8 October 2015
FCA proposes changes to reflect “freedom and choice”
The Financial Conduct Authority has published a lengthy and wide-ranging consultation about updating its rules for pension providers in light of the new “freedom and choice” regime. The FCA recognises that some of its current requirements are no longer appropriate. The consultation will be of most interest to those operating DC pensions but some proposals are also relevant to DB schemes and their sponsors. The main proposals being made are:
- Annuity application forms must not be sent with wake-up packs and reminders unless specifically requested by the customer. This is currently in the ABI’s Code and the FCA intends to incorporate it into its own rules
- Decumulation (such as annuity) illustrations that are not sent either at the customer’s request or to comply with the FCA’s rules must include an illustration for each of the pension decumulation product options offered by the provider, or include multiple illustrations that are representative of this range. The FCA believes this will help prevent the provider (knowingly or unknowingly) steer a customer down a particular route
- The rules requiring the provision of information at least once a year about the sustainability of income after making withdrawals from drawdown products will also cover uncrystallised fund pension lump sums (UFPLSs). The consultation is vague on what specific information needs to be provided in this situation
- An “equivalent suitability report” must be produced when recommending UFPLSs. This is in line with the requirement for suitability reports to be produced whenever a personal recommendation is made in relation to an investment product, including the election of income withdrawals
- The “second line of defence” risk warning requirements will be modified for cases where the customer has a fund of £10,000 or less and has no safeguarded benefits (such as a final salary benefit). In such cases the pension provider will not need to send out a questionnaire for the customer to answer before they can proceed. However, the provider will still need to send out risk warnings
Additionally, the FCA discusses whether traditional “lifestyle” investment strategies that typically result in a pension fund being invested in a 75% fixed interest/25% cash investment split immediately before retirement remain appropriate in the new environment of much greater choice. The FCA particularly notes that “the new freedoms mean that firms can no longer assume that most customers will opt to annuitise at their selected retirement age. Moreover, the concept of a single retirement date will have increasingly less relevance for many customers”. The FCA asks for ideas about what it should do about this without making any proposals itself.
Finally, but not least, the FCA raises several issues about pensions transfer value analysis (TVA) – the process that must be undertaken when assessing suitability of DB to DC transfers. Currently TVA methodology does not allow for taking retirement income in any way other than via a conventional annuity. Generally, any person with a DB fund worth more than £30,000 is now required to take independent financial advice before they are allowed to transfer that fund. As the general requirement of FCA rules has required advisers to start from a position that such transfers are not in the interest of the member, this has led to a block on many such transfers with advisers unwilling to make transfers on behalf of insistent customers for fear of future consequences and liability. The FCA now views this situation as an “impediment” to DB scheme members wanting to take advantage of the pension freedoms available to DC scheme members. The FCA asks how the TVA methodology and regulations can be amended to reflect the new pension freedoms and allow such transactions whilst still providing satisfactory consumer protection. The FCA particularly asks for ideas about managing transfers for “insistent customers” who act against their adviser’s recommendation.
The FCA intends to carry out a further “retirement outcomes review” in early 2016. Interested parties should give their views about this to the FCA by 30 October 2015. The deadline for responding to the rest of the consultation is 4 January 2016.
This is indeed a wide-ranging – and important – consultation paper reflecting the dramatic shake-up of the pensions status quo over the last 18 months. The FCA’s proposals seem reasonable overall and strike a good balance between maintaining consumer protection and reducing the compliance burden for pension providers.
Same sex survivors’ pensions – discrimination in the past is lawful
In the linked cases of O’Brien and Walker the Court of Appeal has upheld the legality of discrimination against same sex partners in the provision of spouses’ pensions in respect of service before 5 December 2005.
To recap, Mr Walker worked for Innospec Ltd from January 1980 until his retirement on 31 March 2003 and during this time accrued rights in Innospec’s final salary pension scheme. Mr Walker had been living with his male partner since September 1993. They registered a civil partnership on 23 January 2006 and have since married.
Mr Walker claimed that in the event of his death his husband should be entitled to the same level of spouse’s pension as would a wife. The difference is substantial. It has been reported that a spouse’s pension of £41,000 per annum would be payable if the claim succeeded compared to about £500 (being the spouse’s GMP) if not.
The reason for the difference is that the UK Equality Act (which is how the EU equality directive is now transposed into UK law) explicitly provides that survivors’ pension rights which accrued, or are payable, in respect of service before 5 December 2005 (the date when the civil partnership legislation became law), do not have to be granted to same sex spouses. The Innospec scheme applied this limitation.
The Employment Tribunal ruled in Mr Walker’s favour in 2013 (see Pensions Bulletin 2013/04) and the Employment Appeal Tribunal ruled the other way last year. The Appeal Court has now upheld the EAT’s ruling.
In the appeal Mr Walker’s counsel put forward three arguments why his claim should succeed:
- The refusal of the Innospec pension trustees to confirm that his husband would be entitled to a survivor's pension is an act that took place after the equality directive came into force and consequently the “future effects principle” in EU law applies
- The ECJ decided in the Maruko (see Pensions Bulletin 2008/17) and Römer cases that a claim such as Mr Walker's is permitted by the equality directive even though his period of service ended before it came into force; and
- The prohibition on discrimination on the ground of sexual orientation is a fundamental principle of EU law and so the 2005 limitation must either be read in such a way as to make it compatible with the equality directive or, if that is not possible, it must be disapplied
The Appeal Court rejected all of these arguments. In particular, in rejecting the first argument the Court reviewed the ECJ’s authorities in the early 90’s “Barber” litigation and came very firmly to the view that it was quite clear that EU law could not be read to apply retroactively to pension accruals.
The “Barber” reasoning was also used to dismiss Mr O’Brien’s claim. Mr O’Brien is a retired judge who unsuccessfully claimed that his part-time service as a judge before the coming into force of the part-time workers’ directive should be pensionable.
This looks like the end of the road for Mr Walker’s claim. This is good news for small companies with DB pension schemes where one highly paid member with a civil partner or same sex spouse represents a large proportion of the scheme’s liabilities. Larger schemes and employers may be more relaxed and provide fully equalised same sex survivors’ pensions and indeed many have done so. Others may come under more pressure to do so.
While Mr Walker and others in similar positions will be disappointed by this outcome it may not be the end of the story. The Government has still to announce whether or not it intends to remove the December 2005 limitation following last year’s report (see Pensions Bulletin 2014/27). We assume that the Government has been awaiting the outcome of Mr Walker’s appeal before reaching a decision. This may follow soon.
Six months to go until the end of contracting out – have you registered yet?
HMRC’s latest countdown bulletin gives a useful update on a number of matters relating to the ending of contracting out, including the state of play with a number of services to help with the GMP reconciliation process. It also reminds schemes that if they wish to use the Scheme Reconciliation Service (SRS) they must register before 5 April 2016.
HMRC has recently set up a customer relations team to provide extra support and remind schemes yet to register for SRS to do so. Usefully the bulletin also sets out a list of reconciliation discrepancies which do not need to be queried with HMRC.
Missing from the exhortation to register for SRS is the consequence of not doing so – having to accept that HMRC’s records of GMPs for pensioners and deferred pensioners are correct. Given that substantial discrepancies on membership are being thrown up through this exercise, let alone GMP differences at the member level, this would seem to be a risk that trustees cannot take.
CMI 2015 projections indicate lower life expectancies
The Continuous Mortality Investigation has published its “CMI 2015” updated projections for mortality improvements. This latest edition takes into account mortality data up to July 2015, and includes the large number of deaths in winter 2015 (partly attributed to the flu vaccine being less effective than usual). As a result, life expectancies at age 65 using CMI 2015 are around 0.3 years lower than had been projected under previous CMI projections (all else held equal).
The research shows that, after a consistent period of strong mortality improvements between 2000 and 2011, improvement rates have slowed since 2011 (with 2015 on track to have the lowest rate of improvements observed in the last 40 years). Pension scheme trustees and sponsors will need to form a view as to whether the recent slowdown in improvements is the start of a new trend, or is just a short term blip. Either way it provides plenty of food for thought.
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.