30 March 2017
Brexit is triggered, but no immediate impact for UK pension law and regulation
The Prime Minister has now sent the notification of withdrawal from the European Union, setting in train a process that may last for two years or more. As a small, but significant part of UK pensions law emanates from the EU we thought that it would be useful to mark this significant moment in the life of our country by means of a News Alert which briefly looks at the withdrawal process and considers what changes to the regulation of UK schemes could happen after we have left the EU.
There may be Brexit-related financial and economic turbulence which affects pension schemes over the short to medium term. However, we do not expect there to be any immediate or direct impact on pensions law and regulation in this timescale, so our message for UK pension scheme sponsors and trustees over this period and in this sphere remains “keep calm and carry on”. But there is so much uncertainty that a weather-eye must be kept on the political developments as they unfold over the next few months.
Large companies hit hardest as PPF proposes Experian scoring changes for third triennium
The PPF has focussed primarily on Experian scoring changes in its consultation on the levy rules for the third triennium (2018/19 to 2020/21) with larger companies expected to see their levies increase by an average of nearly 50%. Amendments are proposed to the certification of Deficit-Reduction Contributions and parent company guarantees, and there could be a levy discount for schemes that can demonstrate good governance.
LCP’s News Alert looks at the detailed proposals and the particular areas that are up for consultation.
State Pension age – evolution, not revolution
John Cridland has resisted the urge to propose radical changes to the design of the State Pension age (SPa) in the first reports to be produced under the regular reviews required by the Pensions Act 2014 (see Pensions Bulletin 2016/42).
As previously indicated, the Cridland report examines the fairest ways of increasing SPa considering the differences that issues such as region, occupation and wellbeing make to longevity. Whilst Mr Cridland accepted variations in longevity for reasons such as those exist, he did not receive “any submissions which suggest any workable ways for State Pension age to address this”. He therefore proposes retaining a universal State Pension age, with key recommendations including:
- State Pension age should rise to age 68 over a two year period starting in 2037 and ending in 2039. This would be a big acceleration from the current timetable increasing to 68 between 2044 and 2046. In future, SPa should not increase more than one year in any ten year period (other than in exceptional circumstances)
- The “triple lock” should be withdrawn in the next Parliament, with State Pension increasing in line with earnings
- Some of the funding released by changes in the State Pension system should be re-invested to support disadvantaged groups. In particular
- The main means-tested benefit for pensioners should be set one year below SPa from the point at which the increase to 68 is introduced, for a defined group of people who are unable to work through ill health or because of caring responsibilities
- The design of the Universal Credit should be adjusted for people approaching SPa, to enable a smoother transition into retirement
- There should be additional support for those working past SPa, including being rewarded with a lump sum if they defer taking their benefit, and introducing a facility to take part of the State Pension whilst deferring the remainder
- There should also be additional support for carers, with Mr Cridland suggesting every employer should have eldercare policies in place. He also recommends a system of Statutory Carers’ Leave, which could be based on the Statutory Sick pay model, to enable informal carers to provide emergency care
- People should have access to a “mid-life MOT” to encourage them to take stock and make realistic choices about work, health and retirement
The Cridland report is accompanied by the Government Actuary’s review, which looks at various scenarios by which people would spend a specified portion of their working life in retirement (with a timeframe not exceeding 2064).
For people to spend one-third of their life in retirement, under the assumptions chosen, SPa would increase to 68 between 2039 and 2041 (with a further increase to 69 between 2053 and 2055). To spend 32% of life in retirement, SPa would increase to 68 between 2028 and 2030, then increase to 69 between 2040 and 2042 before increasing to 70 between 2054 and 2056.
The next step is that, before 7 May, Damian Green, Secretary of State for Work and Pensions, must make a further report accepting these recommendations or not. It is this third report that Parliament will have to debate and from which legislation will flow.
The Cridland report outlines some of the difficulties facing those reliant on the State Pension in their retirement. Recommendations to increase SPa and lose the triple lock were expected, necessitated by expense, but the additional support proposed for carers, those working past SPa, those in ill health and those on Universal Credit is welcome.
The Government Actuary’s review provides a sobering reminder of just how near an SPa of 70 could be.
CMI 2016 projections indicate lower life expectancies
The Continuous Mortality Investigation at the Institute and Faculty of Actuaries has published its “CMI_2016” projections for mortality improvements. This latest edition takes into account population mortality data up to 31 December 2016 and reflects a number of technical changes to previous versions of the model.
Life expectancies for a 65 year-old now, using the CMI_2016 core projections, are around 0.3 years (males) to 0.5 years (females) lower than had been projected under the previous “CMI_2015” model (all else held equal), with greater reductions for younger members.
The latest research shows that, after a consistent period of strong mortality improvements between 2000 and 2011, since then improvement rates have largely stagnated. Whilst the CMI model automatically reflects the recent lower rates of improvement, pension scheme trustees and sponsors will need to form a view as to whether the recent mortality experience affects their longer term views regarding mortality trends, or is just a blip.
SRD II – will it be implemented in the UK?
The Directive comes into force as EU law 20 days after its publication in the Official Journal of the EU. EU Member States then have 24 months to implement the legislation in national law.
The Directive clearly did not come into force before the “Brexit” notification under Article 50 of the Treaty on European Union yesterday, which starts a separate two year clock running.
It now looks unlikely that SRD II will be implemented in the UK - when the Article 50 two years is up there will be no treaty obligation for the UK to do so. However, it may not be entirely safe to assume that this will be the case. This is because there is the possibility that the Article 50 two years may be extended, so that a treaty obligation does arise during any continued period of EU membership.
We also do not really know how the UK government will approach EU legislation which has been adopted as EU law but which the UK is not obliged to implement before exit. It may be that the starting point is that such legislation will be regarded as part of the “acquis” and adopted regardless of any treaty obligation. We are going to have to learn to live with this sort of uncertainty.
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.