15 May 2015 - Post by:Joan Whybray
In pensions more than other industries, the past is not dead; in fact, it is not even really past! This is a point which haunts administrators and trustees in a number of guises on a day to day basis. For example, older schemes will be familiar with the problem of locating previous rules, which usually govern the benefits of members who left while such rules were in effect. If you can’t locate these rules, how do you establish the correct benefits for those members? The same problem arises in respect of old member communications and booklets. How can you know what members have been promised if you can’t locate the right documents?
Another way in which the pensions past can trip you up relates to regime changes – an example of this cropped up recently in respect of a member who had taken benefits both before and after A-Day. The member had taken a pension from one scheme in 2003, and another in 2007. Instinctively, one would perhaps be justified in imagining that the 2003 benefit would not count towards the lifetime allowance, as it pre-dated the A-Day regime coming into force. However, paragraph 20 of Schedule 36 of the Finance Act 2004 would suggest otherwise, and the member was caught out with a lifetime allowance charge, partly in respect of a benefit which had become payable before the relevant provision of Finance Act 2004 was effective. While the likelihood of this sort of problem occurring will reduce with the passing of time, it is still not outside the realms of possibility that other individuals could be affected and trustees should consider whether this should be mentioned in member communications.
The old tax regime can rear its ugly head again where schemes’ rules retain old Inland Revenue limits after 6 April 2006. Schemes often took this approach in the panic of the A-day reforms, thinking it simpler to keep the old Inland Revenue limits in place, and perhaps intending at some future time to address the changes properly but never quite getting round to it. As time marches on it is easy for practice to drift, and for the checks to be gradually forgotten, dismissed as irrelevant. However, if these checks are hardcoded into the rules, trustees are still under a duty to apply them, even though they might feel redundant in our brave new tax world. In most cases (where members are receiving simple 1/60ths accrual) these limits are not likely to be exceeded – however, where you have any unusual accrual, if you haven’t applied the old limits and they haven’t been properly removed, is there a chance you are overpaying members’ benefits?
With the current raft of changes to the UK pensions regime coming through, it is easy to focus on future problems to the neglect of requirements founded in past legislation and practice. However, the examples above show that there are good reasons to keep previous law and practice in mind going forward, to ensure both that the scheme is paying out the benefits it should be, and to prevent members from being caught out.
Joan Whybray is an associate at Allen & Overy LLP