Since our last update, the practical difficulties facing employers and pension trustees in dealing with the impact of the pensions levy created by the Finance (No 2) Act, 2011 (the "Act") have started to emerge. This update focuses on those practical issues assuming that the levy has been paid.

To recap on some key points:

  • The levy had to be paid through the Revenue On-line Service (via the administrator if the scheme is not registered) or on or before 23rd September (as the 25th was a Sunday).
  • Insured assets had to be valued at 30 June 2011 and the levy was payable by the insurer. Most insurers deducted the levy from assets invested with them on or shortly after 30 June 2011 and have already remitted it to the Revenue prior to the due date. If scheme assets include insured and non-insured assets the levy would have been partly paid and the actuary/administrator would then have advised on the remainder amount of the levy to be paid by 23 September.
  • Queries with the Revenue about valuing the assets have been addressed by Revenue guidance.
  • The levy is a stamp duty on a statement of assets. It is not an individual tax on members or their benefits or on the employer.

What happens next?

Most employers have stated that they want members to bear the cost of the levy. In the interests of making valid decisions, it is important for both employers and trustees to appreciate that trustees may not simply be able to agree to reduce benefits without formally considering the discretionary power given to them under the Act.

What does the Act say?

The Act provides that trustees have a statutory discretion to reduce benefits– "the benefits payable currently or prospectively to any member under the scheme may accordingly be adjusted by the trustees". If the trustees decide to reduce benefits the reduction overrides any contrary provision contained in any scheme rules or legislation. The issue this creates is that the Act permits trustees to reduce benefits but does not oblige them to do so. The question for the trustees is therefore whether it is appropriate to accede to the request – should they exercise the discretion to reduce benefits for one or more groups of members?

This leaves most trustees with a difficult decision to make since at first glance it is difficult to see how reducing members' benefits is in members' interests. While this issue is most acute for defined benefit schemes, we recommend that defined contribution scheme trustees should also consider the relevant factors involved and take a formally recorded decision.

What happens next?

What happens next depends on whether the scheme is defined benefit or defined contribution but either way it involves a difficult and delicate decision by the trustees. As with all trustee decisions the trustees must consider the relevant factors, no irrelevant factors, a correct interpretation of the relevant law and scheme provisions, and arrive at a decision which is within the range of answers open to trustees acting reasonably.

DC Scheme: In a DC scheme where the levy has in most cases been paid by the insurance company, the trustees should consider the relevant factors including the provisions of the governing documents on expenses, contributions and scheme amendments and consider whether it is appropriate in all the circumstances to ask the employer to reimburse the scheme for the levy.

DB Scheme: In a DB scheme the trustees are unlikely to take any action until there is a formal request from the employer to reduce members' benefits to take account of the levy. Again the trustees will need to consider the relevant factors including the provisions of the governing documents on expenses, contributions and scheme amendments and consider whether and if so how (after consulting the actuary and scheme legal advisers) to reduce benefits.

The trustees may consider that at first sight the employer should meet the cost of the levy but there are grounds on which employers may resist such an approach. Trustees will inevitably need to consider the wider interests of the beneficiaries and the various relationships central to the continued support of a pension scheme.

Formally recorded decision

The failure of the legislation to direct who will bear the cost of the levy is resulting in unwelcome discussions between trustees and sponsoring employers at a time when the funding of schemes is in the spotlight. These discussions are difficult and delicate for both sides. Given the significant prospect of challenge it is important for all employers and trustees to ensure that the decision making process is robust and properly recorded so it can be evidenced at a later date if necessary.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.