Government backs British Steel pension restructuring – but will it remain a special case?

The Government is considering some potentially fundamental changes to pension legislation in an effort to keep the British Steel Pension Scheme (BSPS) out of the Pension Protection Fund and help find a buyer for the sponsoring employer, Tata Steel UK.

It is understood that the BSPS would be viable as an on-going scheme if its current requirement to increase pensions in both deferment and payment by reference to the RPI were changed to the (potentially lower) CPI measure of inflation. 

A consultation paper issued by the Department for Work and Pensions on 26 May 2016 asks whether that could be done by dis-applying the modifying accrued pension rights legislation for the BSPS only.  Alternatively, current laws on bulk transfers without member consent could be adjusted to allow the BSPS members to be transferred to another scheme with CPI revaluation (unless they opted to stay in the current scheme ahead of transfer to the PPF).

See LCP’s News Alert for more details.

Comment

Although couched in terms of British Steel being a special case, the consultation and events happening elsewhere give rise to the possibility that this could be a signal for further developments in managing DB deficits.

Frank Field announces another pensions inquiry

In the light of the Government proposals in relation to British Steel, Frank Field MP, the Chair of the House of Commons Work and Pensions Committee, has announced a new inquiry to follow on from the inquiries into BHS (see Pensions Bulletin 2016/18).

Arguing that British Steel is not a special case, the Committee is to examine whether radical solutions are needed in order to address the current inter-generational trade-offs arising from persistent debt overhangs in DB schemes.

Comment

The announcement of yet another inquiry might not seem big news.  But if it considers whether to apply the suggested British Steel solutions to DB schemes more generally (such as allowing changes to accrued rights), it becomes huge news for sponsors, trustees and members alike.  We wait with interest just how “radical” the proposed solutions are and whether they find any traction within the Government.

Early exit charges to be capped for all DC pensions

The Financial Conduct Authority and the Department for Work and Pensions have issued co-ordinated consultations on their proposals for limiting early exit charges from contract-based and occupational DC pension schemes, respectively.  Early exit charges are deemed to be one of the “barriers” stopping people from accessing their pensions flexibly and these consultations follow on from HM Treasury’s announcement in February (see Pensions Bulletin 2016/06).

Such charges are newly defined in the Bank of England and Financial Services Act 2016 (see Pensions Bulletin 2016/18) and in summary are those borne by members of personal or stakeholder pensions that are only imposed (or only imposed to that extent) when taking, converting or transferring pension benefits on or after the age at which members become eligible to access the pension freedoms (currently age 55) but before the member’s expected retirement date.

Looking at the FCA paper first, the proposal is that, from 31 March 2017, early exit charges will be capped to:

• 1% of the member’s policy value for existing personal pension contracts
• 0% for new personal pension contracts

Where existing contracts have early exit penalties set at less than 1% of the member’s policy value, the proposed cap will prevent these being raised.

The FCA believes that early exit charges mostly exist for older policies and were designed specifically to recover outstanding up-front sale and advice costs.  The FCA believes there is no justification for early exit charges now that the Retail Distribution Review has happened, and that is why a 0% early exit charge is proposed for new contracts.  The FCA has set the cap at 1% for existing contracts in acknowledgement that an outright ban would cost pension providers significantly greater loss of revenue compared to 1% whilst doing relatively little to the deterrent effect.

Responses to the FCA consultation should be made by 18 August 2016.

Turning to occupational DC schemes, the DWP’s consultation generally mirrors the proposals of the FCA, but applies to occupational pension schemes providing cash balance and money purchase benefits.  The same level of cap for new and existing occupational pension benefits operates as set out above for personal pension contracts.

The cap will only apply to members who are eligible to access their pensions flexibly and will apply whether exit charges are imposed directly by trustees or as a result of contracts with, for example, a third party administrator.  The proposal is that the FCA’s definition of early exit charge will also be used, again as set out above, for occupational pension schemes.

The DWP is also concerned by the possibility that early exit charges will be rebranded or these costs moved elsewhere and asks for views on this issue.

Both consultations note that Market Value Adjustments, which are generally found in with profits products and their ilk, are not considered as exit charges for the purposes of the exit charge cap.  Regulations will be made to avoid any potential ambiguity about this and the DWP also asks for comments about these proposals.

The DWP intends to legislate on this basis in the forthcoming Pensions Bill (see Pensions Bulletin 2016/20).  Responses to the DWP consultation should be made by 16 August 2016 with the intention that these changes will be implemented in 2017 (there is no precise date, unlike the FCA proposals).

The DWP consultation paper also cites a recent survey carried out for the Pensions Regulator which suggests that less than 4% of the 291 occupational pension schemes surveyed applied an exit charge.

Comment

We believe that the intentions of these proposals are fair in the new age of pension flexibility.  Early exit charges only affect a relatively small number of people, but if you are one of those people then such charges seem unfair.

There will undoubtedly be complications for hybrid (and cash balance) occupational schemes so much will depend on the final definition of early exit charges together with the circumstances of the scheme and the member.  If any trustees or managers of schemes think the proposals are unbalanced then they should respond to the consultation.

Local Government to get Fair Deal provisions

Two and a half years after HM Treasury published its revised Fair Deal guidance for most other parts of the public sector (see LCP’s 2013 News Alert for details) the Fair Deal proposals for the Local Government Pension Scheme (LGPS) are finally out for consultation.

The document issued by the Department for Communities and Local Government on 27 May 2016 also includes proposals to introduce more options for AVCs to the LGPS following the introduction of the Government’s ‘Freedom and Choice’ policy, along with a number of other changes intended to improve the administration of the Scheme.

See LCP’s News Alert for more details.

Is Brexit bad for pensioners’ wealth?

Analysis from HM Treasury, that became available shortly before the purdah rules were imposed at the end of last week, suggests that pensioners will be worse off in terms of both income and wealth should the UK vote to leave the EU on 23 June 2016.

“Effects on pensioners from leaving the EU” applies the economic scenarios previously published by HM Treasury on the short-term and long-term effects of leaving the EU.  In these, the Treasury argues that there could be a “shock” or a “severe shock” to the UK economy in the short-term.  In the long-term the Treasury says that productivity and incomes would be lower by 2030.  Applying both to pensioners, the report finds that:

• Higher inflation will lead to lower real buying power for pensioners’ State Pensions, annuities and DB pensions – with an average pensioner with both a Basic State Pension and an annuity being around £190 pa worse off in 2017/18
• Falling markets will reduce the value of pensioners’ houses and savings, with house prices potentially dropping by 10% to 20%
• Future pensioners will have to live off less in real terms, with the pension assets of today’s 50 year olds being some £450 million to £700 million lower in 2030 (when they would be approaching 65) as a result of lower real contributions and lower investment returns

Comment

We described a Brexit Research Paper from the House of Commons Library earlier this year (see Pensions Bulletin 2016/06) as “studiously neutral”.  This analysis from HM Treasury is quite different, being firmly of the view that pensioners will be better off if we “Remain” in the EU.

However, it completely ignores some of the factors that “Leave” campaigners could point to as  improving pensions in future, such as cheaper pensions/annuities and improved DB funding positions (due to higher gilt yields) and the effect of occupational pension schemes potentially not being subject to EU legislation.  In relation to EU law, Brexit might mean that the UK escapes insurance-style reserving on DB schemes which could yet be imposed through a future IORP Directive.  Leaving the EU might also give the Department for Work and Pensions a good reason to abandon measures to require DB schemes to adjust benefits for GMP inequalities.  This and other issues are considered in a paper recently published by the Society of Pension Professionals.

For some LCP views of the effect of a Brexit on pensions, see either Phil Cuddeford’s blog or Phil Boyle’s blog on the subject.

Pension Dashboard – are we nearly there yet?

Well we’re on the way, it seems.  In order to meet the Chancellor’s promised delivery date of 2019 (see Pensions Bulletin 2016/11), the Pension Finder Dashboard alpha project working group is aiming to deliver a beta version in 2017.

Last week the working group published a white paper highlighting its findings so far, including results from its consumer research and plans on the overall architecture and governance.

The idea is that the dashboard will use a website to bring together a person’s pension savings information stored electronically by the State and pension providers.  Individuals will be able to access such information after verifying their identity and may be able to carry out some tasks.

There is likely to be a phased implementation period – the State Pension, some Public Sector pensions and auto-enrolment DC pensions available initially with more “complex” types of pensions, such as Self-Invested Personal Pensions, to be phased in later.

Following consumer research, the recommended approach is to initially build a single-destination dashboard operated by one organisation.  Access to this may also then be made available through a variety of approved industry websites such as those operated by pension providers.

The next phase of the project, making each of the above areas operative, will be open to all organisations who wish to participate.

Comment

This is a fascinating but very ambitious project that, if fully delivered, could revolutionise the way in which individuals access pension information, potentially enabling them to take informed choices about managing their retirement savings.  The consumer research is reported as being overwhelmingly positive, particularly amongst younger participants.  It cannot come too soon, although it is likely that initially at least, it will not deliver the pension information that many will seek, since it will only be able to display the information that providers who are able to participate can readily make available.

Medically underwritten bulk annuities explained

An industry working group has produced a helpful guide explaining how medically underwritten bulk annuities exercises work, giving tips on how to approach them along with certain things that are best avoided.

The guide outlines how asking certain members for medical information can affect the pricing of bulk annuities, how to decide which members to medically underwrite, the most economical ways of collecting members’ medical information, who should undertake the various tasks in the process and the major legislation (including data protection) that applies.  The guide also sets out three case studies that highlight different ways of approaching the exercise.

Comment

This well-written guide is useful reading for any trustees considering such an exercise, particularly those who thought it might be too difficult to undertake. 

The report shows that members are very engaged with the process and willing to share their medical information – that may come as a surprise, but it is in line with LCP’s experience (an 80% engagement rate is not uncommon).

PPF worsens early retirement terms

The early retirement terms for those with PPF compensation are due to become poorer for members from 1 October this year.

New factors published by the PPF show that a member with a Normal Pension Age of 60 who intends to take their PPF compensation 5 years early can expect to see more than a 10% reduction in their benefits, compared to the current reduction of less than 5%.  

The factors for commutation and the annual equivalent of lump sums have also been updated whilst those for late retirement remain unchanged.  A revised note describing the principles behind the calculation of PPF factors has also been published.

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.