Pensions: what’s new this week - 15 August 2022
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Welcome to your weekly update from the Allen & Overy Pensions team, covering all the latest legal and regulatory developments in the world of workplace pensions.
This week we cover topics including: TPR publishes blog post on refinancing risks; Benefit changes: ‘facilitation payment’ not subject to income tax or NI.
- TPR publishes blog post on refinancing risks
- Benefit changes: ‘facilitation payment’ not subject to income tax or NI
The Pensions Regulator (TPR) has published a blog post looking at the risks that refinancing may present to the employer covenant, and the actions trustees and employers should take to make sure that defined benefit schemes are protected. The post highlights that even where existing debt is being extended or replaced at the same monetary amount, other factors such as interest costs and fees, debt structure, security/guarantees and covenant terms could have a material impact on the employer covenant. TPR notes that tightening credit conditions are likely to have an impact on refinancing terms and that sponsoring employers and trustees should understand what implications any refinancing could have for the pension scheme and the employer covenant and seek to mitigate any detriment caused.
TPR also expects trustees to assess carefully any debt transaction where a new lender becomes involved as a counterparty for existing debt (for example, because this might trigger a change in lending strategy) and to engage with management ahead of any potential refinancing. Employers are expected to provide trustees with meaningful and timely information on debt and refinancing proposals.
As parties adjust their due diligence and other processes in the light of the Pension Schemes Act 2021 (PSA21) criminal offences and penalties, this blog post appears to be intended as a nudge to employers, trustees and other parties, including lenders, to take a wide view of the circumstances in which the potential impact on a DB pension scheme must be considered. In light of the PSA21 provisions, parties should be aware of TPR’s published expectations in this area, since complying with those expectations could potentially be relevant to establishing a ‘reasonable excuse’ for acts or omissions, in the event that one is required.
The Upper Tribunal (UT) has ruled that income tax and national insurance contributions (NICs) were not payable on a one-off lump sum ‘facilitation payment’ made to members of a pension scheme, which was paid as part of a negotiated package between the employer and unions: E.ON UK plc v HMRC.
The ruling reverses a decision of the First-Tier Tax Tribunal (FTT) last year relating to a test case in the context of changes made to the employer’s pension arrangements. Before the FTT, E.ON had argued that the payment was not taxable because it was not a payment ‘from’ the employment but was compensation for the loss of, or a reduction in, the employees’ pension rights. However, the FTT agreed with HMRC’s argument that the facilitation payment was ‘from’ the employment because it was made in exchange for agreeing to a change in future employment conditions; the payment was therefore subject to income tax and NICs. A key part of the FTT’s reasoning was that the payment was part of an integrated package negotiated with unions which also included a pay deal and other employment commitments alongside pensions aspects; it could not be separated out from the rest of the package.
E.ON has now successfully challenged this decision. It appealed on various points, but the fundamental issue was whether the payment was ‘from’ employment for the purposes of the relevant statutory provisions. The UT reversed the FTT’s decision, saying that the FTT had made a material error of law because, in its interpretation, in the pensions context sums would only be paid ‘from’ something other than employment if they represented compensation for the loss of accrued pension rights. In fact, the UT ruled, sums paid in respect of a diminution in the practical value of expected future benefits were also ‘from’ something other than employment. That error contributed in a material way to the FTT’s finding that the facilitation payment was ‘from’ the employment. In addition, the UT found that the FTT erred in law by assuming that, because the payment was made as part of a package, it bore the same character for tax purposes as other elements of the package.
Rather than remitting the decision to be considered again by the FTT, the UT considered all the FTT’s findings on the evidence and concluded that the facilitation payment was not ‘from’ employment. Instead, it was compensation for the adverse changes being made to rights and expectations in relation to the member’s pension arrangements and as such was not subject to income tax or NI.