No freedom and choice for the pension providers?

In a potentially worrying development for pension providers, David Cameron has been reported as pledging to keep a “careful eye” on those who are not making available the new DC freedoms to their policy holders, with Ros Altmann reported as expressing her disappointment, saying that the pensions industry “had over a year to prepare for the changes”.

These comments follow an announcement from Friends Life that it has written to a number of its policyholders informing them that it is delaying implementation of partial withdrawals from DC pots.

National newspapers are also running stories that are very critical of pension providers.

Comment

What exactly this might mean for the direction of policy in this area is as yet unknown, but the jungle drums do seem to be beating in Whitehall and a Budget is looming.  It could be that there is some early action on charges.

What appears to be missing from these latest pronouncements is that the Freedom and Choice agenda launched by the Chancellor just over a year ago, and which was not fully delivered by Government and regulatory bodies until literally a few weeks before the 6 April 2015 start date, was intended all along to be a permissive regime.  Market forces were to result in pension providers stepping up to the plate, not government dictat.  And if providers could not or did not wish to offer all the new pension freedoms, the understanding was that they should facilitate transfers, at a reasonable cost, to providers who would.

Although the Government now seems to be rowing back, there has to be a risk that at some point it will impose some or all of the freedom and choice agenda on pension providers.  If that were to occur, how long would it be before it would be extended to the trustees of DC occupational schemes?

Pension transfer rule changes confirmed

The Financial Conduct Authority has now extended the scope of its pension transfer rules so that they apply to those giving “appropriate independent advice” in relation to the conversion or transfer of safeguarded benefits into flexible benefits.

The final rules, which are effective from 5 June 2015, are broadly in line with the FCA’s proposals back in March (see Pensions Bulletin 2015/11).  As such, all this newly regulated advice must be provided or checked by a “Pension Transfer Specialist” who must normally undertake a transfer value analysis.  But, following representations made, the FCA has decided that a transfer value analysis is not required if safeguarded benefits are to be immediately crystallised on the member reaching the scheme’s normal retirement age.

The FCA has also adjusted its pension transfer rules so that they don’t cover transfers from occupational DC schemes.

The FCA acknowledges that the definition of safeguarded benefits is not clear and will be working with the DWP with a view to publishing broad categories/themes to help providers identify safeguarded benefits and apply the advice requirement.

In response to concerns that non-UK residents seeking to transfer benefits overseas may need to employ two advisers, the DWP is to consider whether amendments to legislation are necessary to ensure that the advice requirement operates as intended for non-UK residents.

Comment

Not requiring a transfer value analysis on retirement makes sense, but, as the FCA acknowledges, more work needs to be done on its relevance in the light of the post April 2015 flexibilities.  We can expect more changes following the FCA’s promised broader review of its Handbook pension rules.

Scotland Bill brings closer the day when pension tax could diverge from the rest of the UK

The Scotland Bill, which received its second reading in the House of Commons on Monday, takes a further step towards the potential for the taxation of pensions in Scotland to diverge from the rest of the United Kingdom.

This possibility already exists through the Scotland Act 2012 which provides for the Scottish rate of income tax.  Under this, the UK basic, higher and additional rates of income tax (currently 20%, 40% and 45% respectively) are reduced by 10% for Scottish taxpayers (essentially those living in Scotland for more than half of the tax year) and then the Scottish rate, unconstrained by the UK Parliament, is added back.  This was due to come in from the 2016/17 tax year.  However, it seems that this will now be replaced by much broader powers in the Scotland Bill.  Under this the Scottish Parliament will get the right to set income tax rates and thresholds on non-savings and non-dividend income for Scottish taxpayers, with the potential for a completely different income tax structure to apply north of the border – the most obvious being the return of the 50% rate for the highest earners and a different income tax personal allowance to that applying in the rest of the UK.

The net effect insofar as tax relief on pension contributions and taxation of pension payments is likely to be broadly the same as under the Scotland Act 2012, but as yet the detail is unknown.  If the same process applies as was intended under the Scotland Act 2012 then, in respect of tax relief, should the Scottish Parliament choose to diverge from the rest of the UK it would seem that:

• Occupational pension schemes using the net pay system will automatically deliver relief at the individual’s Scottish marginal rate of tax – so PAYE systems will need to be able to identify Scottish taxpayers and potentially apply a different marginal rate of tax relief to member contributions than to other UK taxpayers
• For other pension arrangements where the relief at source system is used (mostly for personal pension schemes and NEST) the provider will claim relief at the “Scottish basic rate” and the individual can claim additional relief via his or her tax return to bring the total relief up to his or her Scottish marginal rate

Further details of the Scotland Bill are set out in a House of Commons Briefing Paper.

Comment

The details of this are some way off.  What might be a lot closer is a complete rethink of pension tax relief on contributions by the Westminster Parliament, starting with further restrictions on the highest of earners being announced on Budget Day.

Regulator beefs up 2015 DC scheme return

Charge control compliance tops the list of changes being introduced by the Pensions Regulator in the new DC scheme return.

As a result of new legislative requirements introduced on 6 April 2015, trustees and managers of workplace DC schemes will be asked to confirm whether or not they comply with new charge controls, as well as other questions such as confirming the name of the scheme’s chair of trustees or managers.

The new regulations (see Pensions Bulletin 2015/14) are designed to drive up standards of governance and administration across workplace DC schemes.

ACA asks for more information from HMRC on how to cash out benefits

Following on from their earlier letter to HMRC (see Pensions Bulletin 2015/22), the Association of Consulting Actuaries has published two more letters asking HMRC to confirm and highlight some aspects of how occupational pension schemes can operate the new flexibilities introduced from 6 April 2015.

These letters particularly relate to an example member who has DB benefits, with a DC fund alongside in the same scheme arising from AVCs.  The scheme policy in the past has been:

• To allow/require any tax free cash (PCLS) to be drawn from the DC fund first before any commutation of DB pension
• And if there are more AVCs than can be allowed to be taken as PCLS then the balance has previously had to provide additional pension (either by way of annuity purchase or internal conversion to scheme pension)

In the post 2015 world of Freedom and Choice, the trustees are minded to allow the member to cash out any excess AVCs too (so the AVCs are partly delivered as a taxed lump sum).  The letters explore the approach and formulae that might be involved under the latest tax law, for members with no protection and for members with scheme specific protected lump sum limits under the transitional protections applying at 5 April 2006.

Comment

The letters show that using the new tools introduced into tax law is not intuitive in even relatively common situations and more guidance from HMRC for trustees would be very helpful.

Money Advice Service makes its Retirement Adviser Directory available

With no fanfare, the Money Advice Service has made available its Retirement Adviser Directory – an independent directory to match consumers to the most appropriate financial adviser within the directory.  These financial advisers are required to provide regulated financial advice in either the “at retirement” or “post retirement” market, with a free initial no obligation meeting to customers approaching them through the directory.  The MAS intends to provide information on fees and charges at a later stage.

Comment

This Directory is signposted from Pension Wise (the Government’s retirement guidance service) as a next stage to the retirement journey planning.  As such it would seem appropriate for scheme members to be directed to it, rather than other financial adviser directories such as unbiased.co.uk.

EMIR pension exemption extended for two years

The European Market Infrastructure Regulation (EMIR) is now largely in force in the UK.  This requires certain types of “over the counter” (OTC) derivative contracts to be “centrally cleared”.  OTC derivative contracts such as interest rate and inflation swaps are commonly used by pension schemes employing liability driven investment (LDI) strategies.

In recognition of the adverse effect this may have on members’ retirement income, OTC derivative contracts that are objectively measurable as reducing investment risks directly relating to the financial solvency of pension schemes are exempt from EMIR.  This exemption was due to expire on 16 August 2015.  It has now (barring some unforeseen intervention by the European Council or Parliament) been extended by a further two years to 16 August 2017.

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.