Jason Cawley of MNPA discusses administration changes resulting from the passing of the Finance Act 2011.
Pension Input Amounts, Scheme Pays, Pension Saving Statements and Pension Input Periods (PIPs) are new phrases that need be added to the already lengthy pension dictionary.
This is due to the passing of the Finance Act 2011, which will result in major changes to existing administration processes.
In particular, the testing of active (and possibly deferred) members to ascertain whether they have been impacted by the reduction of the Annual Allowance to £50,000 will have an immediate impact on administration processes.
These administration changes can be categorised into three key areas: Change, Complexity and Cost. Changes to administration processes will be necessary due to the reduction in the Annual Allowance that takes effect for PIPs ending in this tax year.
Members’ Pension Input Amounts will be calculated by reference to the PIP for each arrangement, not by reference to tax years. Scheme PIPs may not necessarily align with tax years.
As a result, either estimated or definitive calculations against the reduced Annual Allowance will have to start now and may affect retirements, leavers and possibly transfers. In reality, all member events since 6 April 2011 are affected by this change.
Schemes need to work with their administrators to ensure members who potentially may be impacted will be easily identified. Therefore, it is vital that administrators are fully aware of both the schemes’ PIPs for all of their arrangements, as well as identifying any members that may be affected.
The latter can be done via two methods: the provision of a list of affected members or via a matrix that has been provided by the scheme actuary.
To add a further step to this already detailed process, transitional provisions exist for PIPs ending in the 2011/2012 tax year that commenced before 14 October 2010 (when the changes were announced).
For the longer term, a process will need to be discussed, agreed and put into place, that will allow the administrators to perform annual checks across the membership in order to populate and issue Pension Saving Statements within legislative timescales.
Key decisions will be required whether to align the production of annual benefit statements to PIPs, as this will produce cost savings to schemes in the long term.
Complexity is mentioned at the beginning of this article and the introduction of ‘Scheme Pays’ encompasses this.
In summary, ‘Scheme Pays’ allows members to use their accrued benefits to pay some or all of any Annual Allowance Charge (AAC) for which they become liable.
It must be offered to members who have a total AAC over £2,000 and whose pension savings in the scheme are over the Annual Allowance. Administrators need to liaise with trustees to establish where and when to deduct this charge.
Naturally, deduction of member benefits must be actuarially fair and trustees will need to seek advice and direction from their advisors on this course of action.
As ‘Scheme Pays’ must be elected before a benefit crystallisation event occurs, payment of members’ benefits may have to be delayed until such time a decision has been made by the member and benefit adjustments have been completed.
Finally, to the dreaded cost word.
Administration departments are constantly undertaking comprehensive reviews and changes to current processes, calculations and letters to ensure that they are fully compliant with current legislation.
Major legislative changes, unfortunately, do not come cheap and these are the additional costs that will need to be factored into schemes’ budgets.
The administration world is constantly evolving and becoming more and more convoluted over time. To suggest that ‘administration is easy’ is very much no longer the case.