Anne-Marie Winton and Rosalind Connor in Lexis Nexis PSL Pensions re Pensions End of Year Review ‚Äî A Look Forward To 2016
Pensions analysis: Our panel of experts considers what lies ahead for pensions lawyers in 2016.
Ann Flynn, senior consultant and business development lead, Towers Watson
Anne-Marie Winton, partner, Arc Pensions Law
Rosalind Connor, partner, Taylor Wessing
A view from the market
What are your predictions for 2016?
Ann Flynn: The flexible pension regime will continue to evolve as more people realise the freedoms they now have. Hopefully, the freedoms also make pension saving more attractive to more people, helping to mitigate the concerns about retirement adequacy now being voiced by employers.
As we see the evolution of the ‘freedoms’ it is important default fund design is considered on a more regular basis to ensure it is catering for those who want to take out more cash from their pot or a mix of benefits and are going into drawdown as well. Prior to the introduction of the ‘freedoms’, default fund design generally targeted a tax free cash lump sum of 25% with the balance of the pot being used for annuity purchase. We can see already how much this is changing so trustees and providers must be pro-active in the investment options being made available to members and the education and guidance being provided to support decision-making.
Even with the outcome of the pension tax consultation, DC pensions are the future with more and more employers using them for auto-enrolment purposes. We are definitely going to see more pressure from the government on trustees and providers to ensure they are focusing on enabling good member outcomes and that they reach the right levels to support the ability to retire. Trustees and pensions providers will be under greater scrutiny to take the right actions at the right time, and put changes in place where and when required.
We will also see a spike in the auto-enrolment/re-enrolment process for the bigger employers who will be going through the process again and bringing more people into pension schemes.
Legal developments and practical impact
How is 2016 shaping up in terms of important cases and legislative developments?
Rosalind Connor: We will get a government response on the Treasury’s consultation on possible radical reforms to pensions taxation. The assumption is that certain proposals will be taken forward at some level and announced in the Spring Budget in April 2016.
We are expecting a position from HMRC on the VAT treatment of pensions. If the position is one that does not work in a more joined-up way with the pensions industry, it runs the risk that someone may bring another VAT-related case in the meantime, which will potentially take a very long time to conclude.
The Chancellor hinted in the 2015 Summer Budget that he was going to look at salary sacrifice, which is a big issue for pension schemes these days. This will be a significant and interesting development if it happens.
We are expecting a government response on the right to an equal pension for same-sex partners following Walker v Innospec  EWCA Civ 1000,  All ER (D) 46 (Oct), and whether the law can be applied retrospectively to public sector pension schemes. I suspect it will say that it will be too expensive to offer the same benefits for same-sex couples in public sector schemes, although David Cameron seems to have a strong personal view about the unfairness of treating people unequally because of their sexuality, so it’s not impossible that there might be a different outcome.
Appeal hearings are expected in a number of cases:
Anne-Marie Winton: We will see the final end of contracting out of the state pension system. This is going to mean more legislative hassle for occupational pension schemes. And it’s going to be fiendishly difficult for members to understand what is changing in respect of their pension when a scheme stops being contracted out on a salary-related basis, because most will not know in the first place that their pension scheme is run that way. On top of this, some employers will be making scheme benefits a little less generous, when the schemes become slightly more expensive to run.
There are bound to be little niggles and errors creeping in when you’re trying to unravel decades of law, especially when most people don’t understand contracting out, why it was there in the first place, and why it was supposedly a good idea. I’m afraid that sorting out any kind legislative change is usually a thankless task. I expect that this will be the most pressing thing to do for early 2016, because the changes are coming into force in April 2016.
How will these developments affect your cases and working life?
Anne-Marie Winton: I rather hope that dealing with the cessation of contracting out is not the most interesting thing I do in 2016! I would rather be focusing on helping my clients achieve their commercial objectives than guiding them through quite dull legal change.
Rosalind Connor: The government’s response to its taxation consultation could send shockwaves through the industry. Whatever it decides to do, my concern is that if the taxation of pensions continues to be chipped away at, businesses will need to find more complex ways of tax planning. This may be good news for lawyers and accountants, but not so good for pension scheme members. A radical decision could lead to a wide-scale rethink of the entire industry and have a significant effect on businesses in the UK.
Getting a Court of Appeal decision in the IBM case could also be important. Because we don’t know yet which way the decision will go, many solicitors have been uncomfortable about how to advise on the imperial duty of good faith point, because they could retrospectively get that advice wrong. People are holding off making some decisions as a result.
What would you like to see in 2016?
Rosalind Connor: In the last six years, pensions tax law has been changed every year, and people are finding it increasingly hard to follow. While in this respect I think the industry would generally like to see the government’s attention move away from pensions tax law for the moment, there are a couple of legislative changes that I would welcome. First, the government must legislate on guaranteed minimum pensions (GMP) equalisation and second, some amendment to the Pension Schemes Act 1993 to deal with the clash between trustees’ statutory obligations to make transfers on behalf of members on the one hand, and the complex situation around pension liberation schemes, on the other. Trustees are being caught out at the moment, obliged as they are to make the transfer if the scheme is legitimate. The problem for trustees is that checking whether someone is a fraudster is very time-consuming, and is not absolute. The government and the Pensions Regulator are telling trustees to be diligent, but they need to change the law if they want that to happen.
Anne-Marie Winton: We have had almost a decade of constant legislative change in pensions. I have seen a lot of new schemes I haven’t advised on before. Looking at their trust documents, it’s clear that in many cases they haven’t kept up with the pace of being reworded or tweaked, and sometimes some changes are overriding by statute so are not written down at all. It is very rare to find a trust document that is up-to-date and can tell you everything you need to know about how a scheme operates. Because the employer picks up the tab, it is perceived as an additional cost to write down more ‘legal language’ into a document. What happens is that a patchwork effect is created, with lots of little amendments made in a piecemeal fashion. The result is that you don’t always see the holes, because the trustees don’t ‘fit’ the patchwork together. If you ask a trustee what their trust benefits are, they would reach for the members’ booklet, as it’s the easiest document to look at–but it may not be accurate and is not a legal statement of the benefits. In 2016, I’d like to see employers and trustees begin to see the merits of and having the desire to take stock of whether they actually have the trust document they think they have–can they properly operate their scheme? Do they actually know what their benefit structure is, and are the benefits paid out identically in accordance with what the trust document says?
Is there a piece of legislation you would like to see in 2016?
Anne-Marie Winton: We almost got there a year ago when we ended up with defined ambition and collective defined contribution, which have now been kicked into the long grass. The opportunity we missed was to help save final salary schemes by allowing more heavy duty surgery to be carried out on them. The law is very clear–the benefits you build up to date are completely sacrosanct. Some people may say, if we have ended up securing 90% of what has been promised, surely that’s better than entering the PPF and getting less, and having killed off a viable UK employer? If, for example, a scheme removed spouse’s benefits for members and maybe employer’s put a pot of cash aside on the basis that this could be insured for those who needed this benefit, would that be a better thing to do, if it allowed an employer to keep trading and supporting the British/international economy by paying taxes? Would that not have been the opportunity we should have taken, to be granted the flexibility to reduce accrued benefits, if overall it’s for the greater good?
We have seen how keen employers have been to look at their trust document to see if they can take advantage of changing from RPI to CPI for pension increases and revaluation, but it is just random if you can take advantage of a concession that makes your scheme just that little bit cheaper. This is a bad way of making law–there shouldn’t be random output.
Clients and business developments
How might the expected developments in 2016 affect your business and clients?
Rosalind Connor: Should the government decide to make radical changes to pensions taxation, it could have serious implications for clients, especially those involved with schemes that didn’t pay tax on the way in. Will they be subject to a tax bill from 2016, or are they going to have to run their scheme in two tranches, that is pre-tax and post-tax? This is going to be immensely complex and will not be easy to deal with at all.
The changes to the tapering of the annual allowance etc that are coming in next year are at odds with the philosophy behind auto-enrolment. The government is making more and more employers put their employees in pension schemes without their consent, yet at the same time it is taking away tax relief for making pension contributions. A lot of us feel that this is not consistent, and that as a result it is making it very hard for businesses and trustees to understand where exactly they should be going in terms of their schemes and what they ought to be doing.
Anne-Marie Winton: What I think we will unfortunately keep on seeing next year are some employers still struggling to support their pensions liabilities due to low gilt yields. However, some employers will be looking at whether they can plan to get rid of their schemes over the next 10 or 15 years. That may be feasible for smaller schemes, of which there are thousands across the country.
What I am not expecting to happen is a long line of schemes entering the PPF because their employers have gone bust because they can’t afford the liabilities. It is an additional statutory objective of the Pensions Regulator to help the ongoing viability of businesses, but it’s only an objective in terms of its statutory funding regime. It would be far more helpful if that was an objective in respect of all its powers.
In terms of clients, there will always be a tension between trustees asking for as much money as they can possibly get in terms of employer funding, and the employer trying to pay it as little as it can. There isn’t any new law expected in 2016 that will necessarily bring trustees and employers closer together from a commercial perspective on funding, it would need legislative change in order to enable trustees to think differently when negotiating scheme valuations.
Read the full article on Lexis Nexis PSL Pensions here.
The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. Arc Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.