17 December 2015
The Government sets out version 2 of its plans for a “secondary annuity market”
According to the Economic Secretary to the Treasury, Harriett Baldwin, more than five million people will be able to sell their annuity from 6 April 2017.
This is the ambitious target outlined in this week’s joint Treasury/Department for Work and Pensions response to the idea canvassed in the March Budget (see Pensions Bulletin 2015/12) that a market in the income streams from annuities might be a good idea.
The original target was April 2016, but this was put back to April 2017 in the Summer Budget, because of the need to develop an effective package of measures to protect consumers (see Pensions Bulletin 2015/30).
The Government now says that it is “committed to implementing the market” by April 2017. So by then it will remove the pension tax restrictions on people seeking to sell their right to future income streams for an upfront cash sum, whether they purchased their annuity before 6 April this year or since then. Annuitants will be free to use the proceeds they receive from assigning their income stream how and when they want, taxed only at their marginal rate.
Mindful of the potential for this to end horribly for current annuitants, the Government is focussing a lot of attention on what consumer support should be put in place. So the Pension Wise guidance service is to be expanded to cover all individuals who wish to sell their annuity. For those with an annuity above a certain value, not yet specified, the Government will put in place a financial advice requirement similar to that already applicable to those who are thinking about cashing out their defined benefit pension rights (the necessary amendment to the Bank of England and Financial Services Bill was announced shortly before the response document was published). The Government plans to work closely with the Financial Conduct Authority (FCA) to consider how this will work in practice. The FCA will also consult on other measures that are designed to both protect consumers and promote competition, during 2016.
In its original consultation the Government had set its face against the idea that current grantees of annuity contracts should be allowed to buy back their annuitants’ income streams. The Government broadly holds to this line except that it now agrees that such buy backs may be permitted when brokered by an FCA-authorised intermediary, or if of low value. A whole new category of FCA-regulated activity will be set up for this.
The consultation paper contains a myriad of other decisions and things to do. Amongst the latter are: how to deal efficiently with cessation of annuity payments on the individual’s death; the development of an online tool to enable annuity holders to obtain an estimate of what they might receive in the new market; and the need to protect in some way dependants and beneficiaries whose contingent rights might otherwise be sold without their knowledge or consent.
It is no surprise that the Government is proceeding with this idea, although it is still light on how a market will actually operate. No doubt the details will emerge over the next year. But, as is made clear by the consultation response, there is much to do before everything can be in place and even then, the Government will have merely facilitated such a market. Insurers will then need to see whether they are willing to permit assignment and investors will have to work out whether they wish to operate in a new and untested marketplace.
Should the Government revisit its stance for stressed DB schemes?
The Pensions Institute has published a thought-provoking report that highlights the difficulties being faced by “stressed” underfunded closed DB schemes – which it defines broadly as being with a weak sponsor whose business is likely to fail before it has repaired its DB deficit. Based on an extensive series of interviews with experts from numerous pensions-related disciplines, the paper’s authors call for an open debate and unflinching scrutiny of the problems they identify.
“The greatest good for the greatest number” uses material that has come into the public domain via the PPF and the Pensions Regulator to suggest that there are 1,000 schemes, representing more than 15% of the PPF Index schemes, that are subject to unmanageable stresses and are very unlikely to pay future pensions in full to members and their dependants. Of these it suggests that 600 sponsoring employers will never pay full pensions and many of these employers will become insolvent in the next five to ten years. The remaining 400, with viable businesses, also face the prospect of an insolvency caused largely by the pension scheme deficit.
The Pensions Institute report questions the stance taken by the Government and Pensions Regulator that relying on employer survival represents an unrealistic prognosis for stressed schemes. It suggests that unless early intervention strategies are developed (including the ability for such schemes to pay less than full benefits on a planned and co-ordinated basis), the private sector and the economy as a whole will suffer a worst-case scenario in which there will be many more insolvencies and PPF transfers than might otherwise have been the case.
The report goes on to propose a “second-best” outcome, where trustees of stressed schemes can first act in the best interests of all scheme members, and second meet as best they can the demands of the wider group of stakeholders in the scheme.
LCP was one of the sponsors of this report and we welcome its publication, above all, to encourage debate in this area. Our experience with both trustees and sponsoring employers of stressed schemes has shown that positive solutions can be found for both members and employers, but that there is a need for a change in the regulatory environment in which such schemes operate.
Deadline draws near for initial comments on FCA review of the investment industry
When the FCA published the terms of reference for its market study into the investment management and consulting industry (see Pensions Bulletin 2015/50) it gave a very tight deadline of 18 December for initial comments from interested parties.
The announcement of the study has generated a lot of comment and as we observed previously it has the potential to lead to big changes in the investment landscape, including investment consultancy. The FCA states that it “would like to assess the ways in which investment consultants affect competition for institutional asset management”. It goes on to say that it wants to “understand whether investment consultants are incentivised to suggest or promote investment strategies which may increase their business, but which may not be in the best interests of the investor”.
The FCA notes in this context that that more than half the pension schemes with assets of over £1 billion have in place some form of fiduciary management conducted by their investment consultants.
Despite the tight timescale many will want to engage with the FCA’s process. Much of the commentary and indeed the bulk of the investigation focusses on investment managers, but the strand of the work relating to investment consultants will also be very significant for pension scheme trustees and sponsors.
We wholeheartedly welcome the FCA’s review into these areas. It will be of particular interest to see how the FCA proposes to address the conflicts of interest inherent within firms that offer both asset management and consulting services (eg fiduciary managers), as well as whether the “big 3” consultants identified by the FCA are deemed to have too dominant a role for a healthy market place.
PLSA annual survey shows continuing shift from DB to DC
The Pensions and Lifetime Savings Association has published its latest annual survey of its members, providing an insight into the pensions provision of some of the UK’s largest employers and pension schemes.
The survey includes data on scheme membership and asset values, outsourcing of administration and asset management, DC retirement product options and scheme governance. Highlights include the fact that 45% of main DB schemes in the private sector are now completely closed to future accruals, and that in DC schemes there has been a shift to investment in inflation-linked and property assets in the “at retirement” default fund.
The PLSA has also published a five year trend analysis based on 63 of its fund members who have responded to the survey every year between 2011 and 2015, which highlights the continued shift from DB to DC provision and the ongoing closure of DB schemes to both new employees and future accrual.
A copy of the survey (in pdf format) can be purchased from the PLSA here.
MPs investigate auto-enrolment implementation
A cross-party committee of MPs has launched an inquiry into auto-enrolment, inviting in particular small and micro employers, and their employees, to submit evidence on its implementation.
The Work and Pensions Committee is looking in particular for submissions to cover:
- The effectiveness of the auto-enrolment process and lessons learnt so far
- The impact of auto-enrolment on smaller employers and how they plan to mitigate any negative effects
- DWP support for small and micro employers in meeting their auto-enrolment obligations, and any recommendations for improvement
- The suitability of the auto-enrolment earnings threshold and minimum contribution rates
- The effect of the delays to the implementation of increases to minimum contributions announced in the Autumn Statement; and
- The interaction between auto-enrolment and other pensions reforms, including the new state pension and pension freedoms
The deadline for submissions is 3 February 2016.
New state pension regulations extend gender and age exceptions for occupational schemes
An Order has been laid before Parliament that makes amendments to existing legislation in relation to the introduction of the new state pension applicable to those reaching State Pension Age on or after 6 April 2016.
The Pensions Act 2014 (Consequential, Supplementary and Incidental Amendments) Order 2015 (SI 2015/1985) amends 44 different pieces of secondary legislation, nearly all of which relate to the operation of state benefits. However, Articles 34 and 35 relate to occupational pension schemes.
Taken together these two articles amend the regulations setting out exceptions to the general requirement not to discriminate on grounds of age or gender in such schemes. The current exceptions relating to discrimination as a result of differing state pensions are extended to also cover differences due to the new State Pension.
The Order comes into force on 6 April 2016.
Auto-enrolment parameters for 2016/17 settled
In a written statement to Parliament, Baroness Altmann has announced that the Government has settled upon the auto-enrolment earnings trigger and the qualifying earnings band for 2016/17. The supporting analysis is set out in a separate document.
The earnings trigger will remain at £10,000 pa and thus continue to be set at a rate lower than the income tax personal allowance, whilst the qualifying earnings band will continue to be linked to the Lower and Upper Earnings Limits and thus cover earnings between £5,824 pa and £43,000.
An Order will be laid before Parliament in the New Year to this effect.
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.