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Scheme pension: Lawson Vs Amps on pension bill changes

Standard Life’s John Lawson and Amps chairman Andrew Roberts offer contrasting views on the implications for scheme pension following the Government’s recent amendment.

’Caught up as a consequence of changes aimed at bigger pensions’

A last-minute change to the Pensions Bill has created uncertainty for scheme pensions provided by SSASs and Sipps.

The Government took action after a Supreme Court ruling which found that “internal annuities” pensions provided directly from scheme funds were defined benefits.

The Government was concerned about this ruling because it has an obligation under two EU directives to ensure that schemes providing guaranteed retirement income from their own funds have sufficient assets to meet their technical provisions. In other words, these guarantees should be subject to appropriate solvency rules.

The bill amendments re-classify all scheme pensions as defined benefits. This change to the law applies both to occupational schemes and personal pensions and is likely to be passed without amendment when the bill becomes an act, probably in November.

SSAS and Sipp scheme pensions would appear to have been caught up as an unintended consequence of changes aimed at bigger occupational pension schemes.

And although SSASs and Sipps are currently exempt from solvency requirements, this exemption was granted at a time when they provided only money-purchase benefits.

Having now classified these benefits as defined benefits, the Government, if it is going to stick to its principles, should now make them subject to some form of solvency regime.

This might be the existing regime for bigger DB schemes (schemespecific funding, triennial valuations, PPF levies, etc) or, given that these schemes in many cases have no sponsoring employer, a new regime based upon holding solvency capital.

Alternatively, the Government might exempt these schemes from the new definition, meaning that they become money-purchase benefits once again. The Government has taken powers under the Pensions Bill to allow them to do this but such an exemption or a new solvency regime will take at least six months to execute.

Until then, trustees of these schemes must be made aware they are providing defined benefits rather than money-purchase benefits.

This should lead to a more prudent approach to scheme funding, even if no specific solvency regime applies. For example, reallocating one member’s “excess” fund to other members without a reciprocal obligation to make good the donor’s fund should he, for example, live longer than expected, could be regarded as a breach of the trustees’ fiduciary duty.

Until the Government clarifies this situation, trustees and scheme administrators of these schemes must exist in an uncertain purgatory.

John Lawson, Head of pensions policy, Standard Life

’The impact is not so worrying for providers within SSAS and Sipp’

The Pensions Bill before Parliament sets out to amend what is meant by money purchase with everything else being treated as defined benefit and those amendments make it clear that scheme pension is not treated as money purchase.

The money-purchase definition essentially includes the pension funds being built up by the application of contributions (as you would expect) plus annuitised pensions in payment resulting from such funds. It also includes income drawdown pensions in payment but does not include scheme pension, regardless of whether the scheme pension originated from a money-purchase pot or is subject to underlying fund performance.

This has created a concern that even scheme pensions arising from SSASs and Sipps will (retrospectively) be treated as defined benefit in nature and so such schemes would have to commence onerous and costly processes to comply with regulations.

The intention of such regulations, though, is to protect members of true defined-benefit plans where there is a promise of benefits, the size of which is not derived from the amount of money in the pension fund or on fund performance. Such protection extends only to members of occupational pension schemes (and so does not affect Sipp scheme pension) and furthermore there are exemptions from the regulations noted above for traditional SSASs, that is, those that have fewer than 12 members, have all members as trustees and require unanimous decision-making.

Scheme pension arrangements in SSASs and Sipps usually caveat that the pension is only promised subject to funding and not guaranteed. Furthermore, they are explicitly selected by individuals in retirement who choose scheme pension over annuity. Therefore, the authorities may rightfully be less concerned with scheme pension in SSASs and Sipps.

So the impact of all scheme pension benefits being treated as defined benefit in nature for the purpose of Pensions Act legislation does not seem so worrying for providers of scheme pension within SSAS or Sipp. Of course, there might be secondary aspects to consider such as potential legislative changes.

In the meantime, it is worth noting that the Finance Act 2004 uses its own definition of what is and is not defined benefit and these are not being amended. We therefore have the slightly odd situation that for the purpose of the Pensions Act 2004 (which deals with protection of member benefits) all scheme pensions are defined benefit but for the purpose of the Finance Act 2004 (which deals with taxation aspects), a scheme pension can either be defined benefit or money purchase in nature. Although this sounds odd, there is logic for this position.

Andrew Roberts, chairman, Association of Member Directed Pension Schemes


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. Nick White, Pensions Law Limited 3rd November 2011 at 4:01 pm

    @ John Lawson:

    John, you say “And although SSASs and Sipps are currently exempt from solvency requirements, this exemption was granted at a time when they provided only money-purchase benefits.”

    This simply is not true.

    Though rare, final salary SSAS have existed for a long time, and were deliberately and explicitly exempted by DWP from statutory funding requirements long before the current excitement over scheme pensions erupted: see Reg 17(1)(h) of the Occupational Pension Schemes (Scheme Funding) Regulations 2005 for the present exemption.

    It is scaremongering to represent a minor and innocent drafting oversight by DWP as a major policy change.

    You raise in passing some very legitimate concerns about cross-funding between members, but in these sorts of schemes these sorts of issues are likely to be of much more interest to HMRC than DWP.

  2. Nick,

    The Bill receives Royal Assent today so legally, scheme pensions are now defined benefits.

    That change, to my mind, changes the nature of the responsibility which trustees of these schemes now have towards their scheme pension members. If I were an adviser recommending scheme pensions, I would want to explore what this meant. For example, I might want to ask the following questions:

    1) Now that SPs are defined benefits how does this change the trustees responsibilities towards scheme pensioners. Do they now have to take a more prudent approach to scheme funding?

    2) What does the definition change mean in the specific context of the wording of your trust deed and scheme rules/policy provisions and conditions?

    3) Is reallocation of funds to other members now imprudent? Do the other members have a responsibility to provide a reciprocal commitment to make good the scheme pensioner’s fund should it become deficient?

    4) In the case of a SSAS where a sponsoring employer exists, how does this change the nature of the relationship with the pension scheme. Is the employer aware that they may have to fund any shortfalls?

    5) If paying higher scheme pension rates based on assumed shortened longevity, have the trustees put in place a robust mortality investigation to look at impaired life data – what data sources are they using, is this robust? What about a medical investigation of the scheme pensioner’s health? Has the actuary prepared a report taking these factors into account to support the trustees’ decision to pay a higher pension?

    6) If the pension is being under-paid to fit within lifetime allowance/20, are trustees breaching their fiduciary duty by under paying (being excessively conservative)? Should the trustees not seek to pay an appropriate prudent rate of pension to the scheme pensioner over his remaining estimable lifespan based on the funds available at retirement and a reasonable investment return. If this pension times 20 is higher than the LTA, are their LTA charge issues?

    7) What does this change mean for the calculation of tax-free cash?

    These are not merely issues of tax law but fundamental to the trustees’ fiduciary duty. Whether a specific funding regime exists or not does not alter this duty to act at all times for the sole benefit of and in the best interests of the beneficiary, showing the highest standards of care in law.

    As to the funding point, if you read the narrative that went along with the Bill amendments, the DWP is clear that they want promises fully funded. As far as I am aware they have not said since then that they are planning to exempt SSAS and SIPP from their principled approach, although they do have the power to do so. Whether they make the same decision this time that they made a few years ago in relation to SSAS, I do not know. As I say above, they could introduce a new funding regime, but I don’t know whether they will do this either.

    Was it a mistake, or as you put it, a ‘minor and innocent drafting oversight’ ? I don’t know and I doubt that you do either.

  3. Isn’t this really a storm in a teacup created by what I’m inclined to believe was a drafting oversight rather than a policy change. However surely the real issue is that the Government have made it very clear that their main concern with drawdown is the risk of member’s funds being depleted prematurely. That’s the justification for the lower 100% limit for capped drawdown and for the quite stringent MIR limit for flexible drawdown. Surely the use of scheme pension is primarily to circumvent the 100% limit and as such why should it continue to be allowed – certainly for SIPPs. We’d be better spending time trying to convince the government that in the current climate the 100% limit – and indeed the use of GAD limits – is inappropriate and that they should be reviewed at the earliest possible opportunity.
    John Moret

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