John Cridland sets the tone for the 2017 review of State Pension Age

“We have considerable flexibility and scope” says John Cridland in an interim report published last week on State Pension Age – the first part of the independent review required by the Pensions Act 2014 (see Pensions Bulletin 2016/08).

The report considers what a suitable State Pension Age should be (both now and in the future), whether the current age rising in line with life expectancy is appropriate, and, if not, how access to the State pension could be better structured.

The report cites research suggesting that improvements in life expectancy, although not as great as had been observed a few years ago, would support the rise to 68 being earlier than currently legislated.

It goes on to examine the “serious impacts” of a rise in State Pension Age, stating that various vulnerable groups within society (including carers, those in poor health, the self-employed and ethnic minorities) could be adversely affected, before finishing with what could be an important chapter called “smoothing the transition”.

Within this a number of ideas are floated for mitigating the impact of a rising State Pension Age.  These include:

• Whether Government policies can encourage people to retire later; and
• Whether the most vulnerable can be protected through interventions such as allowing early access to the state pension for those with a long working life (or to accommodate regional variations in life expectancy or to recognise certain occupations where people have a greater risk of a lower life expectancy), allowing early access to a reduced state pension, and enhancing means-tested working age benefits

Responses to the consultation should be submitted by 31 December 2016.

In January 2017 Mr Cridland will make recommendations in a report to Damian Green MP, the Secretary of State for Work and Pensions.  His report will also be laid before Parliament and inform the Secretary of State’s final report on the outcome of the review, which must be published by 7 May 2017.

Comment

We applaud the open-minded nature of this consultation and the careful consideration of the factors affecting different members of society.

What does seem clear, although unspoken, is that State Pension Age will need to rise again, but this time it is likely that there will be much greater effort to ensure that account is taken of increasingly divergent life experiences.  The need for fairness, whilst set in the context of affordability, has moved centre-stage.  This can only be right, but coming to a landing on fairness will prove to be challenging.

Government calls a halt to the creation of the secondary annuity market

In an extraordinary U-turn, Simon Kirby MP, the Economic Secretary to the Treasury, has announced that the Government is cancelling its plans to facilitate a secondary annuity market.  The new team at the Treasury has concluded that it cannot balance the creation of this new market with making sure that consumers are properly protected.

The intention was that all the legislation and regulation would be in place by April 2017 (itself put back from April 2016) and to this end there had been substantial progress, with some laws already in place (although much remained to be done).  But getting the consumer protections right was always going to be the difficulty, with the Financial Conduct Authority acknowledging in its proposed rules and guidance issued for consultation in April that there is a “significant risk of poor outcomes for consumers in the secondary annuity market” (see Pensions Bulletin 2016/17).

Comment

Quite what tipped the balance for the Government is not clear at this stage, but it does seem to be a demonstration that the new Government will not hesitate to cancel the old Government’s projects, no matter how far they are down the track.

Although some will be aggrieved at this about turn (including those who had sunk money into getting ready for April), the policy always risked creating a future wave of mis-selling.  At least this will now not happen.  Those who annuitised will now, for better or worse, have to live with Jane Austen’s famous dictum.

New bridging pension tax regulations span old and new state pension regimes

After an extended period of uncertainty, regulations have now been made to enable the pension tax rules on bridging pensions to work following the introduction of the new state pension from April 2016.

Existing tax legislation sets out allowable shapes of bridging pensions (in terms of the ages such a bridge can stop and how much reduction there can be in pension when the bridge stops) framed around the old state pension.  The Finance Act 2016 provided for the removal of this legislation (see Pensions Bulletin 2016/37), but until now it was not clear how this was to be replaced.

The Registered Pension Schemes (Bridging Pensions) and Appointed Day Regulations 2016 (SI 2016/1005) provide for continuation of the existing provisions, but now only for those reaching State Pension Age on or before 5 April 2016.  So this means in such cases that the permitted reduction continues to be between 125% - 250% of the Basic State Pension at the time, depending on the member’s contracted-out history, with the reduction permitted between the age of 60 and 65.

For those who reach State Pension Age on or after 6 April 2016 the regulations newly provide that the permitted reduction cannot exceed 200% of the full rate of the Single tier State Pension at the time, with the reduction permitted between the age of 60 and the later of 65 and the individual’s State Pension Age.

In both cases the scheme pension can stop if the permitted reduction exceeds the pension that is in payment.

The regulations come into force on 8 November 2016 but take effect in relation to reductions made on or after 6 April 2016 to scheme pensions in payment.

Comment

This appears to be a straightforward fix to the issue – so much so that HMRC did not feel the need to formally consult before laying the regulations.  It would seem to preserve the status quo for those reaching State Pension Age before 6 April 2016 whilst ensuring that there is no worsening (and in fact a significant easement for some) for the others.  However, schemes may wish to check that this change to tax law accommodates their existing bridging rules.

September CPI and RPI inflation measures announced

The announcement on Tuesday that the Consumer Prices Index rose by 1.0% over the twelve months to September 2016 sets the scene for a number of pension benefits and limits next year:

• Thanks to the triple lock, the Basic State Pension (currently set at £119.30 pw) and the Single Tier State Pension (£155.65 pw) will now increase next April either by 2.5% or by the increase in national average earnings (which may come in lower than 2.5%) – whichever applies it will be a significant increase in real terms
• By contrast, SERPS and S2P entitlements will increase by 1.0% next April
• Next year, occupational pension schemes that apply the Limited Price Indexation rules to pensions in payment will have to increase them by 1.0% – and GMPs that accrued after 5 April 1988 will also increase by 1.0%
• The one year minimum revaluation of that part of a deferred pension in excess of any GMP will be 1.0% for both the 5% capped orders and the 2.5% capped orders; and
• For those accruing defined benefits or cash balance, the increase in the CPI of 1.0% is effectively the inflation allowance made before the Annual Allowance starts to be used up in the 2017/18 tax year

Over the same period the Retail Prices Index rose by 2.0%.

Comment

Unlike this time last year, the CPI is in positive territory, but for now it is still quite low which is likely to add to calls for the triple lock to be modified – something which this Government intends to resist during the course of the 2015-20 Parliament.

Customers give the thumbs up to Pension Wise

A short research paper, published by the DWP, reveals very positive experiences by those who have used the Pension Wise service.  The findings include:

• 91% of customers were satisfied overall with the service they received
• 94% of those who attended appointments said that they were likely to recommend the service to others; and
• 85% of customers felt that their understanding of their options improved as a result of using the Pension Wise service

Interviews took place between 29 February and 5 June 2016 (with customers who had appointments in February, March and April 2016).

Comment

This is good news, but it will be interesting to see whether views change when the same customers come to take decisions regarding their pensions and what the experience is of those who chose not to use Pension Wise.

New Shadow Pensions Minister appointed

Alex Cunningham, the Labour MP for Stockton North, has become the new Shadow Pensions Minister.  The position had been vacant for some time following the mass resignation of Labour MPs from the shadow cabinet in the early summer and the subsequent promotion of Angela Rayner MP, who herself was appointed to the Pensions Minister role only in January 2016.

Mr Cunningham is the fourth occupant of the post since the May 2015 General Election.  He previously served in the shadow cabinet, but resigned from it after the EU referendum, citing his belief that the Labour leadership did not campaign strongly enough for remaining in Europe.

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.