Pension fraud – Regulator updates its scorpion campaign (and produces a short film)

The Pensions Regulator has issued a press release launching the latest re-vamp of its “scorpion” anti-scam campaign (see Pensions Bulletin 2015/13 for details of the last refresh).

The press release includes some strong statements from the pensions minister and the chief executives of the Pensions Regulator and the Pensions Advisory Service about what a bad thing pension fraud is, how the public could better avoid it and how the authorities are working tirelessly against it.

The press release also includes a short film warning the public of the dangers of pension fraud.

The updated “scorpion” materials include a pension scams booklet for individuals and an information booklet, including a transfer checklist, for pension scheme professionals.  There is also a ten step guide for individuals and five step guides for business advisers and trustees on avoiding pension scams.  Trustees are exhorted to share the booklet aimed at individuals.  In practice this probably involves enclosing a copy with transfer and retirement packs although surprisingly there remains no explicit legislative requirement on trustees to issue fraud warnings.

Comment

Clearly it is proper for the authorities to update their anti-scam publicity material from time to time, although they will inevitably always be playing catch-up.  But, given that there has not yet been one criminal conviction of a pension fraudster so far as we are aware, we do worry that this sort of activity is becoming a substitute for the sort of tough and well-resourced regulatory and police action which would be needed to turn the tables on the scammers.

Moreover, there is a gaping hole in the Government’s strategy to cut off the growing problem of pension fraud at source.  Identifying pension scheme trustees as key players against pension scams is all very well but proving ineffective when the Government’s own legislation forces trustees to pay out transfers to what they believe are suspect schemes (see Pensions Bulletin 2016/07).

We remain of the view that the best approach from the Government is to legislate to enable pension scheme trustees to block transfers to suspect schemes along with actively targeting the scammers advertising their services and cold-calling members of the public.

MPs say Government should have done better in communicating the new state pension

In its final report of its current inquiry, the Commons’ Work and Pensions Committee has highlighted what it sees as a number of communication failures by the DWP in informing people of the new state pension which starts on 6 April 2016.  In particular, the MPs say that:

• An over emphasis on the flat rate of £155.65 per week has led to unnecessary confusion given that in the early years of the new state pension the majority will not receive this amount
• There was a missed opportunity to explain to women born during the 1951-53 period that they will receive more state pension payments across their lifetimes compared to men of the same age. Had this been made clear early in the process, the group may not have felt so much injustice
• Three groups in particular stand to receive less in the early years of the new state pension than they would notionally have received under the current system:
  • those with fewer than ten years of qualifying contributions
  • those, largely women, who would currently derive rights to a pension based on their spouse’s contributions and are not covered by transitional protection; and
  • those who built up large GMPs during the period from 1978 to 1988 and will reach state pension age during the early years of the new state pension
• The DWP should directly contact those affected, and others with gaps in their contribution records, explaining their personal circumstances and offering a telephone hotline to discuss with an expert the most appropriate strategy for increasing state pension entitlement
• It is concerned by the DWP’s reliance on individuals requesting a state pension statement or generating one on a website. The MPs recommend that people aged 50 or over, unless they opt out on the digital system, should be sent annual state pension statements

The MPs also welcome the Government’s commitment to the creation of a pensions dashboard by 2019 and will follow progress with interest.

Comment

The underlying thread in this report is that in what the MPs agree is a “welcome simplification of an overcomplicated system” the DWP’s communications have been too general in nature.  We also note that there has been a reluctance to identify the winners and losers.  The MPs suggestions are entirely reasonable, but it is unlikely that the DWP will have the funds earmarked to respond.  What is most likely to happen next is the launch of the online system for state pension statements.

DWP could have done better in communicating impact of pension reforms on those with GMPs

The National Audit Office (NAO) has published a report in which it expresses concern about how the DWP has gone about communicating the impact of the state pension reforms on those with GMPs.  Its investigation followed several members of the public approaching them who, in particular, were worried that those with GMPs would be worse off and that the DWP had not given sufficient warning to affected people.

In what is a thorough analysis of the issue the NAO finds that the impact of the state pension reforms on people with GMPs will vary widely and that there has been a lack of clear information from the DWP for people with GMPs.

In relation to the first finding, the report points out that although the DWP has modelled the aggregate impact of pension reforms, it has not analysed how individuals in contracted-out schemes will gain or lose out as a result of these reforms, and by how much.  The NAO carried out detailed modelling to quantify how those with GMPs could be impacted by the new state pension, and found that while some general patterns emerge, the amount by which individuals will be affected will depend on the time they were in a contracted-out scheme, the value of the new state pension, how the Government decides to uprate the state pension, and future inflation rates.

On the second finding, the NAO points out that in March 2015 it wrote to the DWP to highlight a lack of publicly available information and guidance on the scenarios under which pensioners might receive less pension under the new state pension.  The NAO had found by then that the DWP had not communicated the scenarios in which people could be worse off.  In its letter, the NAO recommended that the DWP review its communication strategy and distribute clear guidance, including scenarios relating to the end of contracting out and the indexation of GMP increases.

The report acknowledges that since then the pensions minister has made numerous statements on the pension reforms and the end of contracting out, including the impact on GMPs, and the DWP has published further information in this area, but it has yet to provide details on the circumstances in which individuals could end up worse off.  The report also acknowledges that the DWP is planning to issue a new factsheet on the effect of pension reforms on GMPs.  In conclusion, the NAO states that the DWP “will need to help people identify how they are affected and provide them with accurate and more complete information so that they can make informed decisions about their future pension arrangements”.

The NAO is planning further work to review wider pension reforms.

Comment

The NAO’s report is one of the best expositions of this complex area that we have seen.  Its central conclusion has quite clearly been picked up by the MPs (see article above).  This is yet further evidence that the new state pension will deliver losers as well as winners.

HMRC issues Newsletter 77

The latest pension schemes newsletter from HMRC is a round-up of a number of matters starting with the pensions and related measures in the Budget (see Pensions Bulletin 2016/11).  On this it clarifies that the existing income tax and national insurance relief for employer-arranged pension advice will be repealed rather than adjusted.  The newsletter also implies that the relief will apply for the first £500 of advice and that this limit will not act as a “cliff-edge” as the limit in the existing provision does.  The Government will also consult this summer on introducing a pensions advice allowance which “will allow people to withdraw £500 tax free, before the age of 55” from their DC pension to redeem against the cost of financial advice.

The newsletter also:

• Includes probably the most comprehensive current guidance that members can be pointed to from HMRC on the 6 April changes. It sets out a detailed list for members who already have a pre-2016 lifetime allowance protection to help them decide whether with that older protection they can apply for Fixed Protection 2016 or Individual Protection 2016; information on both is set out in two detailed appendices and new versions of the pro forma letter text for applying for “temporary registration numbers” originally issued with Newsletter 76 (see Pensions Bulletin 2016/07) have been provided
• States that HMRC is reviewing the 2016/17 Event Report, but it has not as yet been adjusted to include the two new lifetime allowance protection regimes so ideally administrators should hold off starting to use this
• Covers a few guidance and reporting matters in relation to pension flexibility
• Reprises the promise that the Government will consult on the details of the tax framework for the secondary annuity market in the spring of 2016
• Confirms that the information regulations have been updated following the introduction of the tapered annual allowance (see Pensions Bulletin 2016/10) – with a strongly implied message that plans to introduce a new “earners over £110,000” group qualifying for proactive pension savings statements have been abandoned; that HMRC’s pensions tax manual now contains guidance on the tapered annual allowance, pension input period alignment and the transitional provisions for 2015 to 2016; sets out some member messages on this subject in an appendix; and states that HMRC is currently developing a new single annual allowance calculator which it hopes will be available for use by summer 2016

Finally, the newsletter states that some small changes have been made to forms used by scheme administrators to claim relief at source on member contributions.

DWP publishes guidance on the alternative quality requirements

The DWP has published guidance that will be of particular assistance to defined benefit schemes that will cease to contract out on 5 April 2016 and which will continue to be used as an auto-enrolment vehicle after this date.  Such schemes are required to go through a process by 5 April 2016 to demonstrate that they remain of a quality that is sufficient for them to continue to be used as auto-enrolment vehicles for their active members.  This requirement applies even if there have been no changes to the accrual of benefits.

The guidance covers the two alternative quality requirements for defined benefit schemes, but majors on the cost of accruals test – an important easement to which was delivered by regulations very recently (see Pensions Bulletin 2016/10).  The guidance will be of particular interest to scheme actuaries who are likely to need to carry out a check on behalf of the scheme’s participating employers, the timescales for which are now incredibly tight.

Comment

This guidance is very welcome, albeit very late in the day, and should hopefully assist actuaries with most queries they may have on the operation of the cost of accruals test.

“People with significant control” – compliance action for corporate pension trustees

Changes to company law from 5 April 2016 mean that unlisted UK companies, including pension trustee companies, will be required to keep a register of “people with significant control” (PSC) of them.  In addition, the register must be filed with Companies House by 30 June 2016.  The information on the register must be kept up to date and criminal penalties apply for non-compliance.  Companies House has published guidance (some still in draft) on the subject.

A person of significant control is someone who directly or indirectly owns more than 25% of the company’s shares, holds more than 25% of the voting rights, or the right to appoint or remove a majority of the board.  It also covers persons who otherwise have the right to exercise, or actually exercise, significant influence or control.

Comment

Corporate pension trustees (independent trustees aside) are normally wholly owned subsidiaries of one of the scheme employers, or a related company, who will be the trustee company’s “PSC” for these purposes.  As such, trustee directors will need to ensure that procedures are in place so that whoever handles their statutory books complies with the new requirements.

Freedom and choice – what are DC occupational schemes doing?

The Pensions Regulator has published the results of a survey into how occupational DC schemes have approached the implementation of the pension flexibilities available since April 2015.  The Regulator commissioned this work as it wanted to understand the approach being taken by schemes and the risks and issues arising.

17 master trusts and single employer occupational schemes were interviewed, with a total DC membership of 68% of all occupational DC members.  Most of these schemes currently only offer the more traditional and simpler options (tax free lump sums and uncrystallised fund pension lump sums), with a view to including drawdown options within the next 12 months.  Highlights from the report include:

• Most schemes have had little experience in pension flexibilities, as very few members within the DC schemes have reached the minimum age at which they can start accessing their flexible benefits. A further factor is concern by employers that the pension flexibilities could take the scheme design too far away from the purpose for which the scheme was originally intended
• Members are generally not engaged with pension saving. This affects trustees’ ability to plan the investment strategy toward retirement.  Trustees are also concerned about heightened risks in pension fraud and scams, lack of understanding of tax implications, and the potential for members to make rash decisions
• Whilst engagement from members is generally low, schemes are at the same time finding that more members are requesting transfer and benefit quotations. Most of these requests did not typically result in a request to access benefits
• Single employer schemes are finding it increasingly more difficult to provide tailored communications that would be FCA-compliant were they required to do so

Comment

This is an interesting survey whose results are consistent with the observations of market participants and commentators over the past few months.  Occupational DC schemes are quite rightly taking a cautious approach to the new freedoms as they identify a number of risks to both members and themselves.

Auto-enrolment earnings parameters – Order finalised

The Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2016, (SI 2016/435) which will give effect to the 2016/17 earnings parameters agreed in December (see Pensions Bulletin 2015/53), has been finalised.

The earnings trigger remains at £10,000 pa and thus continues to be set at a rate lower than the income tax personal allowance, whilst the qualifying earnings band continues to be linked to the Lower and Upper Earnings Limits and thus covers earnings between £5,824 pa and £43,000.

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.