19 May 2016
Pensions and Lifetime Savings Bills announced
The rumours have proved true with the Government finding parliamentary time for a Pensions Bill in this year’s Queen’s Speech delivered at yesterday’s State opening of Parliament.
The Pensions Bill will deliver:
- Protections for members of master trusts
- The removal of barriers for consumers who want to access their pension savings flexibly (including the capping of early exit fees charged by trust-based occupational pension schemes); and
- The restructuring in the delivery of public financial guidance to consumers
In particular, master trusts will have to demonstrate that they meet strict new criteria before entering the market and taking money from employers or members and the Pensions Regulator will be given greater powers to authorise and supervise these schemes and take action when necessary.
As expected following the Budget in March, the Government is to introduce a Lifetime Savings Bill which will enable it to create a new Lifetime ISA, providing savers with a bonus on savings that can be used for a first home, or retirement, or both (see Pensions Bulletin 2016/11). The Bill will also enable the Government to create a new Help to Save scheme, which would support those on the lowest incomes who are trying to save for a rainy day.
In relation to the Pensions Bill we will have to await details. In particular, it is not clear to us what the Government is proposing regarding exit charges beyond that already legislated for in the Bank of England and Financial Services Act (see Pensions Bulletin 2016/18).
We also wonder if the Pensions Bill may end up doing more than currently advertised. The Pensions Regulator’s powers to regulate DB schemes following the collapse of BHS (see Pensions Bulletin 2016/18) may be enhanced. We would also like to see legislation to address the problem of pension scams.
Work and Pensions Committee flags concern that auto-enrolment success is at risk
Reporting on the progress of auto-enrolment to date the House of Commons’ Work and Pensions Committee notes that the policy has so far been a “tremendous success” but also that there are some potential clouds on the horizon.
By March 2016, 6.1 million people were enrolled into a workplace pension as a result of auto-enrolment. 110,000 employers have declared compliance with the auto-enrolment requirements. Only around 10% of eligible workers have opted out, compared to the Department for Work and Pension’s initial assumption of 28%.
Measures to assist small and micro-employers
The Committee says that the current phase of moving 1.8 million small and micro-employers on to auto-enrolment will be the most challenging. In this respect it asks for:
- The messages within the DWP communications campaign – ”Workie” – to be refocused
- The DWP to work with HMRC to expand existing payroll software tools to support small and micro-employers in meeting their auto-enrolment obligations; and
- The DWP to reassure employers about their liability if their chosen pension scheme performs badly or fails
But perhaps the biggest concern of the Committee in relation to auto-enrolment is master trusts. There are around 72 master trusts currently open and the low barriers to entry mean that the Committee and others have doubts about the quality of some of these schemes and the competence of those running them. It notes that if a master trust fails there is the potential for members to lose retirement savings as their pots may need to be raided to pay winding up costs. The bad publicity such a failure would create may also undermine the public’s faith in the auto-enrolment system as a whole.
One of the Committee’s key recommendations is that there should be stronger regulation of master trusts and it supports the pensions minister’s desire that parliamentary time is made available for a Pensions Bill this year to make provision for the Pensions Regulator to have power to enforce:
- Minimum financial and governance standards for market entry
- Ongoing requirements for master trust schemes, which might include making compliance with the master trust assurance framework mandatory; and
- Measures to protect members in the event of a master trust winding up
The Committee is also concerned that the Lifetime ISA announced in this year’s Budget will be seen as a competitor product to workplace pensions and could jeopardise the success of auto-enrolment, especially as it will be introduced next year just when the majority of small businesses will still be on the move to auto-enrolment and the statutory contribution rates will be yet to rise.
The Committee recommends that the Government should make it clear that the LISA is not intended to be a pension and that it should also conduct urgent research on any effect that the LISA might have on auto-enrolment and report on this before the 2016 Autumn Statement.
The Committee (and others) seems to have got its way on master trusts with the announcement of a Pensions Bill. It is also right to warn against complacency about the implementation of auto-enrolment with so many small employers still to sign up. It will be especially interesting to see how the Treasury responds to the recommendations about LISAs.
Pensions Regulator predicts scheme deficits have worsened by at least one-fifth since 2013
In its 2016 funding statement, the Pensions Regulator says that while deficits will have increased for most schemes with valuation dates between 22 September 2015 and 21 September 2016, the required increase in deficit contributions “may be affordable for the majority of sponsors without materially affecting their plans for sustainable growth”. This takes into account the sponsoring employers’ increased profits and dividend payments over the three year period since the previous funding valuation.
With its views firmly rooted in the wider picture of integrated risk management (IRM – see Pensions Bulletin 2015/52), the Regulator comments that:
- Trustees need to understand, monitor and manage the key covenant, investment and funding risks together, and in particular, an understanding of the ability of the sponsor to support the scheme both now and in the future is a fundamental part of the IRM process
- Some schemes may see a substantial increase in annual deficit contributions, partly as a result of the short remaining term of current recovery plans. Where this is the case, trustees and employers should discuss openly and consider alternative options. It may be reasonable to extend the length of the recovery plan in cases where deficit contributions are large compared to the sponsoring company’s profits – the Regulator has in particular considered the affordability of deficit recovery if the recovery plan is increased by three years
- More mature schemes with relatively high allocations to growth assets are much more likely to be affected by short-term market volatility. Over 700 schemes are considered as “mature”, and of these schemes, nearly 200 have over 60% in growth-seeking assets
- With regard to assumptions, trustees should consider any supporting evidence before adopting the newest (weaker) “CMI” mortality model, or making any allowance for funding gains from members transferring benefits out of the scheme in light of the recent pension freedoms. Reduced expectations for future investment returns should be taken into account when setting the contribution rates for future accrual
This is once again a helpful statement from the Regulator giving a steer to those schemes undergoing a funding valuation this year, as well as guidance to those with valuations at a later date. As the first funding statement after the publication of its guidance on IRM last December, it serves as a useful example of how key covenant, investment and funding risks should be managed together.
Having been accommodating in recent years to trustees who go past the statutory deadline, the Regulator has also signalled that it is likely to be stricter for 2016. However, it is not clear what this will mean in practice.
The tapered annual allowance regime: Scheme Pays (and information requirements)
We now have perhaps the last missing piece of the jigsaw on the operation of the complex Tapered Annual Allowance applying from 2016/17. HMRC has confirmed the circumstances when an individual has a right to “Scheme Pays”, ie can demand that his scheme pays HMRC some or all of his annual allowance (AA) charge from his accrued benefits, rather than the member paying the charge directly himself.
The confirmation is via HMRC’s Newsletter 78 released this week, and through an update released last week by HMRC of the Pensions Tax Manual (see PTM051100 in the section “who is responsible for paying the AA charge”).
In essence, to be able to demand Scheme Pays from a scheme to help with a 2016/17 AA charge (and similarly for future years), as before all of three conditions have to apply:
- The individual’s overall AA charge for 2016/17 (from all accrual) is more than £2,000
- The individual’s amount of AA usage in the scheme ignoring carry forward (their pension input amount in the scheme) for 2016/17 is more than £40,000 (importantly this being the general AA, not the member’s personal tapered AA, for the tax year); and
- The member makes appropriate elections within statutory deadlines
There are further complications if the individual is subject to the money purchase annual allowance because of having drawn a money purchase flexible payment in the past.
In the new Tapered AA world, it is likely that many more individuals will have AA charges, sometimes unexpectedly and unpredictably, so the government’s policy landing place on Scheme Pays is important. The policy chosen (perhaps the only workable one) means many of the individuals who have an AA charge will not be able to demand help from Scheme Pays (Example: an individual with no spare AA from the past, with 2016/17 AA usage £30,000 from just one scheme and with a Tapered AA that turns out to be £20,000 would not trigger the right to Scheme Pays - so might have to pay a charge of perhaps £4,000 from his own pocket). Conversely it means that a scheme that always limits accrual to £40,000 or less continues never to be on the hook to implement Scheme Pays, so in theory no extra admin burden. But some employers/trustees may decide nevertheless to allow Scheme Pays voluntarily whether a member has a statutory right to or not, rather than have some very unhappy members.
For the technically minded reader, this policy decision is implemented without needing law change because of subtle wording changes in 2014 to introduce the Money Purchase AA (if the law refers to “the annual allowance for the year in the case of the individual” (or similar) it means the individual’s personal tapered AA, but where it just refers to “annual allowance” it means the general untapered figure).
Newsletter 78 also confirms that for 2016/17 schemes are required to provide an AA “pension savings statement” to a member proactively only if that member’s 2016/17 AA usage pension input amount in the scheme exceeds the general untapered AA (£40,000 for 2016/17) rather than if it exceeds the member’s personal Tapered AA (the reading of the tax law follows similar lines to that described above for Scheme Pays). However, we note that of course the law also requires scheme administrators to provide a pension savings statement on request – and we suspect there will be many more such requests.
2016 Lifetime Allowance Protections – reassurance on “temporary reference numbers”
HMRC Newsletter 78 – and some separate correspondence – has given helpful reassurances to allay some concern amongst scheme administrators relating to members who apply for Individual Protection 2016 (IP2016) or Fixed Protection 2016 (FP2016) using the interim application process (and has given some tighter information on wording to be used in the application processes).
As a reminder, alongside the pensions tax law lifetime allowance reduction from 6 April 2016, HMRC has made available protections individuals can apply for to help mitigate its impact – but it will take some time for HMRC to set up its long term online application system. Because of this, HMRC has set up an interim facility, the so-called “Temporary Reference Number”, to allow individuals to register for a protection if (and only if) they need to start to draw benefit (and trigger the lifetime allowance test) ahead of HMRC’s online system being in place. Concern has arisen about the possible “temporary nature” of the protection – both because HMRC had put a lot of emphasis in its material on the need for members to follow up with the online application and because of the complex nature of the underlying legislation (we noted this in our commentary about the lifetime allowance reduction in Pensions Bulletin 2016/14).
Newsletter 78 does now give some reassurances about the position if the member fails to do this follow up. And shortly before the Newsletter, HMRC provided further confirmation via correspondence with the Association of Consulting Actuaries (see the entry for 13 May 2016 on the Association’s Briefings & Information webpage) and the Association of Pensions Lawyers. In the correspondence, HMRC confirms that “In relation to … BCEs that have taken place under the auspices of a temporary reference number, there may be reasons why HMRC would look again at a BCE and the LTA charge on that BCE, but it would not be because the member had failed to obtain a permanent reference number”. The letter also gives more detailed technical background.
However, the Newsletter does warn that when the pension scheme administrator look up service becomes available, the service will only validate permanent reference numbers.
As a separate point, the Newsletter also contains amended pro forma letter text for scheme members to use when applying for a 2016 Protection using the interim process. These pro formas have been amended from the versions in earlier Newsletters (see Pensions Bulletin 2016/07) now to more accurately list the information the member must provide to HMRC to fit the legislative provisions (the ACA/APL/HMRC correspondence refers to this mismatch) – so currently it is the best list for members to use rather than other HMRC sources of guidance.
Given uncertainties to date, some law firms were advising clients that the safer course when/if processing a member retiring ahead of the online process was to assume no 2016 protection exists (ie to ignore interim registrations) or else to suggest delaying retirement – not a comfortable position for members with large benefits. HMRC’s clarifications may largely have unlocked this position.
HMRC also mentions that when individuals apply for a 2016 protection via the on-line system, details of the application and any previous lifetime allowance protection with HMRC will appear on the individual’s personal tax account (that digital gateway planned for all sorts of individual information). We note that will be a real boon to forgetful executives – and HMRC states it would be grateful if scheme administrators promote the benefits of going on to apply online after applying using the interim process.
Your opportunity to tell HMRC that the Lifetime Allowance is complex!
HMRC has issued two surveys (found via Newsletter 78) asking about the practical issues, experiences and member knowledge/understanding of the lifetime allowance and associated protections. HMRC has done this to aid the development of its new “pensions lifetime allowance online services” (including the system to apply for a 2016 protection). One survey is for scheme administrators and the other for members.
Anybody who wants to complete one of the surveys (and to let HMRC know just how difficult this all is) should do so by the end of May.
HMRC newsletter 78 – round-up of the rest
As well as the beefier items noted in the above articles, Newsletter 78 includes a miscellany of other items including:
- Highlighting that an Uncrystallised Funds Pension Lump Sum (UFPLS) gets tested against the lifetime allowance that is in force at the date of the UFPLS’s payment (by contrast to a tax free pension commencement lump sum (PCLS), which mostly is tested against the lifetime allowance in force (has its test “BCE” date set) when the connected pension is tested). This has set new challenges given that an UFPLS usually has to be paid via a payroll department to arrange tax deduction and payrolls usually run to fixed timetables out of the control of a pension scheme. We suspect there have been cases where an UFPLS was authorised before 6 April 2016 but not actually paid until after that by when it will use up more of the payee’s lifetime allowance
- Confirming the process to follow regarding coding for death payments that are entirely non-taxable while HMRC investigates why its systems are incorrectly issuing tax notices (Pensions Bulletin 2016/19 gives some of the background)
- Clarifying changes to serious ill-health lump sums being made by the current Finance Bill. Currently such a lump sum cannot be given from an arrangement where an individual has already accessed any benefit. The Bill will remove the block in relation to remaining uncrystallised funds in the arrangement, but not from crystallised funds of any kind, such as drawdown funds, although this was unclear by the Bill’s Explanatory Notes
- Giving a reminder (partly, we understand, to discourage ad hoc approaches to HMRC by other means) of the routes by which parties can get HMRC’s views on how the pensions tax regime should be read
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.