Pensions Act 2004: could you be a cross-border scheme?

Summary

New cross-border requirements came into force on 30 December 2005. Broadly speaking, trustees must not accept contributions from an employer in relation to active members (other than certain seconded employees) who work in another EU member state. Trustees must not accept such contributions unless they are authorised by the Regulator and they ensure the scheme is fully funded on the scheme funding basis within a short period (for existing cross-border schemes, by September 2008).

It is important that employers and trustees ascertain whether or not their scheme would qualify as a crossborder scheme as soon as possible. Where the scheme does fulfil the requirements, the trustees and employers will have to decide whether they wish the scheme to continue to operate cross-border. If they do, which we suspect is unlikely in most cases, the Regulator will require trustees of schemes that were operating cross-border at 23 September 2005 to apply for approval and authorisation by 29 March 2006. If they do not, they will have to stop the accrual of the relevant members.

This briefing note sets out the questions trustees and employers will need to ask themselves to ascertain whether their scheme fulfils the cross-border requirements. It assumes that the scheme is located in the UK.

1. Does the scheme have active members whose place of work is in another member state and who are subject to the pension law requirements in that member state?

   If yes, the scheme may be a cross-border scheme.
   If no, the scheme is not a cross-border scheme.

   Remember that the Channel Islands, the Isle of Man and Switzerland (among others) are not member states.

2. Are all the non-UK but EU-based members seconded employees?

   If yes, the scheme is not a cross-border scheme.
   If no, the scheme is a cross-border scheme.
   

3. What is a seconded employee?

   A seconded employee is an employee who has been sent to work in another member state for a limited period (usually not exceeding five years) and who, at the end of that period, intends either to return to work for his or her employer in the UK or to retire.

4. Does it make any difference if the secondment started before 30 December 2005?

   No. Where the employee was seconded before 30 December 2005 for a limited period and the secondment period had not expired by that date, the employee is counted as a seconded employee for the purposes of the cross-border requirements.

5. What should employers and trustees do now?

   Employers need to work with trustees to:

   • Check if there are any members who qualify the scheme as cross-border.
   • Decide whether or not to take action to stop such members continuing to accrue benefits in order for the scheme to avoid being cross-border.
   • Obtain authorisation and approval from the Regulator if the scheme is to be operated cross-border.
     
     
6. Can a cross-border scheme operate before the trustees have applied for scheme authorisation as well as approval of the specific cross-border activity?

   No. Employers will have to notify trustees in sufficient time before any employees are transferred/employed overseas so that the trustees may both apply for and obtain the necessary authorisation and approvals.

7. What about a scheme which operated as a cross-border scheme on 23 September 2005?

   Provided that the trustees apply to the Regulator for the necessary authorisation and approval by 29 March 2006, the scheme may continue to operate as a cross-border scheme. The Regulator will confirm whether the scheme is a cross-border scheme within five months. If the trustees do not make the necessary applications, they must stop receiving cross-border contributions by 30 March 2006.

8. What is authorisation?

   Trustees must ensure that a scheme is authorised by the Regulator before it can operate cross-border. Authorisation is a general process: it does not relate to operations in a particular member state. The trustees need only obtain authorisation once no matter how may member state/employers become involved with the scheme.

   The authorisation application form can be found on the Regulator's website.

9. What is approval?

   Trustees must get approval for each specific cross-border activity. This means that approval is needed for each employer in respect of each member state where that employer has employees who are (or will be) scheme members.

   The approval application form can be found on the Regulator's website.

10. Can the trustees apply for authorisation and approval at the same time?

    Yes. The Regulator will consider the application for authorisation before the approval application. It is important to remember that a scheme may be authorised without having approval, but it is not possible to have approval without authorisation.

11. What does the Revenue say about overseas members of pension schemes from April 2006?

    The Revenue manual states that from 6 April 2006 anyone may become a member of a pension scheme regardless of where they or their employer are resident. However, UK tax relief may not be available