24 November 2016
Autumn Statement pension aspects
There were only a few announcements in the Autumn Statement with pension implications and these are covered below.
Silence on the Lifetime Individual Savings Account is interpreted as this policy going ahead as planned next April, but it is not clear whether the potential upheaval of the taxation of pension schemes (see Pensions Bulletin 2016/11) is now firmly on the backburner.
Philip Hammond confirmed that the triple lock on state pensions will continue for this Parliament, but implied that it could be adjusted in the next, following the next Spending Review.
He also announced that this would be the last Autumn Statement. Following next Spring’s Budget, the timetable will swap around with Budgets being held in the autumn and new Spring Statements (which will do no more than respond to the latest forecast from the Office for Budget Responsibility).
Money purchase annual allowance to reduce
The Government proposes to reduce the money purchase annual allowance, which applies in limited cases, from £10,000 to £4,000 pa from 2017/18 (including, we assume, for those already falling into this measure because of past events). A short consultation about whether this reduction would achieve certain Government aims is in place until 15 February 2017.
A reminder about what the money purchase annual allowance is. When the flexible regime started in 2015 the Government introduced this allowance. It sits alongside the main annual allowance test on total savings and applies for individuals who have at any stage drawn money purchase benefits using any route called “flexible payment”. After the first time they have done this, (broadly) if the individual and or his employer together make more than £10,000 pension savings on a money purchase basis in any future tax year, the excess incurs an annual allowance charge. To the extent the member also builds up DB savings, the main annual allowance applies in an adjusted form for that tax year.
The proposed reduction is intended to limit opportunities for recycling/churning that the flexible regime created, whilst not interfering with auto-enrolment requirements.
The Government argues that £4,000 pa strikes the right balance between limiting churning opportunities and allowing these individuals to save when continuing to work (particularly noting ISAs as an available home for making savings).
The Government may have overlooked the significance of the fact that the money purchase annual allowance impacts not just traditional DC but also savings into "cash balance" arrangements, a vehicle used by several large employers. The way the calculations work, a year’s core pension provision for individuals on surprisingly low salaries could count as more than £4,000 – a problem if they have accessed pension flexibility anywhere.
In any case, the current complicated pension tax regime has just got one step more complicated.
Technical changes to be made to the taxation of foreign pensions
The Chancellor announced a number of small changes to the current foreign pensions tax regime as follows:
- The tax treatment of foreign pensions will be more closely aligned with the UK’s domestic pensions tax regime by bringing foreign pensions and lump sums fully into tax for UK residents, to the same extent as domestic ones
- Specialist pension schemes for those employed abroad (“section 615” schemes) will be closed to new saving
- The taxing rights over recently emigrated non-UK residents’ foreign lump sum payments from funds that have had UK tax relief (under what seems to be the member migrant relief provisions) will be extended from five to ten years
- The tax treatment of (presumably overseas) funds transferred to UK registered pension schemes will be aligned. It is not clear what precisely is intended
- The eligibility criteria for foreign schemes to qualify as overseas pension schemes for tax purposes will be updated by removing the requirement for 70% of transferred funds to be used to provide the member with an income for life. This appears to be to do with the definitions involved in establishing that an overseas pension scheme is a Qualifying Recognised Overseas Pension Scheme (“QROPS”)
A consultation paper is expected shortly.
The removal of the “70% of funds as income for life” requirement for a QROPS is, perhaps, not surprising, as it brings the QROPS regime closer to the “freedom and choice” regime for domestic UK pension schemes.
Section 615 schemes have been an anachronism for a long time now, and there have been suspicions that their unique tax privilege of being able to pay benefits as tax-free cash (in relation to accruals before 5 April 2011) was being abused. So it is not a surprise the Government has taken action about them.
Action on pension scams at last?
The Government is to publish a consultation on options to tackle pension scams, including banning cold calling in relation to pensions, giving firms greater powers to block suspicious transfers and making it harder for scammers to abuse small self-administered schemes.
The cold calling ban was heavily trailed and is clearly necessary as we move into an era where pensioners control their retirement pots. How effective it will be remains to be seen.
What has come as a surprise is the power to block suspicious transfers. We eagerly await the details. A carefully worded restriction on members’ statutory right to transfer could be the most effective means of cutting scams off at source.
Aligning the taxation of different forms of remuneration
The Chancellor announced a number of measures that are intended to make the tax system fairer between workers carrying out the same work, but receiving their remuneration in different forms. They are as follows:
- Salary sacrifice – following consultation (see Pensions Bulletin 2016/33), the income tax and NIC advantages of salary sacrifice schemes will be removed from April 2017, except for arrangements relating to pensions (including advice), childcare, Cycle to Work and ultra-low emission cars. This will mean that employees swapping salary for benefits will pay the same tax as those who buy them out of their post-tax income. Arrangements in place before April 2017 will be protected until April 2018, and arrangements for cars, accommodation and school fees will be protected until April 2021
- Valuation of benefits in kind – the Government will consider how benefits in kind are valued for tax purposes, publishing a consultation on employer-provided living accommodation and a call for evidence on the valuation of all other benefits in kind at Budget 2017
- Employee business expenses – the Government will publish a call for evidence at Budget 2017 on the use of the income tax relief for employees’ business expenses, including those that are not reimbursed by their employer
We are pleased to see that pensions will be exempted from what has become a necessary restriction in the scope of tax-advantaged salary sacrifice arrangements, but until the Government publishes the legislation it will not be clear quite how the exemption works. For example, will life assurance or permanent health insurance cover provided outside an occupational pension scheme be exempt?
Personal allowance and higher rate threshold
The personal allowance is to rise to £11,500 pa next April, as previously announced, but in a departure from current policy, once it reaches £12,500 pa, which should be before the end of this Parliament, it will then rise in line with CPI as the higher rate threshold does, rather than in line with the national minimum wage.
National insurance thresholds
As recommended by the Office of Tax Simplification in March 2016, the national insurance secondary (employer) threshold and primary (employee) threshold will be aligned from April 2017, meaning that both employees and employers will start paying national insurance on weekly earnings above £157. This will simplify the payment of national insurance for employers.
FCA criticises weak price competition in asset management industry
The Financial Conduct Authority is proposing significant changes to the asset management market amid concerns that a lack of price competition and conflicts of interest may be reducing investor returns. It is also considering whether to refer the institutional investment consultancy market to the Competition and Markets Authority (CMA) because of concentration in a small number of firms in this industry.
In an interim report on its Asset Management Market Study (launched in November last year – see Pensions Bulletin 2015/50), the FCA identifies a number of ways asset management could work better for investors. Those of most interest to pension schemes include:
- A strengthened duty on asset managers to act in the best interests of investors. This includes holding asset managers accountable for how they deliver value for money, as the study found that:
- fund governance bodies lack independence from fund managers
- some investors are paying “active” management prices for products that are similar to passive funds
- both active and passive funds on sale in the UK on average underperformed benchmarks after charges were taken into account; and
- the average profit margins for asset management firms are around 35% - and even higher when allowing for profit sharing, wages and bonuses
- Introducing an all-in fee approach, so investors can gauge the total effect of fund charges and transaction costs in a single figure. There should also be increased transparency and standardisation of charges
- Clarifying the objectives of funds and showing performance against more appropriate benchmarks
- Discussing with government the potential benefits of greater pooling of pension scheme assets. The study found that smaller pension schemes are likely to achieve significant cost savings from consolidating their assets
- Recommending that providing institutional investment consultancy services becomes a regulated activity (only certain types of advice are currently regulated)
The FCA noted that the existence of firms offering both investment consulting and fund management services (also known as “fiduciary management”) raised questions about competition and value for money. It also found that the lack of transparency in fiduciary management generally is likely to make it difficult for pension trustees to manage conflicts of interest when investment consultants also provide fiduciary management, leading to poor outcomes. The FCA could also require clearer disclosure of fiduciary management fees and performance.
Comments on the report are invited by 20 February 2017.
We welcome this important report. Several of the proposals mooted could improve investment returns for pension schemes and with the threat of referring institutional investment advice to the CMA, the FCA shows that it is in no mood to mess about.
The potential for conflicts of interest in a fiduciary relationship are clear, so pension schemes should seriously consider whether they should be getting independent advice on the performance of their fiduciary manager.
Whether this review will mark the start of a downturn in profitability in the asset management industry remains to be seen. Certainly the industry isn’t perfect. But some of the FCA’s proposals, such as a greater focus on benchmarking performance and publishing “all-inclusive” fees, may create the wrong incentives and exacerbate short-termism, which would not be a good outcome.
Statutory revaluation and indexation confirmed
The Order has now been made setting the statutory minimum revaluation of deferred pensions other than GMPs for those reaching normal pension age in 2017. The same Order also sets, indirectly, the statutory minimum increases for pensions in payment in 2017.
The revaluation percentages within the Occupational Pensions (Revaluation) Order 2016 (SI 2016/1102) reflect the overall rise in the Consumer Prices Index from September 2010 to September 2016 and movements in the Retail Prices Index prior to this.
The one year Order for revaluations subject to both the 5% cap and the 2.5% cap is 1.0% (the CPI rose by 1.0% in the twelve months to September 2016). These one year Orders also form the basis for so-called Limited Price Indexation for pensions in payment and so the 5% LPI increase and the 2.5% LPI increase will also both be 1.0%.
Final Equitable Life report published
HM Treasury has issued its final report on the Equitable Life Payments Scheme, set up in 2010 to compensate Equitable Life policyholders who had suffered loss when Equitable Life failed.
Whilst a few claims are still in progress, over £1.12 billion has been paid to over 930,000 members (around 90% of eligible policyholders), out of a potential compensation fund of up to £1.5bn. This compares to policyholders’ relative losses calculated by government to be £4.1 billion. There were over 107,000 policyholders who either could not be traced or had died (and their estates did not try to claim the payment).
The Government will be pleased that this mammoth exercise, which cost £73 million to administer, has come to an end, but not everyone will welcome the outcome, particularly those who were not With-Profits Annuitants – they have substantially lost out as a result of Equitable Life’s failure.
ABI renames retirement options
The guide suggests that members will find it easier to talk about the following options on retirement:
- You can keep your pension pot where it is
- You can take your whole pension pot in one go
- You can take your pension pot as a number of lump sums
- You can get a flexible retirement income
- You can get a guaranteed income for life; and
- You can choose more than one option and you can mix them
The ABI hopes the standardised language will be used across the industry. The guide also contains some standard wording for explaining the options above, important information for prospective pensioners to consider and a supporting glossary.
It makes sense for all those involved in pensions to try to use the same terms and limit member confusion where possible. Trustees and employers alike may wish to adopt these terms when communicating with members.
Second leg of State Pension age review underway
As required by the Pensions Act 2014, pensions minister Richard Harrington has now written to the Government Actuary to ask him to prepare a report on whether the current rules on State Pension age mean that, on average, a person who reaches SPA within a specified period can be expected to spend a specified proportion of his or her adult life after this point and if not, ways in which the rules may be changed with a view to achieving that result.
For this purpose, the Government Actuary’s Department has been asked to consider two scenarios – where the specified proportion is 33.3% and where it is 32% – and apply them to a specified period of between 2028/29 and 2064. Adult life is assumed to begin at age 20. Life expectancy is to be measured on a unisex basis, via the principal projections of UK cohort life expectancy published by the Office for National Statistics.
The Government Actuary’s report is due to be finalised by January 2017.
The latest life expectancy projections, published late last year, are likely to bring the increase in SPA to 68 forward by five years compared to the current timetable set out in legislation. However, it is not a done deal that the minister will follow the analysis to be produced by the GAD as he also has to have regard to the separate report being produced by John Cridland (see Pensions Bulletin 2016/42). Nevertheless, it would seem likely that by May 2017 we will be told that SPA is to rise yet again.
Regulator issues first pensions landscape report
Education is the sector to work in if you want an open defined benefit pension scheme, according to the Pensions Regulator’s first “pensions landscape” report.
The report, which will annually cover all the private DB occupational pension schemes registered with the Regulator, highlights 80% of active members in schemes run by a college or education institute are in open DB schemes. By comparison, the figure was less than 1% in schemes sponsored by limited liability partnerships, partnerships or overseas companies.
Overall 15% of DB schemes are open to new members, whilst 45% are closed to new members and 35% are closed to future accrual. The remainder are winding up.
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.