13 July 2017
Risk warnings and valuation clarity for “safeguarded flexible benefits” arrives
In September 2016 the Department for Work and Pensions consulted on new regulations aimed at pension scheme members with “safeguarded flexible benefits” (see Pensions Bulletin 2016/39). These are benefits which are defined contribution in nature but offer some form of guarantee in relation to the pension income that will be available to the member such as a guaranteed annuity rate.
The purpose of the consultation was twofold – to simplify how such benefits should be valued for the purpose of assessing whether or not the £30,000 threshold for the exemption to the independent advice requirement is reached and to introduce new consumer protections for members with these benefit entitlements who wish to transfer or convert them and in so doing lose potentially valuable guarantees.
The DWP has now responded to the consultation with the regulations consulted on split into two sets.
The Pension Schemes Act 2015 (Transitional Provisions and Appropriate Independent Advice) (Amendment No. 2) Regulations 2017 (the Valuation Regulations) are substantially in the same form as those consulted on last year, prescribing that safeguarded flexible benefits must be valued using the cash equivalent transfer value method. There are the following changes following consultation:
- A provision of the transfer value regulations which might have resulted in a higher valuation is to be disregarded in the valuation of members’ safeguarded benefits when determining whether the exception to the advice requirement applies
- It is made clear that the Valuation Regulations apply to members with pension credit rights following a pension sharing on divorce order who do not have a statutory right to transfer
- The coming into force date of the regulations has been delayed to 6 April 2018 (previously expected to be 1 October 2017 at the latest)
- The transitional requirement to provide information to members who had been informed of the advice requirement within six months prior to the regulations coming into force now applies where the member is informed of the advice requirement after 1 October 2017 (a period of just over six months)
The Pension Schemes Act 2015 (Transitional Provisions and Appropriate Independent Advice) (Amendment) Regulations 2017 (SI 2017/717) (the Risk Warning Regulations) set out the content of the “personalised risk warnings” that must be given to all members and survivors with safeguarded flexible benefits if they take one of the actions that would trigger the advice requirement. Following consultation the following changes have been made:
- A personalised risk warning is triggered whenever the trustees of the member’s current scheme communicate their intention or agreement to carry out a conversion or transfer requested by the member or survivor, or make an offer to do so
- The deadline to ensure personalised risk warnings are sent to members is now two weeks before completion of any proposed transaction
- Where the transfer may otherwise go ahead without any further action or confirmation being required from the member it must include a narrative section informing members of the need to contact their scheme if they do not wish to proceed with the transaction
- Pension Wise (and presumably its successor – see the item below on the single financial guidance provider) must now be signposted within personalised risk warnings
- FCA assumptions may be used in the financial illustrations
The Risk Warning Regulations have now been made as a statutory instrument. The Valuation Regulations are subject to the affirmative resolution procedure and we expect these to be made shortly. Both come into force on 6 April 2018.
It is taking a long time for these provisions to arrive but hopefully providers of schemes with safeguarded flexible benefits will now know how to value them when a member wants to turn them into fully flexible benefits, most likely in order to access them under the freedom and choice regime.
We also now know the final detail of the risk warnings required and when they are required. In essence we have a new and prescriptive disclosure requirement for a comparatively small group of pension scheme members. The jury is out on how effective a piece of consumer protection this will be.
PPF annual report – another good year but still a lot of risk out there
The numbers all look good. Invested assets are up from £23.4bn to £28.7bn and total balance sheet assets grew to £34.1bn. This equates to a funding level of 121.6% compared to one of 116.3% last year and a reserve of £6.1bn compared to £4.1bn last year (they called it a “surplus” then).
The probability of meeting the stated funding target (“self-sufficiency” by 2030) has remained static at 93%. An apparently excellent investment performance of 16.0% equates to 3.9% once you strip out the LDI hedging strategies successfully employed. This is 1.6% above the PPF’s benchmark.
We commented last year that the PPF is in rude financial health and this seems to be even more the case now. It is also wary of complacency. As well it might be. Reserves of over six billion pounds sound good until one compares them to the net deficit of £226.5bn in the schemes the PPF protects. The PPF is doing a very good job of managing the known risks, but a lot could happen between now and the targeted self-sufficiency in 2030.
PPF responds to DB Green Paper
In its response (delayed due to election purdah) to the Green Paper on DB pension regulation (see LCP’s February News Alert) the Pension Protection Fund – a major stakeholder in these debates – is broadly supportive of the Government’s conclusion that, while there are considerable risks in the current system, there is not a case for radical overhaul. The PPF says that evidence and modelling appears to support the view that the majority of schemes can be expected to pay pensions to their members in full and, that in general, DB schemes remain affordable for their employers.
The PPF does throw its weight behind the following incremental reforms:
- Defining boundaries within the scheme funding regime perhaps policed through a “comply or explain” mechanism, to provide a clear framework for schemes to operate within whilst preventing inappropriate levels of risk. A key benefit of this would be to ensure that strong employers tackle deficits within acceptable timeframes
- Schemes exhibiting characteristics of significant “stress” should be required to conduct a detailed evaluation of their position and consider the range of options available to them. Linked to this, further consideration should be given to extending access to regulated apportionment arrangements where appropriate, allowing the scheme to reach a settlement with an employer before all value is eroded
- Further investigation and action to address the problems of small schemes which face particular challenges and greater likelihood of being stressed, with consolidation of smaller schemes possibly providing the best way forward
- In order to support proactive regulatory intervention, the position of scheme trustees in corporate transactions could be strengthened (for example through a requirement for the trustees to be consulted) and that measures to incentivise clearance applications in instances where there may be cause for concern would have merit (for example by introducing a system of punitive fines where employers are found to have avoided pension scheme liabilities)
The response document contains some helpful data backing the PPFs conclusions.
This is an important contribution to the debate, with the PPF broadly lining up with the Government position. Unfortunately, two months after the closing date for responses, it is still far from clear what the next step in the DWP consultation process will be, or when it will happen.
Pensions Regulator – ignorance of the law is no excuse for compliance failures
The Pensions Regulator has published two “compliance and enforcement bulletins” showing how it has used its powers to tackle non-compliance with legal requirements and that trustees of pension schemes who fail in their basic duties can expect to be fined.
In the bulletin on the chair’s statement the Regulator notes that the majority of schemes providing DC benefits complied with new legislation obliging them to prepare an annual governance statement, signed by the chair of trustees. During 2016, 85 schemes received a mandatory fine for not preparing a chair’s statement. A large proportion of those failing to produce a statement were schemes with fewer than 100 members.
With regard to scheme returns the Regulator notes that it received 16,963 scheme returns, and after starting enforcement action against trustees received a further 868 returns. A number of trustees failed to comply even after receiving a warning from the Regulator and so 88 trustees were fined.
Both bulletins include case studies, from which the strong message emerges that the Regulator will not tolerate failure to comply with these basic legal duties (and neither ignorance of the law nor misunderstanding of duties is considered a valid excuse).
Thankfully, the more extreme examples of trustees simply being unaware of their legal duties are comparatively rare and concentrated among smaller DC schemes. We hope that the Regulator’s robust approach will mean that such examples become rarer.
Pensions Regulator annual report – evolution the watchword
- Over half a million employers are now operating auto-enrolment, with over seven million employees now enrolled in a workplace pension scheme
- Enforcement activity, including fines for auto-enrolment non-compliance has been stepped up as well as stricter enforcement activity for non-compliance with basic legal duties (see the article above)
- It has been involved in difficult and high profile anti-avoidance actions resulting in the recovery of more than £650m (including settlements in the BHS and Coats cases – see Pensions Bulletin 2017/27) , bringing the total recovered using its anti-avoidance powers to over £1bn
- In this year’s funding statement (see our May News Alert) a step up in Regulator expectations was signalled
- New investment guidance was issued (see a re-run of our webinar for a flavour)
The above is far from an exhaustive list of Regulator activity. Spending £74.8m (within its budget of £78.5m) and with a complement of just over 500 people it does look like it is providing value for money. But as it says in its press release, how it evolves to meet the next set of challenges and deploys its limited resources to the best effect for member outcomes is, well, challenging.
Single Financial Guidance Body consultation response published
As a reminder, the new (as yet to be named) body will have as its core functions the provision of guidance to the public about debt, money generally and pensions. It will also have a strategic remit to improve the financial capability of the public. The Bill also provides funding for equivalent bodies to be set up by the devolved administrations in Scotland, Wales and Northern Ireland.
As is the case currently this service will be largely funded by levies on pension schemes and the financial services industry.
During the second reading of the Bill in the House of Lords on 5 July, Baroness Buscombe, Parliamentary Under-Secretary for Work and Pensions, said that there will be no reference to cold calling in the Bill. She also said that the Government planned to publish a response to the December 2015 consultation on pension scams shortly.
How the merged guidance body will operate in practice is still not entirely clear. Hopefully more details will emerge soon.
And a reminder of a pensions tax deadline
For most members who incurred a 2015/16 Annual Allowance charge and wanted to meet it using “Scheme Pays”, the formalities will all have been completed some time ago. But don’t forget that in most cases the ultimate deadline in tax law for the member to submit the irrevocable election necessary to secure a statutory right to the facility extends until 31 July 2017 (sic).
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.