hard to explain.
Trustees will be relieved that the primary responsibility for compliance lies with the service provider, but
they should be aware of their obligation to inform existing service providers by 6 May 2016 (assuming that
their scheme is already being used for auto-enrolment), and within one month of any service provider
change. Service providers may have a hard time making the connection between product charges and
commission payments, especially on older products.
Current issues 07
April 2016
The Occupational Pension Schemes (Requirement to Obtain Audited Accounts and a Statement from the
Auditor) (Amendment) Regulations 2016 (SI 2016 No. 229)
Contents of audited scheme accounts
The DWP has removed many of the disclosure requirements from the legislation on the preparation and
audit of scheme accounts, with effect from 1 April 2016. Instead, the scheme auditor is now required to
confirm that the accounts have been prepared ‘in accordance with the relevant financial reporting
framework applicable to occupational pension schemes current at the end of the scheme year to which the
accounts relate’. The changes were prompted by the introduction of Financial Reporting Standard 102
(FRS 102) and the revision of the statement of recommended practice (SORP) for pension schemes’
financial reports.11 The revised legislation continues to require the inclusion of information concerning
concentration of risk, employer-related investment, and the investment purchase and sale totals for the
scheme year.
The amendments also introduce an exception to the requirement for the auditor to give an opinion about
whether contributions have been paid in accordance with the schedule of contributions (for defined benefit
schemes) or payment schedule (for money purchase schemes). The exception applies to schemes that
had at least twenty participating employers at the beginning of the scheme year in question.
Amendments to fair value disclosures
Separately, the Financial Reporting Council (FRC) has simplified the disclosures that pension schemes
accounts must contain about financial instruments.12 The amendments make the disclosures more
consistent with the fair value hierarchy used for EU-adopted international standards.13 They are effective
for accounting periods beginning on or after 1 January 2017, although early adoption is allowed. The
pensions SORP (mentioned in a preceding paragraph) has yet to be updated.
The trustees of large multi-employer schemes may no longer have to provide their auditors with evidence
that the correct contributions have been paid, but they are not released from their governance obligations.
They should still be satisfied that their schemes are receiving all of the monies due, and on time.
New Duties Affecting Corporate Trustees
New company law rules mean that many trustee companies will have to identify, obtain information from,
and maintain a register of ‘people with significant control’ of the company (PSCs).14 Failure to comply is a
criminal offence.
Official guidance is available.15 The PSC requirements apply, in very broad terms, to companies that are
not traded on regulated markets. Information about PSCs will have to be provided to Companies House,
which will add it to a public register. The obligation to create a register applies from 6 April 2016, and the
duty to supply information to Companies House will start from 30 June 2016.
Trustee directors will want to know that the person in charge of the company’s statutory filings is aware of
the new requirements. The ownership of a trustee company will often lie somewhere within the group of
companies that participate in the pension scheme. We can imagine cases in which members’ eyebrows (or
hackles) could be raised upon hearing that the trustee is under the ‘significant control’ of a scheme
11
Financial Reports of Pension Schemes: A Statement of Recommended Practice (2015) with accompanying commentary and guidance.
Amendments to FRS 102–Fair value hierarchy disclosures
International Financial Reporting Standard IFRS 13: Fair Value Measurement.
14
Part 21A of the Companies Act 2006, as amended by the Small Business Enterprise and Employment Act 2015.
15
<www.gov.uk/government/publications/guidance-to-the-people-with-significant-control-requirements-for-companies-and-limited-liability-partnerships>.
12
13
Current issues 08
April 2016
sponsor; and some careful explanation could be necessary to convince them that the words do not imply
impropriety.
Retrospective ‘Barber’ Equalization Ineffective
An employer’s attempt to equalize the normal retirement ages for its male and female employees from the
date of a prior announcement was unsuccessful, according to the High Court. 16
In its Barber judgment, the European Court of Justice (ECJ) ruled that differences in the normal retirement
ages (NRAs) of men and women under UK occupational pension schemes were contrary to European law,
even if they originated from differences under the UK’s State pension. 17 Equalization was required with
effect from the date of the judgment, 17 May 1990. Subsequent cases explored the implications and limits
of the Barber judgment, determining for example that benefits had to be ‘levelled up’ so that men were
entitled to the same, lower NRA as women for periods of service between 17 May 1990 and the date on
which ‘measures’ were taken to ‘level down’ by raising women’s NRA to match that of men.
In the present case the trust deed provided that the principal employer, with the consent of the trustees,
was able to alter the scheme rules by way of a supplemental deed; and that the amendment could take
effect from the date of a prior written announcement to scheme members. An announcement was made
dated 1 September 1991, and repeated in a letter dated 1 December of that year, informing members that
NRA would be 65 for men and women with effect from 1 December 1991. The change was formalized in a
trust deed dated 2 May 1996, and said to be effective from 1 December 1991. (Note that this all happened
before section 67 of the Pensions Act 1995 came into force to restrict the ability to modify accrued rights.)
The High Court had to decide when the necessary ‘measures’ were taken to achieve equality by levelling
down the NRA of female members to 65; and whether the purported retrospective effect of the measures
was consistent with the requirement under European law for benefits to be levelled up in the meantime.
The judge’s decision contains a lengthy discussion of relevant case law, including an interesting argument
about whether he came to the wrong conclusion in a previous ruling. 18 In summary, he determined that the
1991 notices could not be measures sufficient to comply with the equal treatment requirements. He
therefore rejected the employer’s application for a declaration that NRA had been equalized at 65 with
effect from 1 December 1991.
Those who have prior knowledge of the numerous cases in which the issue of ‘Barber’ equalization has
arisen will be unsurprised to learn that a ‘very large sum of money’ is at stake here. Often in the past the
problem has been that the terms of a scheme’s amendment power were not followed correctly; whereas in
this case it seems that they were, but that they clashed with EU law. An appeal seems likely.
16
17
18
Safeway Limited v Newton & Another [2016] EWHC 377 (Ch).
Barber v Guardian Royal Exchange Assurance Group (Case C-262/88).
Harland and Wolff Pension Trustees Ltd v Aon Consulting Financial Services Ltd [2006] EWHC 1778 (Ch).
Current issues 09
April 2016
GMP Increases in Public Service Schemes
The Government has announced that public sector workers who reach State pensionable age (SPA) in the
period from 6 April 2016 to 6 December 2018 will have their guaranteed minimum pensions (GMPs) fully
increased in line with consumer prices.19
Background
Statutory GMP Increases
Occupational pension schemes have a limited liability to make cost-of-living increases to GMPs. Any part
of a member’s GMP that was accrued before 6 April 1988 is not increased at all. The portion built up in
connection with service from 6 April 1988 to 5 April 1997 is increased in line with ‘the general level of
prices’, but with that increase capped at three per cent. The official measure used for this purpose is, for
the time being, the Consumer Prices Index (CPI).
Pre-6 April 2016 State Pension Increases
However, that is not the end of the story. For those reaching SPA before 6 April 2016 the Department for
Work and Pensions (DWP) re-calculates annually the earnings-based additional State pension (ASP) that a
person would have built up if he or she had not been contracted out, deducts the GMP that is due from
private pension arrangements, and pays the balance (this is an over-simplification). Increases to the ASP
are not capped. In this way, GMPs are effectively fully inflation-proofed, in a convoluted fashion, with the
State picking up the liability from the point where the statutory obligation of occupational schemes ends.
Calculate
ASP ignoring
c-o [full
inflationproofing]
Deduct GMP
[partial
inflationproofing]
ASP paid by
State
Figure 1: Annual additional State pension calculation for pre-6.4.16 pensioners
Public sector pension increases
Public service pensions are increased annually, once in payment, in line with inflation (again, the CPI is
currently the measure used). To avoid any double-payment arising from the State pension calculation
described in the preceding paragraph, the legislation generally requires that the schemes deduct any
GMPs before applying the increase. However, provision is made for circumstances in which, for one
reason or another, the State will not provide the extra increase necessary to (in effect) fully inflation-proof
the member’s GMP; this will happen if the ASP to which the pensioner is entitled is less than his or her
GMP. In those circumstances, public-sector increases are calculated (in broad terms) without deducting
members’ GMPs.
New State pension
Those reaching SPA on or after 6 April 2016 will be covered by the new, single-tier State pension rules.
They will not have entitlements to ASP, and the DWP will not perform the sort of annual calculation
19
<www.gov.uk/government/news/government-one-step-closer-to-introducing-new-state-pension-this-year>.
Current issues 010
April 2016
described previously for them.20 This has an odd implication for public-service pensioners with GMPs who
are entitled to the new State pension. Their ASPs being zero, and naturally therefore less than their GMPs,
they will have their occupational pensions indexed without prior deduction of their GMPs if the Government
does not change its existing pension increase policy.
The announcement
It is against that backdrop that the Government’s recent announcement must be understood. It says that
‘the government’ will continue to fully price-protect the GMPs of public-sector workers where the ASP
uprating rules do not apply. More specifically, it says this treatment will apply to those who reach their SPA
on or after 6 April 2016 and before 6 December 2018 (by which date the phased equalization of men’s and
women’s SPAs will have been completed), for the whole of their lives (and presumably for the whole of the
lives of those who become entitled to survivors’ GMPs upon their deaths).
The longer-term application of the policy will be considered as part of a consultation exercise that the
Government expects to run this year.
There has been speculation for some time about whether and how the existing public-sector pension
increase policy would be revised as a consequence of the introduction of the new State pension and,
crucially, who will bear the cost if it is not. The announcement that ‘the government’ will fully price-protect
GMPs makes sense in the context of the unfunded public sector schemes, where the difference between
payment via the ASP and payment by the scheme is largely a matter of accounting treatment.
For the funded Local Government Pension Scheme (LGPS), on the other hand, the announcement could
be seen as a case of generosity with other people’s money. For a typical council, if the Government
decides to continue with this policy, it could mean a cost increase of around 0.2 per cent of payroll each
year for the next ten years; however, the cost increase would vary by employer depending on the age
profile of its current and former employees. The additional expense may seem trifling when set beside the
rise in employer National Insurance contributions triggered by the end of contracting out, which LGPS
employers are unable to offset through an increase in member contributions or reduction in future benefits;
but at a time of squeezed budgets any extra cost will be deeply unpopular. Other employers who are
participating in the LGPS will want to know whether the terms of their admission agreements will mean that
they carry the can for any increase.
The trustees of private-sector occupational pension schemes that contain references to the public sector
pension increase legislation in their rules should consider whether the Government’s decision will affect
them. Legal advice may be required.
20
There will be a one-off transitional calculation to take account of their pre-6.4.16 State pension entitlements. The savings that the Government expects to make in
this way were factored into the arithmetic for the cost-neutral transition to the new State pension. In other words, we are told, if the Government had continued its
practice of fully inflation-proofing GMPs, the headline rate of the new State pension would have been lower.
Current issues 011
April 2016
And Finally…
In recent weeks it has become difficult to spend any significant time reading the pensions press without
encountering references to 'robo-advice'. Sadly, given the hopes, fears and expectations that the term
will raise for sci-fi fans, the reality of the matter is sure to be anticlimactic.
There's no reason to believe that IFAs should be any more worried about artificial intelligence than, say,
South Korean Go grandmasters. OK, so that means that they should be utterly petrified21, but that's not
the sort of thing that we were thinking about. The arrival of the technological singularity (the
hypothesized point at which AI will surpass human capabilities) still doesn't seem particularly imminent,
and it'll probably be a while before the advice systems that emerge are even good enough to pass the
Turing test.
Having said that, the Turing test isn't a measure of artificial intelligence; it just requires that a computer
responds in a sufficiently human manner to persuade a living, breathing human being that he or she
hasn't spent the last fifteen minutes conversing with an uppity toaster. Some of the tactics that have
been employed in meeting this challenge have accordingly been characterized as 'artificial stupidity', in
somewhat cynical recognition of the fact that—to put it bluntly—not all human behaviour is intelligent
behaviour. So, for example, if a computer deliberately introduces typos into a written conversation, the
human interlocutor might be less inclined to think that he or she is corresponding with HAL 9000 or an
unusually garrulous Cyberdyne Systems T-101.
(Of course, the converse of the statement made earlier is also true: intelligent behaviour is not
necessarily human behaviour. Consider the celebrated passage in Douglas Adams' So Long and
Thanks For All the Fish describing how
'man had always assumed that he was more intelligent than dolphins because he had achieved so
much—the wheel, New York, wars and so on—whilst all the dolphins had ever done was muck about
in the water having a good time. But conversely, the dolphins had always believed that they were far
more intelligent than man—for precisely the same reasons.')
We don't know about you, but for us the possibility that Skynet might disguise its activities by acting
erratically raises worrying concerns about the implications of Government pensions policy. AF, for one,
welcomes our new robot overlords…
21
<www.nature.com/news/google-ai-algorithm-masters-ancient-game-of-go-1.19234>.
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