At a meeting on 3 June of the HMRC PSS Customer Forum, the new Head of Policy at Pension Schemes Services, Peter Seedhouse, offered a brief update on draft secondary legislation.

1. The Pension Schemes (Transfer, Re-organisation and Winding Up) (Transitional Provisions) (Amendment) Order 2007 was first announced by the Government on 12 December 2006. Nothing has been seen of it since the consultation closed on 5 October 2007. The Order aimed to preserve scheme-specific lump sum protection and protected pension ages on wind-up (see original Aries article).

In March 2009 Aries learned that it was being redrafted. HMRC told us the consultation had exposed the need for extensive changes, which the Solicitor's Office had been asked to make in September 2008. Unfortunately the second draft did not resolve the issues and HMRC sent further instructions on 8 May. Aries has been told to expect a final draft in the first half of June, although Peter Seedhouse informed the Forum that the solicitors had yet to deliver it. When it does appear, we have been promised an opportunity to comment before it is laid.

2. Changes to the Modification Regs (SI 2006/364) were published in draft in March 2007. They addressed the difficulty faced by those schemes whose rules contain a condition that no alteration to the rules may be made unless "approved" by HMRC. As drafted, they would amend SI 2006/364 to provide an override to any provision in scheme rules that makes alteration of those rules subject to HMRC approval. All former approved schemes, including both occupational schemes and personal pension schemes, would be covered. The Government's original stated intention was to lay the regulations so as to come into effect from June 2007. Again, nothing more had been heard officially of these draft regs until last week, when Peter Seedhouse announced that they would be "hopefully made before Parliament rises in July".

3. The same news was given about The Taxation of Pension Schemes (Transitional Provisions) (Amendment) Order 2008, published in draft on 1 July 2008 (see Aries article). This would amend SI 2006/572 by inserting a new article 34A, modifying FA 2004 Sch 28 para 15 in relation to financially dependent children who are over 23 and have ceased full-time education or vocational training. The effect is to exempt pensions paid on the death of the parent who was the member of the pension scheme from taxation as an unauthorised payment.

However, as drafted the scope of the amendment is narrowly drawn and will benefit only a declining minority of dependants*. Aries has argued that this runs counter to Government policy to assist elderly people to remain in their own homes as long as possible. Instead, the taxpayer would be bound to cover a growing bill for institutional care in residential homes. In the era of supposed 'joined-up government' this does not make much sense. Aries has pointed out also the inherent discrimination, in that beyond the scope of the draft amendments a dependant adult stepchild - or any other financially dependant adult - could still qualify for a dependant's pension under the law (subject to scheme rules, of course), whereas a natural adult child would be barred.

* the amendments will apply only where the member's pension or the pension death benefit has already come into payment (or entitlement to the pension death benefit has arisen), on the "announcement date" (which HMRC could deem to be 1 July 2008, the date the draft regs were published). Furthermore, pre-A Day the scheme rules must have allowed a pension to be paid in these circumstances, and must not have been materially altered since A Day in the respect.

4. Another outstanding matter raised at the Forum was the Scheme Sanction Charge review (see Aries article), which should have been completed by Summer 2008 and the results published soon after. It transpired that the review is indeed complete but HMRC are not yet ready to publish the findings. In the meantime, we understand HMRC has not sought to collect any scheme sanction charges.

At the previous meeting the Forum has suggested HMRC should publish a legislation "state of play" update from time to time (similar to that produced by DWP). Peter Seedhouse thought that this was a reasonable idea and agreed to produce some sort of spreadsheet, probably quarterly. The intended distribution is the Customer Forum only.

The only secondary legislation laid in recent weeks affecting scheme pensions under the FA 2004 regime has been The Pension Schemes (Reduction in Pension Rates) (Amendment) Regulations 2009 (SI 2009/1311), which comes into force on 1 July 2009 but has effect from A-Day (6 April 2006). This amends SI 2006/138 to remove unintended tax charges where there is a reduction to pensions paid to certain members during the winding up of a pension scheme.

Once it is in payment, a scheme pension can only be reduced from one year to the next in certain specified and limited circumstances set out in FA2004 Sch 28 para 2(4) and also in SI 2006/138. However, because of the time taken to wind up a pension scheme, pensions that are already being paid to the members at a reduced rate because of underfunding will often need to be reduced once again when the scheme's solvency is finalised. In practice, reductions are not always made at the same rate to all pensions in payment as they may have been put into payment on different terms and depending on the degree of scheme solvency at that time.

The existing legislation only caters for reductions to all pensions of a pension scheme at the same time and by the same rate. This means that the non-uniform type of reduction described above would create increased tax charges on most of the future pension payments and possibly even lump sums that have been paid in the past. This risk of further penalty is now lifted.