The Chancellor’s Budget promises to transform the post-retirement landscape. What George Osborne unveiled on 19 March 2014 represents the most radical reform of pension taxation since 1921, and introduces far more flexibility than all the defined ambition (DA) work put together.

From April 2015, individuals will be able to draw on their defined contribution (DC) funds with much greater flexibility than now. However, as a first step in implementing the reforms, a number of interim taxation changes took effect from 27 March 2014. The new flexibilities will have a huge impact on the way in which both DC and DB schemes operate, and we will look at the implications and developments as they unfold in our new ‘Countdown to Flexiday’ series of briefing notes.

Yet, whilst the Chancellor’s proposals will have far-reaching consequences for all those involved with pensions, other long-awaited changes have also finally reached the top of the Government’s in-tray, in particular with the Pensions Act 2014 receiving Royal Assent on 14 May. This bulletin looks at some of these changes.


Bridging the gap

One development which has been three years in the pipeline is the retrospective amendment to the definition of ‘money purchase benefits’. The change comes in response to the Supreme Court ruling on 27 July 2011 in the Bridge case, which confirmed that money purchase benefits could still create a funding deficit. As this ran counter to the DWP’s view of ‘money purchase’, on the day of the judgment the DWP announced that it would introduce retrospective legislation to amend the definition to exclude any benefit which is capable of being underfunded. Section 29 of the Pensions Act 2011 contains the revised definition, which, when brought into force, will have retrospective effect back to 1 January 1997. However, regulations providing transitional protection will limit the retrospective nature.

The DWP’s original intention was that this transitional protection would only apply until the date of its statement i.e. 27 July 2011 in some circumstances, such as employer debt and wind-up. Thankfully, it has relented on this and protection will now apply from 1 January 1997 until early July 2014, which is when the revised regulations are expected to become law. This means that schemes will generally not need to revisit past employer debt or wind-up calculations carried out between these two dates.

The key benefits to be affected by the regulations are internally annuitised money purchase benefits, money purchase arrangements which provide some form of investment guarantee and top-up and underpin benefits. Trustees will need to consider whether any benefits under their scheme are affected; if so, they will have to comply with all the rules applying to defined benefits, in particular the scheme funding and PPF levy requirements, and the employer debt regime. They will also have until 6 October 2014 to appoint a scheme actuary if they do not yet have one. The PPF is consulting on the circumstances in which it will require schemes to bring forward their PPF levy valuation to reflect benefits now being brought into the scope of the PPF.


Pensions Act 2014

Following a lengthy passage through Parliament, the Pensions Act 2014 has received Royal Assent, providing for major reforms to the state pension, changes to state pension age (SPA) and changes to private pensions.

Amongst the changes to private pensions is the new objective for the Pensions Regulator (TPR) to minimise any adverse impact on the sustainable growth of the employer in the context of DB funding. This will come into force in mid-July. TPR had intended to publish its revised DB funding code of practice taking this new objective into account in May, but we now understand that this is scheduled for 10 June (alongside the usual annual funding statement).

For DC schemes, new powers in the Pensions Act 2014 will allow the Government to introduce minimum governance and administration standards and restrict charges in workplace pensions. Short-service refunds of contributions from DC trust-based arrangements will be abolished for members with more than 30 days’ qualifying service. The introduction of ‘pot follows member’ at some stage in the future will see members’ DC pension pots of less than £10,000 being transferred automatically to their new employer’s scheme.

Abolition of DB contracting out

When the new state pension is introduced on 6 April 2016, this will mean the end of contracting out for DB schemes. Currently, sponsors of contracted-out DB schemes pay reduced rates of NI contributions (NICs), yet when contracting out is abolished in April 2016, both employers and employees face higher NICs as a result of losing the NI rebate.

The Government wants employers to be able to make changes to their pension scheme rules to offset the increase in NICs. However, most private sector scheme rules can only be amended by the trustees or with the trustees’ consent. The solution is therefore a new statutory override power, which will enable private sector employers either to reduce benefit accrual and/or increase member contributions to offset their additional NI costs. The power cannot, however, be applied to individuals formerly employed in nationalised industries who have ‘protected person’ status.

Draft regulations require an actuary to certify that the proposed scheme amendments do not exceed the annual increase in employer NICs in respect of relevant members. The calculations must be carried out on the scheme funding basis as recorded in the statement of funding principles, but the employer can instruct the actuary to remove any margin for prudence and adjust the assumptions to a best estimate basis. The actuary carrying out the calculations need not be the scheme actuary.


According to Pensions Minister Steve Webb, the case for DA remains as strong as ever despite the radical changes announced in Budget 2014.

In practice, it seems likely that most amendments to reflect the reduction in employer NICs will be carried out using a scheme’s usual amendment power and with the full agreement of trustees and employers. However, the statutory override will provide a useful alternative where this is not possible. The consultation on these draft regulations (as well as a set of highly technical regulations which aim to replace the existing contracting out regulations) is open until 2 July 2014.

Although April 2016 may still seem some way off, DB sponsors need to start considering their options as any changes will take time to implement and be subject to member consultation. Trustees and employers may also wish to consider whether the new state pension has any other knock-on effects on their scheme rules, in particular where the benefit design incorporates offsets to integrate the scheme benefit with the existing state pension.


Where next?

Amid all these proposed changes, we must not forget DA. According to Pensions Minister Steve Webb, the case for DA remains as strong as ever despite the radical changes announced in Budget 2014. The greater freedom in workplace pension design and risk-sharing associated with DA could help to implement the wholesale reforms to private pensions announced by the Chancellor. However, it remains to be seen how much appetite there will be for models such as collective DC given that individuals will be able to access all their income at the point of retirement under an ordinary DC scheme.

We are expecting the Queen’s Speech on 4 June to include plans for yet another Pensions Bill to introduce the DA reforms, which will have to be rushed through Parliament before the General Election in May 2015. There is also likely to be another bill from the Treasury to bring the 2014 Budget changes into force.

At this stage, there is perhaps one thing which is certain: as we approach the General Election, we can expect further policy ideas from all sides