Pensions Bulletin 2014/03
Print Download PDF version
23 January 2014
Government to announce delay to charge capping proposals today
Steve Webb will announce to Parliament today that the Government’s proposals to cap charges on the default fund within defined contribution (DC) schemes qualifying for auto-enrolment, which were to be implemented from this April, will not go forward for a period believed to be at least a year. This delay, which is highly embarrassing for policymakers at the Department for Work and Pensions (DWP), emerged last Friday in various news reports.
The DWP’s consultation on delivering value for money in DC schemes (see Pensions Bulletin 2013/45) by addressing high or unfair pension charges and improving disclosure was to have led to new rules for charging from April 2014. However, the BBC and others have reported that the DWP is backtracking from this timeframe in the face of widespread criticism of its proposals.
This delay is unlikely to put on ice the current debate on whether there should be regulatory intervention on DC scheme charges, as witnessed by the exchange in the House of Lords this week during the Pensions Bill’s Committee stage. A Pensions Institute report titled VfM: Assessing value for money in defined contribution default funds has also added to the debate, finding that the impact of charges is much more important than investment strategy to the pension a member will actually receive.
Consumer groups will be disappointed with any delay to the charge cap proposals, but it’s important that any changes are fit for purpose when they are introduced. We would rather see considered measures take a little bit longer than witness inappropriate changes being rushed through.
Simplified auto-enrolment requirements for DB schemes find their way into the Pensions Bill
Government amendments to the Pensions Bill have been tabled and accepted in the House of Lords this week that will make it easier for defined benefit (DB) schemes to be used as auto-enrolment vehicles.
These “alternative quality requirements for UK defined benefit schemes” enable regulations to be laid that can provide that a DB scheme having its main administration in the UK satisfies the quality requirement in relation to a jobholder if any one or more of the following is satisfied:
- The scheme is of a prescribed description and satisfies the defined contribution (DC) quality requirement in relation to that jobholder
- The cost of providing the benefits accruing for or in respect of relevant members over a relevant period would require contributions to be made of a total amount equal to at least a prescribed percentage of the members’ total relevant earnings over that period
- In the case of each of at least 90% of the relevant members, the cost of providing the benefits accruing for or in respect of the member over a relevant period would require contributions to be made of a total amount equal to at least a prescribed percentage of the member’s total relevant earnings over that period
The first route will make it possible for schemes that are regarded by the auto-enrolment legislation as DB, but have a DC-type structure, to be assessed against the DC quality requirements. For such schemes it may currently be difficult to show how the “test scheme standard” applicable to DB schemes is met. The new route should benefit a scheme that provides guaranteed conversion terms for contributions, such as through running an internal “with profit” deferred annuity structure, or a scheme that provides a guarantee on investment performance during the accumulation phase. Such DB schemes will also be able to take advantage of the phasing of contributions allowed to DC schemes. However, any scheme that qualifies under the first route will not be able to utilise the deferral of entry option (until 1 October 2017) that is generally available to DB schemes.
For the second and third route the prescribed percentage must be at least 8%. Regulations will set out further detail such as the method and assumptions to use, the benefits that should be ignored and certification by the scheme actuary. These are intended to be simpler tests than the test scheme standard and may be of particular use to currently contracted-out schemes that come April 2016 would otherwise be subject to unnecessary complex and burdensome assessments against this standard, having prior to this point been more than adequate by virtue of being allowed to contract out. In the fullness of time they could also benefit DB schemes that are modified to enable some risk sharing to take place between the employer and scheme members, once enabling DWP legislation is in place for such changes.
Under the second route the benefit accrual for the scheme as a whole is tested to see whether it is worth at least a prescribed percentage of the members’ total relevant earnings. Under the third a similar test is carried out for each individual member and at least 90% must pass.
This is very good news. Not only does this hold out the promise of easing the compliance burden for good quality DB schemes that cease contracting out in April 2016, but it also lifts unnecessary regulatory requirements on certain risk-sharing schemes that currently class as DB but whose benefit structure does not fit naturally with the test scheme. The regulations cannot come soon enough.
FRC challenges companies reporting their pension liabilities as equity
The Financial Reporting Council (FRC) has warned companies that the Financial Reporting Review Panel (FRRP) is likely to investigate if some of their pension liabilities are reclassified from debt to equity in company accounts.
The FRRP has noted such reclassifications occurring where employers have used a Scottish Limited Partnership as part of an asset-backed contribution arrangement. The FRRP acknowledges the genuine commercial reasons for setting up such arrangements. However, where the Scottish Limited Partnership has also been used to transform those of the company’s obligations to the pension scheme that are delivered via the asset-backed contribution arrangement into an equity instrument there are favourable impacts on the company accounts. Financial solvency, gearing and reported comprehensive income all improve as a result of a reclassification.
The FRRP has intervened with several annual reports and accounts because of this issue, and in each case the company has revised either the arrangements or the amounts recognised to the FRRP’s satisfaction.
There can be advantages for both the scheme and the employer in setting up an asset-backed contribution arrangement, but the FRC is making a clear statement that treating some pension liabilities as an equity obligation within the sponsor’s accounts is not one of them.
Other Pensions Bill developments
As the Pensions Bill made its way through the House of Lords this week the simplified defined benefit auto-enrolment provisions outlined above were not the only matters discussed. Some of the more significant amendments proposed included the following:
- Government amendments to the existing provisions in the Bill that make the PPF compensation cap service-related. These amendments, which were accepted, ensure that whilst members of a scheme undergoing a PPF assessment period at the time the legislation is introduced will see their payments increase in line with the service-related compensation cap, any valuation of the scheme will remain based on the current cap. They also provide that a scheme that is winding up outside the PPF when the legislation comes into force will allocate its assets against the current cap structure
- Government amendments to the PPF compensation cap. A technical error in the current law was corrected with retrospective effect so that any individual with an entitlement to an occupational pension and a pension credit following divorce in the same or a connected scheme will have the two entitlements kept separate when PPF compensation is calculated. The strict letter of the current law could result in significantly lower PPF compensation as the PPF cap is applied to the two amounts having been added together
- The Pensions Regulator’s new objective, “in relation to the exercise of its functions under Part 3 only, to minimise any adverse impact on the sustainable growth of an employer”, was passed without amendment. It was suggested that “sustainable growth” be changed to “sustainability”, to be more appropriate for all organisations (eg not-for-profit organisations). The Government reassured the House that “sustainable growth” would be interpreted widely to ensure it was appropriate for all employers
Budget 2014 – You decide!
HM Treasury has launched a public call for original and innovative ideas which could be considered in this year’s Budget on Wednesday 19 March 2014.
If you have any ideas which could improve the Government’s taxation or spending policies they need to reach HM Treasury by 14 February 2014.
This Pensions Bulletin should not be relied upon for detailed advice or taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
The firm is regulated by the Institute and Faculty of Actuaries in respect of a range of investment business activities.
© Lane Clark & Peacock LLP