In this month’s E-Bulletin, we consider the key pensions headlines from the recent Budget; the implications of the Test-Achats case on the use of gender in calculating pension scheme benefits; and the shake up of public sector pension provision in light of the Hutton Report and the consultation on the possible scrapping of Fair Deal.
Budget – pensions headlines
The key pensions headlines of the recent Budget are:
- flat rate state pension of £140 per week likely to be introduced – individuals currently receiving state pension will be unaffected;
- contracting-out for defined benefit schemes to be abolished (if flat rate pension goes ahead) – contributions to the current system to be honoured;
- employer tax relief on asset backed contributions may be cut – changes to ensure tax relief more accurately reflects the increase in value of pension plan assets;
- future changes in State Pension Age to be managed more automatically in line with longevity changes;
- Lord Hutton's recommendations (see below) for reform of public sector pensions accepted by the Government as a basis for consultation with public sector workers and trade unions;
- two percent cut in main rate of corporation tax – may lead to more funds available for pension scheme deficit funding.
More detail is expected to follow on all areas and will be covered in future E-Bulletins.
The European Court of Justice ruled this month in the Belgian Test-Achats case that, with effect from 21 December 2012, insurance companies will no longer be able to use gender based factors when calculating benefits and premiums.
European law prohibits the use of gender as a factor in the calculation of premiums and benefits for the purposes of insurance and related financial services. However, there is an exception to this rule – member states are allowed to permit proportionate differences in premiums and benefits where the use of gender is a determining factor in the assessment of risk taking into account relevant and accurate actuarial and statistical data. This exception was successfully challenged in the Test-Achats case as being contrary to the fundamental principle of equal treatment between men and women.
Impact of case for pension schemes: annuities
The case is likely to have a direct impact on the cost of annuities. Generally, insurers charge a woman more for the same annuity than a comparable man on the basis of actuarial factors which show that women on the whole live longer than men. In future, this practice will not be permitted and annuities purchased by members with their money purchase pension pots will have to be based on unisex factors. Similarly, trustees securing benefits for their members with an insurer (including buy-in/buy-out policies) will be facing premiums based on unisex factors. Given the additional "risk" associated with securing female members' benefits, due to their increased life expectancy, it seems likely that insurers will set factors closer to those which currently apply to females, meaning that the cost of securing benefits may rise overall from 21 December 2012. The cost of insuring death benefits is also likely to be similarly affected by the case.
Impact of case for pension schemes: actuarial factors
The Equal Treatment Directive, which prohibits gender discrimination in occupational pension schemes, contains an exception (reflected in UK legislation) which permits the use of gender based actuarial factors in certain areas, including commutation, transfer values and early and late retirement. These exceptions, though similar in rationale to the insurance exceptions, are not directly affected by the Test-Achats case which is restricted to the insurance industry. However, the principles on which the decision was based i.e. that the use of gender based actuarial factors is contrary to the fundamental European Union principle of equal treatment arguably applies equally to pensions. As a result, the use of gender based actuarial factors in defined benefit pension schemes may well be outlawed at some point in the future – legislative and case law developments will require close monitoring. However, at present, the specific exceptions remain in place and there is therefore currently no requirement for trustees to equalise actuarial factors, although trustees will want to bear the case in mind when considering whether it remains appropriate for the use of gender based actuarial factors in their scheme to continue.
Shake up of public sector pensions: Hutton Report and Fair Deal
Lord Hutton published his final report on public service pension provision on 10 March. Key recommendations are as follows:
- accrued benefits should be honoured in full, with final salary link maintained for past service;
- career average revalued earnings (CARE) scheme to be adopted for general use in public service schemes;
- pension benefits should be uprated in line with average earnings (rather than prices) during the accrual phase for active scheme members;
- normal pension age should be increased in line with State Pension Age (except for uniformed services where normal pension age should be fixed to reflect work involved – probably age 60);
- fixed cost ceiling for pensions to be set – if exceeded, there should be a consultation process to bring costs back within this limit with an automatic default change if agreement cannot be reached.
Consultation on possible abolition of Fair Deal
The Government has recently launched a consultation on the future of its Fair Deal policy, which requires private contractors taking on public sector contracts to provide broadly comparable pensions where staff are compulsorily transferred. Fair Deal not only requires future pension benefits to be broadly comparable to those in the public sector scheme which the employees are leaving behind, but also requires the new employer to take on liability for employees' past service pension benefits if they choose to transfer them to the new employer's scheme. Where the public sector scheme is a defined benefits scheme, the costs and risks involved in taking on these pension liabilities is a considerable disincentive (which is often prohibitive) to contractors tendering for these public service contracts.
The consultation follows recommendations made in the interim Hutton report last year which found that "Fair Deal creates a barrier to the plurality of public service provision" which "makes it more difficult to achieve the efficiencies and innovation which new providers can bring to public service delivery".
The consultation will close on 15 June 2011 and we will update you on the outcome of the consultation once published.