Feature – Preparing your pensions admin system for A-Day

A-Day check list
•A-Day is 6 April 2006, when an entirely new tax regime for pensions arrives. Scheme rules need reviewing before organisations’ admin systems can be changed.
•The Inland Revenue requires electronic reporting and payment from A-Day.
•Dealing with the change means setting up a project group, with some tight deadlines, and liaising closely with software providers.

Article in full
April 6, 2006 sees the replacement of the rules for tax relief on pensions, with a new structure providing for a Lifetime Tax Allowance (LTA) and annual allowances.

However, the existing tax regime is embedded in scheme rules. So a necessary first step before changing scheme administration systems is to review the rules and decide on policy issues. For example, employees will have a new freedom to carry on working and draw a pension at the same time from their employer. But will all employers want to allow it?

Staff with any form of transitional protection will need that fact recording. “For the relatively small number of people close to or over the lifetime allowance there will be a lot of work prior to A-Day, in determining which protection they should opt for,” explains Karen Hoodless, senior partner at specialist pensions administrators KHPMC.

Some of the simplified Inland Revenue (IR) limits are not that simple. “The tax-free cash calculation has some junior administrators glazing over,” adds Hoodless. Beneath the headlines that all employees will be entitled to take 25% of their pension fund as tax-free cash, the detailed rules require a complex calculation to be written into schemes’ administration systems.

>From April 2006, all schemes will have to send in their regular reports, self-assessment forms, and quarterly tax payments electronically. The IR have been consulting on the details of the information requirements and the electronic forms, but nothing will be in its final form until April 2005 at the earliest.

Gary Evans, regional manager, Benefits Administration Solutions, Watson Wyatt, says: “The major issue here is properly understanding what being compliant will mean by A-Day, and having procedures in place to identify what you need to report. For example, you’ll need your accounting process to track items classified as unauthorised payments as they occur. It could be very difficult indeed if you only identify them after the event, and a tax liability arises about which you haven’t communicated with the member.”

Schemes will also need to make specified reports to members, who must provide the schemes with certain information, to avoid any unnecessary tax charges. “Benefit statements will have to be revisited to include how much of someone’s lifetime allowance is represented by the accrued benefits, and this will have system specifications, programming and testing implications,” says KHPMC’s Hoodless.

The best way to deal with this will be to set up a project group, involving departments such as IT, payroll, HR and pensions administrators. The group needs to set some strict deadlines and be kept well-informed on IR developments. The project group leader will need to liaise closely with software providers and outsourced administrators, who will also be under severe time pressures.

And the cost of the change could be high; a 2004 survey by benefit consultants Hewitts found that a third of UK organisations anticipated costs could exceed £50,000.