Terry Saeedi, Matthew Ambler, Ruth
Bamforth and Ian Devlin
Eversheds
Hilton Hotel, Belfast
21 March 2011
• The effectiveness of the anti-avoidance regime
• Case study
• Legal round-up:
– Latest developments in the Republic of Ireland
– Latest developments in Northern Ireland
The effectiveness of the anti-avoidance regime
• Anti-avoidance: a quick reminder
• Anti-avoidance in practice
• The effectiveness of anti-avoidance
• Anti-avoidance: where next?
• Regulator has power to issue:
– Contribution notices (CNs)
– Financial support directions (FSDs)
• Designed to protect members’ benefits and PPF
• Clearance regime
• CN may be issued, where reasonable, to party to act/failure which:
– Had a materially detrimental impact on DB scheme’s ability to pay accrued benefits; or
– Was designed to avoid or reduce a section 75 debt
• Covers employers, directors and other group companies
• Material detriment code of practice
• FSD may be issued on person connected or associated with sponsor which is:
– A service company; or
– Insufficiently resourced
• FSD only issued where reasonable
• FSD require Regulator-approved financial support until scheme wind-up
• CN: Bonas Group
• FSDs:
– Sea Containers
– Nortel Group
– Lehman Brothers Group
• Bonas Group:
– Bonas trading at a loss
– Bonas placed into pre-pack insolvency
– Regulator concluded Bonas unsustainable due to pensions liabilities
– Regulator declined imposing CN against individuals
• Bonas Group
– Upper Tribunal preliminary judgment
– Upper Tribunal final judgment awaited
• Sea Containers
– First FSDs issued against Bermudan SCL
– UK subsidiary (SCS) was service company
– SCL ceased participation in UK schemes
– Trustees contacted Regulator
– Reasonable to issue FSD
– Parties agreed financial support despite SCL and
SCS in US Chapter 11
• Nortel Group
– Nortel global network operated as single entity
– Group went into insolvency
– History of contribution holiday led to deficit
– Parent refused to let Nortel UK agree contribution schedule
• Nortel Group
– Regulator litigation in US/Canada
– Insufficiently resourced test satisfied
– Reasonable to impose FSD
– Further litigation
• Lehman Brothers
– Complicated corporate structure
– Companies operated in “closely integrated fashion”
– Parent companies controlled sponsoring employer
– Reasonable to impose FSD
– Further litigation
• Nortel and Lehman: the latest
– Both in insolvency
– High Court decision on FSDs and companies in insolvency:
• FSDs can be imposed
• FSD ranks as administrative expense
– High Court decision appealed
– FSD appeal on hold
The effectiveness of anti-avoidance (1)
• FSDs and companies in insolvency
• Enforcement overseas
• Timing issues
The effectiveness of anti-avoidance (2)
• FSDs and companies in insolvency
– Many issues as result of High Court decision
– Administrators/liquidators may be reluctant to take appointments
– Banks may have concerns
The effectiveness of anti-avoidance (3)
• Enforcement overseas
– FSD does not itself impose enforceable liability
– Ease of enforceability depends on the jurisdiction
– Regulator considers no difficulty enforcing in EU
– Jurisdictions outside EU may be problematic
The effectiveness of anti-avoidance (4)
• Timing issues
– Years before cases finally decided
– Is there any money left?
Anti-avoidance: what next?
• Pensions Bill changes to time limits
– Currently time limits end with Determinations Panel decision
– Bill provides time ends with Regulator warning notice
Legal round-up
• Latest developments in the Republic of Ireland
• Latest developments in Northern Ireland
Background to Recent Developments
• National Pensions Framework
• Deepening banking crisis
• EU/IMF bailout and National Recovery Plan
• Budget and Finance Act 2011
• New Fine Gael / Labour Government
National Pensions Framework – Overview
• Launched March 2010 following extensive consultation on 2007 Green Paper on Pensions
• Aims
– Adequacy of retirement incomes
– Sustainability of pensions system
– Increase pension coverage
National Pensions Framework – Proposals
• State Pensions
– State pension age to increase to 66 in 2014, 67 in 2021 and 68 in 2028
– State pension - 35% average weekly earnings
• Auto-enrolment
– Employees not already in a pension scheme
– Mandatory contributions from employees, employers and the
State (via tax relief) in a 2:1:1 ratio
– 2014 “ depending on the prevailing economic conditions ”
National Pensions Framework – Proposals
• Occupational pension schemes
– Replace marginal rate tax relief via State contribution of 33% tax relief
– Ongoing review of funding standard
– Proposals on new model DB scheme
• Public service pensions
– Career average for new entrants
– Increase retirement age to 66
– Link post-retirement increases to CPI
NPF Proposals – Overtaken by Events
• Deepening Banking Crisis
– €7 billion of NPRF invested in BOI and AIB
– Continued rise in Irish bond yields
– Ireland withdraws from bond markets
– EU/IMF bailout and National Recovery Plan (“NRP”)
NRP – Impact on Pension System?
• Commitment to reduce pension tax relief by €940 million by 2014
• Pension Contributions
– Abolish employee PRSI and health levy relief
– Reduction of annual earnings cap
– Reduction in Standard Fund Threshold (“SFT”)
– Phased reduction of tax relief to 20% by 2014
Budget and Finance Act 2011
• Implementation of NPR proposals
– Annual earnings limit reduced from €150K to €115K
– Tax free lump sums capped at €200K
– SFT reduced from €5.4 million to €2.3 million
– Imputed distributions on ARFs increased
– USC and PRSI applied to employee contributions
– Employer PRSI exemption reduced
• But, rate of tax relief on contributions unchanged
Other Recent Pension Developments
• Sovereign Annuities (SAs)
– Pensions Board approved SAs backed by Irish/EU
Government bonds
– Buy-in or buy-out pensioner liabilities
– Underlying bonds default => reduce pension payments
– Honest and reasonable defence for trustees
Other Recent Pension Developments
• Funding Standard
– Effectively suspended last October
– Reintroduction now awaited
– Re-price liabilities where invest in SAs
New Government, New Direction?
• Fine Gael / Labour Government now in power
• On pensions, Government for National Recovery 2011 –
2016:
– Retiring politicians wait until 65 for pension
– Cap tax subsidies on pensions €60K plus p/a
– Reforms to achieve universal coverage - focus on lower paid
– Greater flexibility for phased retirement
New Government, New Direction?
• Limited detail on pension proposals but:
– Continued clamp down on large pension pots
– Possible further reduction in SFT and annual earnings allowance
– May see auto-enrolment to address coverage
– Flexible retirement - access funds while still in employment?
Final Thoughts
• Irish pensions system undergoing major reform
• Pensions as tax efficient savings vehicle for high earners reduced
• The big threat - tax relief restrictions in NRP?
• Return of reformed funding standard for Sas
• Expect continued DB restructurings and wind ups
• Auto-enrolment and public sector reforms?
• Phased increase in State retirement age
Legal round up: Northern Ireland
• Revamped tax regime
• Auto-enrolment round the corner
• Other issues to be aware of
Revamped tax regime
• April 2011 changes
– New annual allowance (AA)
– Abolition of compulsory annuitisation
• April 2012 changes
– New lifetime allowance
Revamped tax regime: new annual allowance (1)
• From 6 April 2011:
– AA reduced to £50k
– AA test applies in year benefits come into payment except:
• in year of member’s death
• on terminal or serious ill-health
• for period of deferral
– Three year carry forward of unused AA
Revamped tax regime: new annual allowance (2)
• AA charge at marginal rate
• Proposal for payment of AA charge
– In full each year
– £2-6k in relevant tax year and balance from scheme
Revamped tax regime: new annual allowance (3)
• Transitional provisions
– New AA does not apply to pre 14 October 2010 pension earnings
BUT
– Issues for pension input periods after 5 April 2011
Revamped tax regime: abolition of compulsory annuitisation
• Members satisfying minimum income requirement (£20k pa) will not have to annuitise DC pot at age 75
• NB age 75 requirement removed for various lump sums
Revamped tax regime: April 2012 changes
• Lifetime allowance (LTA) currently £1.8m
• LTA to reduce to £1.5m from April 2012
• New “fixed protection” regime to protect earnings in excess £1.5m
• NB trivial commutation to remain at £18k
Auto enrolment around the corner (1)
• Auto-enrolment: quick reminder
• What employers need to do
Auto enrolment round the corner (2)
• Quick reminder
– Jobholders aged 22 to SPA to be auto-enrolled into qualifying scheme/NEST
– Minimum contributions 8%: 4% jobholder; 1% tax relief; 3% employer
– Auto re-enrolment every three years
• 2010 Review changes
Auto enrolment round the corner (3)
• What employers need to do
– Determine date duty applies: staging 01 October
2010 – 01 October 2016
– Decide on qualifying scheme
– Ensure relevant information available to jobholders
– Ensure administration process in place for both enrolment and re-enrolment
Other issues
• Abolition of default retirement age from 1 October 2011
• CPI/RPI for pension increases and revaluation
• Equalisation legislation expected soon
• Bridge Trustees v Yates in Supreme Court June 2011
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