Pensions Bulletin 2015/10
5 March 2015
Pension Schemes Bill receives Royal Assent
Royal Assent to the Pension Schemes Bill was announced in the House of Lords on Tuesday. The Pension Schemes Act 2015 seeks to do three main things:
- Make changes to legislation sponsored by the Department for Work and Pensions (DWP) to assist the pension tax freedoms introduced in the Taxation of Pensions Act 2014
- Create a regulatory space for schemes that share risk between members and other parties; and
- Enable new schemes to be set up that share risk between members
The first, along with the necessary regulations, needs to be in place by 6 April 2015. The DWP aims to activate the second and third (including the required secondary legislation and any additional tax changes) by 6 April 2016.
An LCP Guide to the Pension Schemes Act 2015 is now available to assist trustees, employers and scheme managers in understanding the legislation made so far and the actions that they may need to take. In relation to the pension tax freedoms, it complements the LCP Guide to the Taxation of Pensions Act 2014 released shortly after that Act received Royal Assent in December.
The provisions relating to the pension tax freedoms will require nifty footwork by all those involved in occupational pension provision to ensure that schemes are ready in time to comply with their new duties. And as these provisions will all be in force this side of the General Election they are likely to prove hard for a future Government to unwind. By contrast, the two aspects of this Government’s risk sharing agenda contained within the Act are much more susceptible to a change in policy direction and so might never be commenced.
DWP sets out the detail of the new independent advice requirements
The Department for Work and Pensions (DWP) has added a fourth set of draft regulations to the three sets published on 19 February relating to its part in delivering the new DC flexibilities (see Pensions Bulletin 2015/09).
These latest regulations add the necessary detail to the Pension Schemes Act 2015 requirement that trustees must (unless otherwise excepted) check that “appropriate independent advice” has been received by a member or survivor before certain transactions can take place.
These transactions are where any “safeguarded benefits” (broadly defined benefits) are to be transferred or otherwise converted into “flexible benefits” (broadly defined contribution) and also where such benefits, unusually, are to be paid out as an uncrystallised funds pension lump sum.
Amongst other things, the Pension Schemes Act 2015 (Transitional Provisions and Appropriate Independent Advice) Regulations 2015:
- Set out the disclosures that the trustees must give to a member or survivor who is requesting that one of the above transactions is carried out – this includes telling the member/survivor within one month of the initial enquiry whether or not the independent advice requirements are likely to apply
- Define “appropriate independent advice” as advice from an independent adviser regulated under the appropriate part of the Financial Services and Markets Act 2000
- Contain the details of the confirmation that the authorised independent adviser providing the advice must supply to the member, or survivor, for onward transmission to the trustees
- Set out the details of the exception, which applies where the cash equivalent value of all the safeguarded benefits is £30,000 or less; and
- Contain important transitional provisions such that the independent advice requirements should not apply to most transfers and conversions that are being processed at 6 April 2015
The regulations also specify the circumstances in which an employer must pay for or arrange such advice. These are where the employer (not the trustees) writes to two or more members or survivors, setting out the available options “in terms that encourage, persuade or induce” the individual to ask the trustees to carry out any of the above transactions.
All four sets of regulations are subject to final legal checks and parliamentary approval later this month, so they should not be treated as finalised.
These latest regulations are a key part of the new post April 2015 regime. Although the independent advice requirements apply beyond individual transfers out, it is to these that they are likely to have the greatest impact, adding, as they do, a further layer of complexity to the management of transfer requests for those with defined benefits.
Previously announced Government policy was that the employer had to pay for this advice in relation to any internal transfer from defined benefit to defined contribution. The regulations now make clear that it is now necessary for the “encourage, persuade or induce” condition to hold.
And on this condition, there is a concern as to its exact meaning. Hopefully guidance from the Pensions Regulator will make clear what ought not to be caught, such as routine employer communications that simply explain the options available.
Views sought on how transaction costs in workplace pension schemes should be reported
The Department for Work and Pensions (DWP) and the Financial Conduct Authority (FCA) have launched a joint call for evidence on the disclosure of transaction cost information for workplace pension schemes.
From April this year, independent governance committees (IGCs) and pension scheme trustees will be required to report annually on the costs and charges involved in managing and investing the DC pension pots of scheme members. While in this first phase there is flexibility for governance bodies to choose how best to report this information, the intention is that the second phase will build on these requirements to require reporting in a standardised, comparable format. This call for evidence is intended to enable the FCA and DWP to look at how best to work toward such standardised reporting of transaction costs.
In particular, the DWP and FCA would like views, by 4 May, on:
- What costs should be included in the transaction cost reporting
- How such costs should be captured and reported
- Whether information about other factors that impact on investment return should also be provided
- How IGCs and trustees will receive cost information from those managing their scheme’s assets and investments and if additional disclosure requirements on other parties are needed to enable this; and
- When, how and in what format members and/or employers should receive transaction cost information
The second phase will also cover the reporting of administration charges, which are subject to the charge cap from April and therefore more readily identifiable and disclosed.
A quick reading of this paper exposes the difficulty being faced by policymakers in seeking to obtain greater transparency over transaction costs. But having already obliged DC trustees and IGCs to obtain information on such costs as part of their “value for money” annual assessment, the race is on to find ways of streamlining this. As such this call for evidence will interest many parties.
The charge cap – guidance for occupational schemes and rules for workplace personal pension schemes
The Department for Work and Pensions has published finalised guidance on how the charge cap will apply from 6 April 2015 for money purchase occupational pension schemes that are used to fulfil auto-enrolment requirements.
The guidance is aimed at trustees and managers of such schemes and provides an overview of how key elements of the draft regulations laid in February (see Pensions Bulletin 2015/06) work, with particular emphasis on identifying the default arrangement and how to assess charges.
In addition, the FCA has now published its final rules implementing the charge cap on default funds for auto-enrolment and banning certain charging practices in the workplace personal pension schemes it regulates. The rules are virtually identical to those published for consultation last October (see Pensions Bulletin 2014/46).
The DWP guidance is particularly well written and as such is a very useful primer for those who need to get into the nitty gritty of charge cap compliance. It reveals how potentially complex it can be to demonstrate compliance with what was a simple policy idea. At least the author had a sense of humour, as demonstrated by the naming of fictitious employers used in a series of illustrative examples!
As all the necessary tools to implement the charge cap have now been made available trustees and managers of DC occupational schemes and providers of workplace personal pension scheme should urgently consider the Regulations, guidance and rules to determine how the new requirements apply to their schemes, taking further advice and action to ensure compliance by 6 April where necessary.
Are changes needed to the law on investments in occupational pension schemes?
With the stated intention of ensuring that trustees of pension schemes understand the extent of their investment powers and duties and that the law supports them in meeting these, the Department for Work and Pensions has launched a consultation seeking views on two of the three proposed changes to the Occupational Pension Schemes (Investment) Regulations 2005 suggested by the Law Commission last summer (see Pensions Bulletin 2014/27).
The Law Commission not only concluded that trustees should take into account factors which are financially material to the performance of the investment, but also that the law is sufficiently flexible to allow other, non-financial, concerns to be taken into account subject to certain conditions. It also stressed the value of investors having meaningful relationships with the companies in which they invest.
The Law Commission recommended that the Government reviews:
- The exemption of schemes with fewer than 100 members from the regulation which sets out what trustees are required to do when choosing investments
- The reference to “social, environmental or ethical considerations” as one of the matters to be included in the statement of investment principles, to ensure that it accurately reflects the distinction between financial and non-financial factors; and
- Whether trustees should be required to state their policy (if any) on stewardship
The Government has decided it is not necessary to proceed with the first at the current time and so is now asking for views and concerns around:
- How the Investment Regulations could be amended to more clearly reflect the distinction between financial and non-financial factors; and
- Whether the Investment Regulations should require trustees to comply with the Stewardship Code published by the Financial Reporting Council or explain why they have not done so – and if not then what would be the most appropriate way to encourage trustees to consider their approach to stewardship
Consultation closes on 24 April, with the Government intending to publish its response later in 2015 and to make any resulting changes to secondary legislation in 2016.
There does seem to be merit in adjusting the regulations on the first point and in particular to move away from a narrow reference to social, environmental, or ethical considerations, but the case for mandating compliance with the Stewardship Code has not convincingly been made.
FCA finalises provider “additional protection” rules for those seeking to access their pension pot
The Financial Conduct Authority (FCA) has issued new rules for pension providers designed to bolster the protection of those seeking to access their defined contribution (DC) pension pots under the post April 2015 flexibilities. These follow the public letter sent by the FCA to Chief Executive Officers of pension providers on 26 January 2015 (see Pensions Bulletin 2015/05) that outlined the nature of this initiative – being dubbed by some as the “second line of defence” to the Pension Wise guidance service.
Under the new rules providers will need to give consumers appropriate personalised risk warnings when they decide to take a specific action to access their pension savings (including exercising existing options such as taking an annuity). The intention is that consumers will, through this, understand the importance and implications of the decision they are making and be further prompted to seek regulated advice or guidance from Pension Wise to help them understand the particular risks they face.
A process flowchart comprising a trigger and three steps sets out how the new rules will operate. The trigger is the consumer signalling to the provider that they want to access their pension savings. Step 1 is broadly around seeking to establish whether the consumer has or is intending to seek guidance from Pension Wise or regulated advice elsewhere. Step 2 is where the provider asks questions to identify whether risk factors are present and, depending on the response, step 3 is where certain “retirement risk warnings” are given.
In order to make this work the FCA has set out what risk factors it thinks are associated with each way in which DC pension savings may be accessed. Examples of risk factors are the consumer’s state of health, the impact on means-tested benefits and the existence of investment scams. The FCA goes on to give, for each risk factor, an example of what the provider should be trying to find out.
Precisely how providers go about setting up this “second line of defence” is being left to them, but they will need to keep records to show that consumers have received relevant warnings and whether they have taken regulated advice or guidance from Pension Wise.
The rules are being introduced from 6 April 2015 without consultation. However, the FCA is intending to consult in summer 2015 as part of a wider consultation on updating its rules in the pension and retirement area.
Insofar as occupational pension schemes are concerned, the FCA says that the Pensions Regulator will be publishing complementary guidance for trustees on the new disclosure requirements and that as part of this it will “set out the Regulator’s expectations of trustees in relation to the provision of information to their members on the generic risks of the decumulation options”.
For pension providers the nature of this ”second line of defence” is now quite clear, but for trustees of occupational schemes, we need to wait a little longer to find out what is to be expected of them in addition to their (soon to be adjusted) statutory obligations under the disclosure of information regulations. However, the terminology used by the FCA above implies that for trustees this might be more along the lines of providing a generic flowchart (hopefully provided by the Regulator) which the individual member self-serves. It will be a complete nightmare, if at the last moment, the means to impose a question, answer and risk warning session on trustees of occupational schemes is found.
New UK pensions accounting rules amended
The Financial Reporting Council (FRC) has published an amendment to the pension accounting rules in FRS 102. FRS 102 is the new UK accounting standard which is replacing previous UK accounting standards, including the pension standard FRS 17, for accounting years beginning on or after 1 January 2015.
The Amendments to FRS 102 – pension obligations clarify that certain complex rules that can require an entity to recognise additional liabilities under the corresponding international standards (in IAS 19 and IFRIC 14) should not apply to FRS 102. A further technical clarification affects pension schemes where a surplus is not recognised on the company balance sheet.
These amendments are in line with an exposure draft issued last year (see Pensions Bulletin 2014/34). An additional amendment, not included in the earlier exposure draft, requires companies to disclose their future funding commitments under funding agreements, such as contributions payable under a schedule of contributions.
The amendments apply immediately from the effective date of FRS 102 (ie accounting periods beginning on or after 1 January 2015), and are therefore potentially relevant to all companies preparing pensions figures under FRS 102.
This gives welcome certainty on an important point to companies preparing their pension figures under the new standard. The change does, however, introduce an important difference between the simpler rules in FRS 102 and the more complex rules in the international standard IAS 19.
Companies preparing figures under both IAS 19 and FRS 102 may, in some circumstances, see significantly different figures under each standard. Some companies have a choice of using FRS 102 or international standards, and these differences in pensions figures could prove to be an important influence on that decision for some companies.
High Court green lights Merchant Navy deficit repair plan but we still do not know for sure whether or not final salary linkage counts as “accrual”
In the context of the long-running lawsuit about which employers are on the hook for the Merchant Navy Ratings Pension Fund’s deficit (see Pensions Bulletin 2011/23) Mrs Justice Asplin has delivered her judgment on the latest plan to repair it.
This is a difficult case for those involved. The scheme (and its sister scheme for Merchant Navy officers) is a long-established, non-sectionalised, industry-wide defined benefit scheme providing pensions for merchant sailors.
The scheme had a deficit of £325m as at March 2013. One of the current participating employers had been paying 60% of the deficit contributions and the earlier case, referred to above, was the result of proceedings initiated by them and resulted in a ruling that former employers could still be on the hook.
Since then the trustees have been working on a new deficit reduction plan which makes former employers liable for deficit repair contributions and also gives the current employers credit for their deficit contributions paid to date. The trustees submitted this plan to the court for approval. Some of the former employers objected. In essence, these objections were twofold:
- The plan involved an impermissibly retrospective amendment; and/or
- The trustees had exercised their powers improperly, not in “the best interests of the beneficiaries”
The judge rejected these arguments, based on a detailed analysis of the legal authorities (the case runs to 103 pages and there are a lot of detailed arguments by counsel considered by the judge) and approved the deficit repair plan.
Of wider interest is that as part of all this the judge had to consider whether or not some enhanced revaluation terms awarded to certain members when the scheme closed to future accrual in 2001 constitute “accrual” for the purposes of pensions legislation governing winding up priorities and employer debt. This could be significant for determining the statutory liabilities of the various participating employers for the deficit. The scheme had been administered since 2001 as if it were “frozen” under the employer debt regulations, but if some employers had in fact continued to have active members in the eyes of the law, the scheme would not in fact have been frozen.
The judge held that enhanced revaluation does not constitute “accrual” because the right to it “is not related to being in the description of employment to which the scheme relates” on which the definition of active member in the Pensions Act 1995 is built.
Furthermore, she said that this conclusion was consistent with the way the indexation legislation works, defining “pensionable service” in part by reference to the accrual of years and the way in which revaluation, preservation and the cash equivalent legislation work.
It is a shame that the judge was not called upon to answer (or even said something obiter about) the question of whether or not final salary linkage (which lots of closed schemes have) constitutes “accrual” for statutory debt purposes. Many practitioners would welcome a clear ruling on this. However, the reference to “accrual of years” might give a steer on this uncertainty.
It is not yet clear whether this will be appealed.
Labour to fund tuition fee reforms through pension tax relief cuts
Speaking at Leeds College of Music last week, Labour leader Ed Miliband made a number of election promises on education including reducing maximum university tuition fees by £3,000 pa, to be funded by a further withdrawal in pension tax reliefs as follows:
- Anyone earning over £150,000 a year will receive only 20% tax relief on pension contributions – the same as that available to basic rate taxpayers
- The lifetime allowance will be reduced from £1.25m to £1m; and
- The annual allowance will be reduced from £40,000 to £30,000
No further details are available, but separately, Labour has also indicated that it intends to increase the higher rate of income tax from 45% to 50%.
The respected Institute for Fiscal Studies has published its observations on the pension aspects of the proposal. In relation to the first, it says that “Fundamentally the idea that income tax relief should be restricted to the basic rate is misguided”. On the other two it says that, although they “are less incoherent” they are “not the best way to reduce the generosity of the pensions tax system”. It concludes that the proposals build on existing complexities and are a “missed opportunity to rationalise those parts of the pensions tax system that are overly generous”.
This policy announcement was heavily trailed, but when it came the reduction in tax relief was more severe than had been widely anticipated. The first proposal would appear to be very similar to the special annual allowance charge measure announced by the former Chancellor Alastair Darling in 2009 but which, following the change of Government, was not introduced. What will concern many is the proposed further reduction in the annual allowance as, without introducing yet further complexity into an already complex regime, many individuals who are by no means high earners could find that they face a tax charge on their pension savings.
Auto-enrolment pushes workplace pension saving to a “record high”
New data from the Office for National Statistics (ONS) provides further evidence of the impact of the introduction of auto-enrolment, with the Department for Work and Pensions stating that “Britain now has the highest level of pension saving since records began in 1997”.
Key findings from the 2014 Annual Survey of Hours and Earnings are:
- Workplace pension scheme membership increased from 50% in 2013 to 59% in 2014, driven by increases in membership of occupational defined contribution (DC) and group personal and stakeholder schemes. Membership increased in both the private and the public sectors
- Occupational defined benefit (DB) pension schemes represented less than half (49%) of total workplace pension membership in 2014, for the first time since 1997
- Workplace pension membership increased across all age groups in 2014, with the largest increase in the age group 22-29, in which 53% are now members of a pension scheme. Although membership in the age group 16-21 is particularly low at 12%, it has increased, despite this age group not being directly affected by auto-enrolment
- In the private sector, the proportion of employees with workplace pensions making contributions of greater than zero but under 2% has trebled since 2013
- The proportion of employees in the private sector receiving employer contributions of greater than zero and under 4% has almost doubled since 2013
These last two findings are thought to be driven by auto-enrolment, with the increase in the proportions receiving low employer contributions potentially explained by new members who have been automatically enrolled into a workplace pension with lower initial employer contributions until the phasing of contributions is completed in 2018.
Whilst pension membership might be at its highest since 1997, the survey does not make clear whether overall savings are at a 20 year high. And as many of those new to pension membership are likely to be making and having paid on their behalf, very low contributions, the nagging concern, despite the clear success of auto-enrolment so far, is that of contribution adequacy.
This Pensions Bulletin does not constitute advice, nor should it be 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.