borrowing and lending by pension schemes (59)
by Roderick Ramage BSc(Econ), solicitor
first published by distribution to professional contacts on 26 October 2018
This article is not advice to any person and may not be taken as a definitive statement of the law in general or in any particular case. The author does not accept any responsibility for anything that any person does or does not do as a result of reading it.
1 Whether or not trustees may borrow and lend money and provide security for borrowings depends on the general trust law, the trust documents and statute law. In this note, lending by pension schemes is lending to scheme employers and connected or associated persons.
2 Schemes’ trust deeds and rules commonly permit trustees to borrow money, give security for it and to lend money. These powers are not unconditional, but must be exercised properly, which means, in general, that the trustees believe that the borrowing or lending is the best interests of the beneficiaries of the trust, namely the scheme’s members and their dependants.
3 The words “unauthorised” and “authorised” in the Finance Act 2004 are used to show whether payments are or are not liable to tax (other than routine tax such as income tax on pensions). These words do not prohibit or permit the payment or transaction or invalidate it, but “merely” show whether they are taxable.
borrowing by pension schemes
4 Regulation 5 of the Occupational Pension Schemes (Investment) Regulations 2005, SI 2005/3378, made under the Pensions Act 1995, s36A, prohibits pension schemes from borrowing money except to provide liquidity on a temporary basis. Schemes with fewer than 100 members are exempt from this prohibition: ib reg 7.
5 Section 182 of the FA 2004 permits a registered money purchase scheme to borrow if it meets the arrangement borrowing condition, which is that the total of all existing borrowings (except amounts repaid) plus the new borrowing is not more than half the value of the arrangement’s assets.
6 The consequence of an unauthorised borrowing is that, by the FA 2004, s183, the scheme is treated as having made a scheme chargeable payment. The amount of the scheme chargeable payment is either:
(a) the amount of the new borrowing, if the existing borrowing is equal to or more than half the value of the arrangement’s assets; or
(b) if the existing borrowing is less than half the value of the arrangement’s assets, the amount by which the sum of the existing and new borrowing exceeds half the value of the arrangement’s assets.
7 There are corresponding provisions in s184 and s185 for arrangements which are not money purchase.
8 When a pension scheme is treated as having made a scheme chargeable payment, a scheme sanction charge become payable under s239 of the FA 2004 of an amount, which, under s240, is 40% of the scheme chargeable amount.
9 Section 251 of the FA 2004 (Information: general requirements) and reg 3 of the Registered Pension Schemes (Provision of Information) Regulations 2006. SI 2006/567 require information to be given to HMRC. Page 160000 of the Pension Taxed Manual requires scheme administrators to tell HMRC of reportable events submitting an event report for the tax year. A scheme chargeable payment is a reportable event.
lending by pension schemes
10 Section 40 of the PA 1995 regulation 12 of the Occupational Pension Schemes (Investment) Regulations 2005, SI 2005/3378 prohibit the trustees of an occupational pension scheme from holding more that 5% of the scheme’s assets in employer-related investments, which include loans to the employer or persons connected with or associates of the employer (as defined in the PA 1995 s123). The penalties on contravention can be to a fine or imprisonment.
11 This prohibition does not apply to a small scheme (SI 2005/3378 reg 12(1)), which is an occupational scheme with fewer than twelve members, where all the members are trustees (or trustees of a corporate trustee) of the scheme and either (i) the scheme’s deed and rules require all decisions to be unanimous or (ii) the scheme has an independent trustee as defined in the PA 1995 s23.
12 Payments by a pension scheme, which are not authorised by the FA 2004, are taxed. By s179 a loan made to sponsoring employer is an authorised employer loan if—
(a) it does not exceed 50% of the sum and assets held for the purpose of the scheme immediately before the loan is made,
(b) it is secured by a charge of adequate value,
(c) the rate of interest payable on the loan is not less than the rate prescribed in SI 2005/3449, ie 1% pa plus the average base lending rates of specified banks,
(d) its repayment date is within five years of the loan unless postponed for not more than five years, which may be done only once, and
(e) each periodic payment is not less than the required amount defined in the FA 2004, sch 30 para 4, which means level annual amounts of loan repayments pus interests throughout the loan period.
12 By the FA 2004, s162 “loan” does not include a debenture, loan stock etc listed of a recognised stock exchange or offered to the public.
13 The penalty for an infringement is an unauthorised payment charge (FA 2004, s208) of 40% of the unauthorised payment, the amount of which it highest of the excess amounts of the conditions in para 11 above (ib sch 30 paras 12 to 16), and
(a) an unauthorised payments surcharge 15% (ib s209) if the unauthorised payments in any period of twelve months exceed 25% of the value of the scheme’s assets, and
(b) a scheme sanction charge (ib s239) of 40% (reducible to 15% if the employer pays the tax due under s208) if two or more scheme chargeable payments are made in any tax year.
14 The only loans which are authorised by the FA 2004 are made under s179. All other loans, including loans to members, are unauthorised.
15 A loan by an investment regulated pension scheme (FA 2004 sch 29A , part 1) to a person to fund the acquisition of taxable property (typically residential property), is an indirect holding of taxable property (FA 2004, sch 29A para 16) and therefore taxable as an unauthorised member payment (ib s174A) unless a specified exception apply.
15 A pension scheme ought not to charge its property as a third party security, because (a) it is unlikely to be easy (or even possible) to show how it could be in the beneficiaries’ best interests and (b) it is likely to be an unauthorised payment under the value shifting provisions of the FA 2004, s174.
copyright Roderick Ramage
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