POLITICAL STAGE Tax tug of war

Ceri Jones, financial journalist, reports on the confusion over pension transfers, following HMRC’s failed tribunal appeal concerning inheritance tax

HM Revenue & Customs (HMRC) has lost a tribunal appeal relating to the two-year inheritance tax rule on pension transfers.

The case concerns the estate of a woman who transferred her section 32 contract to a personal pension shortly before her death, with the express intent of putting it out of the reach of her former spouse.

Where a person dies within two years of making a pension transfer, if they knew they were in ill-health at the time of the transfer, HMRC sees it as an act designed to reduce inheritance tax (IHC).

Death benefits under a s32 pension are subject to IHT. The woman in the case was terminally ill with cancer when she made the transfer, and HMRC therefore treated it as a “chargeable lifetime transfer” and applied IHT, but the woman’s estate challenged the decision.

Advisers will be interested in this case because many are grappling with defined benefit (DB) pension transfer advice, where ill-health may be a factor in a client’s decision to take a cash equivalent transfer value, but where their estates might potentially be caught by HMRC’s rules. Several advisers have now called on HMRC to clarify its rules.

***The Financial Conduct Authority (FCA) has meanwhile warned advisers not to execute DB transfers without considering how the relocated assets will be invested. In a move that shifts additional responsibility on to the adviser, the FCA says that the adviser should take into account the characteristics of assets after transfer and illustrate the rates of return required to replicate the benefits given up by the transferring scheme. 

Some advisers have been recommending transfers based solely on critical yield, but the FCA stipulated that firms should consider the expected returns of the actual assets under the new arrangement.

Advisers report that they still receive enquiries from members of the public who believe that the DB transfer process will take just a few minutes and cost less than £100 in advice fees. The going rate is actually around 1% of the transferred funds.

Self-invested personal pension (SIPP) operators must also beef up their due diligence practices, the FCA has urged, as it is concerned at the increased use of discretionary fund managers running portfolios that invest in special purpose vehicle bonds.

SIPP assets must appear on the regulator’s list of standard assets, capable of being accurately valued on an ongoing basis and sellable within 30 days.

Operators that are subject to liquid capital requirements and fail to identify non-standard assets could suffer a capital shortfall, the regulator warned.

In July 2014, the FCA sent out a letter to the chief executive officers of SIPP operators, urging them to follow guidance it had issued the previous October.

Age discrimination challenge succeeds

The Employment Tribunal has found that the transitional provisions introduced in the New Judicial Pension Scheme (NJPS), as part of the reform to public pension schemes, are age discriminatory. The case relates to complaints that the transitional provisions to a career average basis in the NJPS subjects members to age discrimination and, in some cases, race and sex discrimination.

The case, McCloud & Ors v Ministry of Justice, will have ramifications across other public schemes where similar transitional provisions have been adopted, such as the Firefighters’ Pension Scheme. For private sector schemes, it also demonstrates the standards that must be met for an objective justification defence to succeed. 

The MoJ conceded at the Employment Tribunal that the transitional provisions offer less favourable treatment to the claimants because of age; and also that, because of the gender and racial profile of members, the provisions have a disproportionate impact on female and ethnic minority judges. It then sought to argue that those transitional provisions were justified, as a proportionate means of achieving a legitimate aim which was to protect those closest to retirement from the impact of pension reform. However, the Employment Tribunal decided this was not the case and that the arguments were unsupported by hard evidence. The MoJ is now considering its options for an appeal.

Gary Delderfield, a partner at Eversheds, noted the irony in the situation whereby the solution the trade unions fought for is now being challenged as discriminatory, and said the outcome suggests that specific and contemporaneous evidence will be required to stand up an objective justification argument.

DB schemes overestimating life expectancy

DB schemes are too cautious in their life expectancy assumptions and could knock £25bn from their deficits if they used more accurate life expectancy data, analysis from Club Vita reveals.

The overvaluation of life expectancy is equivalent to an additional four months of pension per member, a discrepancy that if addressed could keep scheme deficits down in 2017 valuations.

“Companies, and scheme trustees, should look at whether they’re taking an unnecessarily prudent approach,” Douglas Anderson, founder of the longevity specialist, said. “When we take on a new scheme, on average there’s an overvaluation of liabilities of around 1%, with several schemes enjoying far larger reductions to their deficits – equivalent to continuing to pay everyone’s pension for four months after they have passed away. You might have expected that bigger schemes would be better at assumption setting than smaller schemes, but that’s not so, with several £1bn plus schemes overestimating liabilities by substantial amounts.”

Anderson said common reasons for overvaluations are using final salary as a predictor of longevity, because a typical £5,000 annual pension could relate to a long serving, low salary person or a short service, high salary person – two profiles with very different life expectancies.  

He said that Club Vita’s survival tables use data from 2012–14, which captures the heavier mortality in recent years, rather than the Continuous Mortality Investigation tables typically used by schemes which use data from 2007, adding that there is also a natural behavioural bias to err on the side of caution.

Osborne and MPs’ extracurricular roles

George Osborne’s advisory role at BlackRock, which pays around £200,000 a year, was waved through by the Advisory Committee on Business Appointments (Acoba), but the committee is facing growing calls for reform and an overhaul of the rules surrounding MPs and second jobs.

In the most recent development, it has come to light that the committee has been officially reprimanded for approving a position at BlackRock for Osborne’s former chief-of-staff Rupert Harrison in June 2015, without disclosing meetings Harrison held with the asset manager. An investigation by the Information Commissioner’s Office into the dealings of Acoba found a “shortfall in public interest transparency”, and concluded it was “a matter of legitimate concern” that the appointments committee had not made public the two meetings between Harrison and BlackRock.

In Brief

Progress on EMIR

Pension scheme exemption from EMIR (the European Market Infrastructure Regulation), which sets minimal rules on the collateral that investors must have to back their derivatives trades, expires on
16 August 2018. The combined impact could wipe £3bn off EU pensioners’ retirement income every year, according to EU estimates.

Brussels is planning “targeted amendments” to the EU law to give pension schemes a permanent exemption, but there is concern that this could become bogged down in political squabbles over the role of clearing houses. In particular, the French have identified the revision of the 2012 law as an opportunity to address wider, more political issues relating to derivatives trading, such as the potential systemic risks posed by mergers between clearing houses.

Former Boris adviser says scrap relief

Edmund Truell, former adviser to Boris Johnson, chair of Disruptive Capital Finance and founder of Tungsten, has called on the government to scrap tax relief on final salary pension contributions. He also argues that promises to link pension payment rises to inflation should be dropped.

Truell is seeking to install himself as a trustee of Tata Steel’s pension scheme, having written to the trustees with an offer aimed at rescuing the £15bn scheme, by merging Tata Steel’s speciality unit with Sheffield Forgemasters, a struggling steel materials business.

Dashboard deliberations

Margaret Snowdon, a member of a Treasury steering group overseeing the development of the pensions dashboard, has called for pension schemes to be obliged to send data to the digital dashboard. Seventeen major pension providers, such as Legal & General, Aviva and Royal London, are collaborating to build a dashboard ready for testing by March.

While many large pension providers have signed up to the project, some DB schemes have little online presence and automation, so this task would be costly.

Snowdon says the government should put in motion the framework for compulsion by 2021 and has asked the Treasury to offer tax breaks to pension scheme administrators, in the form of VAT relief on dashboard related work.

Businesses that contribute to the pensions dashboard project have to pay £50,000 each for the privilege, although there could be some reimbursement if it comes in under budget.

Ceri Jones is an award winning financial journalist. She has edited several publications including the Investors Chronicle, Financial Adviser and Pensions Management.