Scheme pays - What does it mean and are your administrators ready?

Scheme pays – what does it mean and are your administrators ready?

Now is the time to ensure that “scheme pays” is on trustees’ agenda to consider its implications and to give time to plan for any decision making or communication considerations. 

The Annual Allowance reduced from £255,000 per annum to £50,000 per annum from 6 April 2011.  A pension scheme member may now ask the trustees to pay any personal tax liability incurred in respect of benefits that accrue in excess of this Annual Allowance, where the tax liability exceeds £2,000. The trustees will then reduce the member’s benefits, defined benefit or defined contribution, by the amount of the tax.  The first requests to do this will arise in respect of the tax year 2011/12.

First requests must be submitted by 31 December 2013 but they may be submitted to trustees earlier.*

Once a request is made the trustees become jointly and severally liable for the tax due.  

There is a lot of detail and many practical issues that trustees and their administrators will need to consider. There are a number of decisions to be made as well as changes to existing process.

Trustees need to ensure they understand the decisions they have to make, for example:

• How would benefits be reduced?  This is particularly important for defined benefit schemes and actuarial advice will be required.
• In what circumstances do the trustees have to offer this, when can it be done on a voluntary basis and when might this be attractive to the trustees?
• Should trustees be communicating this option to members, if so, what is the timing and how does it fit with the overall communication programme?

The scheme administrator will need to set up an overall process with underlying procedures for collating and verifying information, updating records, settling the tax liability and communicating with members.

• Have your administrators advised you of what they will be doing to ensure compliance?
• Are your administrators ready to provide automatic Annual Allowance information, the first of which must be prepared by October 2013.
• Will information be provided to all members or just those whose benefit accrual exceeds the Annual Allowance?

A number of details are still to be worked out and administrators will be assessing the impact of the regulations over the next few months.

* The request can only be made where the annual allowance has been exceeded across all pension schemes and the member’s savings in the pension scheme exceed the Annual Allowance (£50,000).