22 June 2017
The Queen’s Speech – pensions round-up
As we went to press details of the Queen’s Speech were published by Downing Street. The wider elements of the Queen’s Speech, such as its emphasis on Brexit, the two-year term of this Parliament rather than the normal one, and the reduced “pomp and circumstance” of the actual occasion have all been widely discussed in the general media. In this article we highlight the most relevant parts of the Speech for pensions and employee benefits. More details about these may be released in the forthcoming days in which case we will cover them in future Pensions Bulletins.
Summer Finance Bill 2017
There will be a Summer Finance Bill to implement budget decisions and it “will include a range of tax measures including those to tackle avoidance”. No further details are given but we presume it will include the reduction in the money purchase annual allowance and possibly the increase in the income tax exemption for employer-provided pensions advice to £500, both of which were dropped from the Budget Finance Act as part of the wash-up before the General Election (see Pensions Bulletin 2017/18).
State pension triple lock
Whether to abolish, change or retain the triple lock on State pension increases was the most high-profile pension topic in the General Election campaign (see Pensions Bulletin 2017/22). However, it is not mentioned in the Queen’s Speech programme. This is undoubtedly because, whilst the Conservatives intended to downgrade it to a “double” lock, the Democratic Unionist Party, which the Conservatives are likely to rely on for Parliamentary support, wants to retain the triple lock as it stands. It seems likely that the Conservatives’ plans for a double lock will not make it on to the statute book during this Parliament.
Financial Guidance and Claims Bill
This Bill will establish a new arm’s length Single Financial Guidance Body that will replace the Money Advice Service, the Pensions Advisory Service and Pension Wise. This follows on from a consultation at the end of 2016 (see Pensions Bulletin 2016/51).
Data Protection Bill
Although not directly relevant to pensions and employee benefits, we mention this because the Bill will implement the General Data Protection Regulation, amongst other things, which will impact on providers of pension and employee benefits when it comes into force on 25 May 2018 (see the Information Commissioner’s Office overview for general information about the GDPR).
The Conservatives’ proposals on social care were one of the major features of the General Election campaign. The Queen’s Speech programme does not include a Parliamentary Bill but does announce an intention to “bring forward proposals for consultation”.
Other matters not mentioned
Some other polices mentioned in the Conservatives’ manifesto do not seem to be explicitly covered in the Queen’s Speech. It is unclear whether this means they have been shelved permanently or just put to one side for now. These include further changes to the State Pension Age and means-testing of Winter Fuel Payments.
In these unusual political times we find ourselves in, pensions are understandably not going to be at the top of the Government’s legislative agenda. However, there is much unfinished pensions business for which the Government will need to legislate at some point in this Parliament.
Guy Opperman confirmed as new Pensions Minister
The DWP has now made a formal announcement welcoming the new ministerial team appointed in the wake of the inconclusive General Election result. It has now become clear that Guy Opperman takes over Richard Harrington’s pensions brief which extends to also cover financial inclusion.
In his statement noting his appointment Mr Opperman says that it is a privilege to undertake a role promoting financial inclusion and helping people prepare for later life, with both a state and private pension. He goes on to say that automatic enrolment has been a huge success and that he looks forward to the Government’s efforts to build on it.
Meanwhile Debbie Abrahams continues in her role as Shadow Work and Pensions Secretary for Labour whilst newly re-elected Stephen Lloyd takes on the Work and Pensions brief for the Liberal Democrats.
Mr Opperman is the third Conservative politician appointed to the much reduced in importance pensions brief in just over two years. We hope that he will stay long enough to make a mark, but his time could also be curtailed given doubts as to how long the Government will be able to survive.
Pensions Regulator’s response to Green Paper made public
One of the many items in Mr Opperman’s in tray will be how to take forward the Green Paper on Security and Sustainability in Defined Benefit Pension Schemes (see Pensions Bulletin 2017/08), consultation on which closed on 14 May 2017.
As we are now past the General Election purdah period, the Pensions Regulator, a key stakeholder in any new dispensation, has made public its response to the consultation. Its contents are not a surprise, as much of what it is asking for it has already signalled, in particular to the House of Commons’ Work and Pensions Committee (see Pensions Bulletin 2016/27).
Changes that the Regulator would like to see take place include alterations to its scheme funding powers, a strengthening of its information gathering powers and the introduction of a DB chair’s statement (ie an extension of the current requirement for most DC schemes to produce such a document).
On scheme funding the Regulator would like to be able to articulate standards in the form of detailed codes or guidance, supported by a legally enforceable “comply or explain” regime. It is of the view that there are a number of sponsors who could afford higher deficit repair contributions and that measures should be brought forward to encourage this to take place.
The Regulator is against an across the board change of indexation measure from RPI to CPI as it is of the view that it cannot be justified on grounds of affordability, nor on grounds of rationalisation or simplification of benefit structures.
The Regulator would like to have a general power to compel parties to submit to an interview where it believes they have information that could assist its casework. It would also like to have its inspection power extended so that it can be used earlier in any investigatory process. It also believes that it needs to be able to impose fixed and escalating civil penalties (akin to what it has under auto-enrolment) as such would require a lower burden of proof than the powers it currently uses, resulting in quicker and more effective action.
In relation to corporate activity, whilst it is open to requiring clearance in some defined circumstances, it is against a universal requirement which it feels would be disproportionate both for the UK economy, itself and its levy payers.
Finally it would like to see further exploration of the various ideas put forward under which DB schemes can be consolidated, but with any package being put forward on a voluntary rather than compulsory basis.
No doubt the Regulator’s proposals will weigh heavily on the new minister’s mind, but there is as yet no timescale within which to take forward the contributions made by numerous parties to the Green Paper, still less any mention of it in the Queen’s Speech. Hopefully we will see a response to the consultation before the year is out, but it then may be down to competing agendas for Parliamentary time, especially in this crunch period when many Brexit-related laws need to be passed.
FCA signals move away from critical yield analysis in bid to improve the quality of DB pension transfer advice
The Financial Conduct Authority has published new proposals on advice relating to transfers from DB schemes with the aim of ensuring that such advice considers the customer’s circumstances in full and properly takes into account the various options now available to individuals in the light of the Government’s 2015 “freedom and choice” reforms.
Significantly, the FCA signals that whilst keeping such “safeguarded benefits” will be in the best interests of most consumers, since the introduction of the pension freedoms it is no longer appropriate for the adviser to start from the assumption that a transfer will be unsuitable.
The proposals include:
- Replacing the current transfer value analysis requirement with a comparison showing the value of the benefits being given up
- Introducing a rule to require all advice in this area to be provided as a personal recommendation which fully reflects the client’s circumstances and provides a recommended course of action
- Updating the FCA’s guidance on assessing suitability when giving a personal recommendation to convert or transfer safeguarded benefits, so that advisers focus on whether a transaction is right for a particular individual; and
- Introducing guidance on the role of a pension transfer specialist
The FCA has been concerned for some time that its present rules are not always engendering the appropriate behaviours in the transfer advisory market. Indeed, this January the FCA issued a risk alert setting out some of its concerns and reminding advisors of the current rules.
In the changed environment the FCA now sees the provision of a personal recommendation based on the consumer’s individual circumstances as a pre-requisite for appropriate consumer protection. Guidance is to be provided that helps advisers assess suitability which will include such matters as the client’s income needs and expectations, the specific receiving scheme being recommended along with the recommended investments and how funds will be accessed.
Transfer value analysis (TVA), which solves for a “critical yield” equating the transfer value being offered against the benefits being given up, is to be replaced with an appropriate pension transfer analysis (APTA) at the heart of which will be a transfer value comparator (TVC) in which the customer will be shown how the transfer value being offered compares with the amount needed in the proposed new arrangement in order to buy the benefits that are being given up.
The FCA intends that its APTA proposals will result in a significant shift in the quality of pension transfer advlce, with the financial analysis genuinely adding value to the decision on whether to transfer.
Consultation closes on 21 September 2017. After considering the responses, the FCA intends to publish its new rules in a Policy Statement by early 2018.
This development is long overdue, but welcome nevertheless and particularly given the substantial activity in DB transfers at the present time, focussed on those close to their DB scheme’s retirement age and boosted by historically high levels of transfer values. There has to be a concern that tempted by telephone number transfer quotes, customers are not stopping to assess the nature of the valuable benefits they are giving up. If the FCA’s proposals, once refined, achieve the objective they have set out, this will all be to the good.
FCA reports on insurers’ changes to lifestyle investment strategies
When the Financial Conduct Authority updated its rulebook to reflect some “freedom and choice issues” last June (see Pensions Bulletin 2016/17) it decided that, as its existing rules provided enough clarity in relation to lifestyling investment strategies, it would be better to monitor how providers were evolving their strategies in response to the 2015 pension freedoms than adjust its rules then. In particular, the FCA’s expectations were that firms:
- Should continue to actively review their lifestyle investment strategies to ensure they remain appropriate for customers and their retirement choices; and
- Should remind customers of how their lifestyle investment strategy relates to the retirement options available to them and that, if their retirement needs change, they may need to review it
The FCA has now reported on the results of its engagement with life insurance companies and what seems to be coming through is a mixed picture. It appears that insurers have focused their efforts on new business and post-2012 auto-enrolment contracts, where they have created new default funds, lifestyle glide paths and have communicated to customers when migration exercises have taken place. Progress has been much slower on existing business likely written prior to 2012 and doesn’t appear to have started in relation to legacy business likely written prior to 2001. On both of these the FCA is concerned with the insurers’ lack of timeliness for customers approaching or already having entered the de-risking phase and the lack of clear communications to these customers, many of whom may no longer wish to pursue an investment strategy that targets tax-free cash and an annuity at their nominated retirement date.
The FCA says that it will be following up with firms where it has identified concerns and will be inviting firms in the sector to a roundtable event in Q2 2017 to discuss the FCA’s findings.
It does appear that insurers are reacting slowly to the FCA’s clear expectations, but it is not clear what, if any, action the FCA will take other than behind the scenes pressure – particularly when it comes to customer communications.
Workplace pension participation continues to increase
The Government’s auto-enrolment policy continues to drive up workplace pension participation, as evidenced in the latest findings published by the DWP.
Workplace Pension Participation and Savings Trends of Eligible Savers Official Statistics: 2006 to 2016 follows on from a publication of a similar name published last December (see Pensions Bulletin 2016/49) and shows that:
- 78% of employees eligible to participate in 2016 were in a workplace pension in 2016 (up 3% from 2015)
- 77% of employees eligible to participate in 2012 have saved into a workplace pension in at least three of the four years between 2013 and 2016 (down 2% since 2015); and
- The annual total amount saved by eligible savers stands at £87.1 billion in 2016 (up £3.8bn from 2015)
The report continues to also analyse participation trends between the public and private sector, by industry, occupation, employer size, earnings, gender, working pattern (full or part-time), region, age, economic status (employed or self-employed) and disability.
The amount saved per eligible saver in the private sector has flattened out, but can be expected to increase shortly as a result of the planned increases in minimum contribution levels to DC auto-enrolment vehicles which come into force from April 2018.
As more of these reports are being published it is becoming clear that the significant upwards trend in participation rates experienced in the private sector since 2012 is starting to level off at just short of 75% of eligible employees – significantly lower than the participation rate in the public sector. We may yet see a step change as micro-employers complete auto-enrolment, but after this it will surely reach a peak unless Government policy changes.
Scheme funding improves
In some rare good news, the Pensions Regulator reports that the average funding ratio of “tranche 10” schemes has improved since the previous valuation, with deficit repair contributions relatively unchanged in nominal terms and an average extension to the recovery plan of just over one year.
The Regulator’s latest analysis and related statistics is based on around 1,700 tranche 10 schemes – those with triennial valuation dates between 22 September 2014 and 21 September 2015 – which by 31 January 2017 had either submitted a recovery plan to the Regulator because they had a funding deficit, or reported a surplus. Over 80% of the schemes submitting recovery plans had also submitted recovery plans in tranche 7, 4 and 1.
The Regulator has also reported:
- The average increase in assets between the tranche 7 and tranche 10 valuations is 32%, while the average increase in technical provisions is 19%. On average, the funding ratio has improved, standing now at 88.7%. By 31 January 2017, 377 tranche 10 schemes had reported surplus positions out of a total of 1,701 submissions; this compares with 221 surplus schemes out of 1,991 in tranche 7
- On recovery plans for many schemes a smaller deficit has led to a shortened recovery period relative to that agreed under tranche 7 – nearly 60% of schemes have brought forward their recovery plan end dates or left them unchanged, whilst 20% have extended their recovery plan end dates by more than three years. Schemes with longer recovery periods tend to be those with weaker covenant support, lower funding levels, and greater proportions of return-seeking assets
It is good to see that this tranche of schemes is making steady progress towards full funding on a technical provisions basis, but a word of caution is in order. With an average valuation date of 31 March 2015 these statistics are now over two years out of date.
PPF says that it remains on course
In its latest strategic plan the Pension Protection Fund has set out its vision for how it intends to achieve its three strategic objectives, which focus on funding, customer service and risk.
The PPF’s Strategic Plan for the next three years (2017-2020) suggests that over the period ending 31 March 2020 the PPF will have grown its assets to £32bn and will have as many as 300,000 individuals covered by PPF compensation.
Over the three years ending 31 March 2017 the PPF says that scheme funding levels have fallen substantially and, with little prospect of them improving in the near term, the PPF is clearly concerned that any rise in corporate insolvencies (currently at an all–time low) could adversely affect its aim to be financially self-sufficient by its 2030 funding horizon. The British Steel Pension Scheme is also mentioned given the significant impact it would have on the PPF’s finances should it be required to assume responsibility for the scheme in full.
Whilst the external environment and the universe of schemes the PPF protects “continues to present challenges”, the PPF intends to focus on ensuring that its assets continue to perform well and are subject to greater control. The PPF has successfully completed the first two phases of its project to insource part of its investment management, and plans to insource sections of its private and public market credit portfolio over the next three years. The PPF will also examine the rationale for insourcing passive currency hedging.
Financial Assistance Scheme member services are to be brought in-house over the next three years, following on from the insourcing of PPF member services in 2015. This follows work with the DWP to assess the best approach to FAS administration in the long term.
The PPF is a clear success story, but by its very nature it operates in an environment that presents a number of risks that, whilst it can understand, it cannot either control or mitigate. With DB funding remaining volatile and all the uncertainties posed by Brexit, it is not a given that the PPF will be able to weather all the potential storms that lie ahead.
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.