Pensions Bulletin 2017/30
20 July 2017
Supreme Court rules that same sex partners are entitled to full survivors’ pensions
Last week the Supreme Court decided that survivor pensions for same sex partners cannot be restricted to accruals from 5 December 2005. In quashing the decision of the Court of Appeal in Walker v Innospec (see Pensions Bulletin 2015/43), the Supreme Court held that:
- The exemption in the Equality Act 2010 put through by the UK Parliament is incompatible with EU law; and
- Mr Walker’s husband is entitled to a spouse’s pension calculated on all the years of his service with Innospec, provided that at the date of Mr Walker’s death, they remain married
For further information about this judgment and its implications for defined benefit pension schemes see our News Alert.
Summer Finance Bill slips into autumn but with full retrospectivity
The Government has run out of time to introduce a Finance Bill before the summer recess (despite promising to do so in the Queen’s Speech of only a few weeks ago – see Pensions Bulletin 2017/26). Instead, it will be introduced “as soon as possible after the summer recess”.
In a written statement to the House of Commons on 13 July 2017, Mel Stride, the Financial Secretary to the Treasury, said that in relation to this Bill “where policies have been announced as applying from the start of the 2017-18 tax year or other point before the introduction of the forthcoming Finance Bill, there is no change of policy and these dates of application will be retained. Those affected by the provisions should continue to assume that they will apply as originally announced”. The following day the Treasury listed the provisions that will be backdated, including the cut to the money purchase annual allowance and the higher limits for employer-sponsored pensions advice.
So it is now absolutely clear that the Government intends the money purchase annual allowance – applying for those who exercise or have exercised certain flexibilities – to be reduced from £10,000 to £4,000 with effect from the start of the current tax year. As we said when the measure was removed from the Finance Bill as part of the wash up process before the General Election (see Pensions Bulletin 2017/18), it would be a brave employer, scheme provider or adviser that rows back on warning members that the money purchase annual allowance is likely to be £4,000.
Government to publish White Paper on the future of DB later in 2017
The Government has announced the next steps for its Green Paper “Security and Sustainability in Defined Benefit Pension Schemes” following the consultation period drawing to a close in May (see Pensions Bulletin 2017/20).
In a statement to the House of Commons last week, David Gauke said that the DWP intends to publish a White Paper later this year which will set out the proposed next steps. This paper will:
- Address the commitments in the Government’s manifesto in relation to the regulation and rules governing DB private pensions
- Consider innovative delivery structures, such as consolidation and measures to drive efficiency within the sector; and
- Consider the need to evolve and adapt the regulatory regime to improve security for members (whilst ensuring that the needs of consumers, schemes and business are balanced)
Mr Gauke concluded by promising to continue the collaboration with a range of external stakeholders to develop sensible policy proposals.
When the consultation closed it was not clear what the next steps would be or their timing. The White Paper is likely to be a precursor for a Pensions Bill, but it seems that we may have to wait until 2019 to see this.
Regulator “will not hesitate to prosecute” those refusing to give information
“From now on we will not hesitate to prosecute further companies or individuals if they refuse to give us the right information” stated Nicola Parish, Executive Director for Frontline Regulation at the Pensions Regulator, as a regulatory intervention report on two cases involving the failure to provide information was published.
The two cases, which saw the first criminal prosecutions for failing to provide information requested as part of ongoing investigations, were heard in April. They involved:
- Anthony Wilson, managing partner of Ashley Wilson Solicitors LLP, who was fined £4,000 with £7,500 costs and a £120 victim surcharge (the firm was also fined £2,700 with £2,500 costs and a £120 victim surcharge)
- Patrick McLarry, Chief Executive of Hampshire-based charity Yateley Industries for the Disabled Limited, who was fined £2,500 with £4,000 costs and a £120 victim surcharge
The Regulator has indicated it will be taking a tougher approach to pension regulation, and the messages accompanying this report are entirely consistent with that stance.
First Reading for the key Brexit Bill
The long-awaited European Union (Withdrawal) Bill received its First Reading in the House of Commons last week. This much vaunted “Great Repeal Bill” is in fact the opposite – having as its main purpose to take a snapshot (with the help of the Queen’s Printer) of all relevant EU law at the moment that the UK leaves the EU and converting it to UK law with the assistance of wide-ranging “Henry VIII” powers to iron out incoherencies once we have departed. It also repeals the European Communities Act 1972 – the Act under which Ted Heath took the UK into the EU 45 years ago – in order to prevent any more Brussels-made law from finding its way through the Channel Tunnel.
As was expected, it is silent on specific areas of law such as pensions, being essentially no more than a technical document necessary to ensure that the canon of UK law does not fall over on exit day and that the EU has no automatic say from this date. What will be of interest to followers of pensions law is how the various pensions-related laws initiated in Brussels will fare on exit day. They include equality law (such as that relating to unequal GMPs), cross-border pension schemes, TUPE, VAT and IORP II.
On the last of these it remains unclear how the DWP will implement this Directive. The UK has a treaty obligation to implement it by January 2019, but first the DWP needs to decide how, especially as it apparently does not have access to a Pensions Bill for the next two years. As the EU’s chief negotiator said last week, the clock is ticking.
FCA contemplates introducing protections for the retirement income market
Two years after the horse bolted, the Financial Conduct Authority is considering introducing a number of measures to protect those who have taken advantage of the previous Chancellor’s “freedom and choice” policy, which he surprised the country with in his 2014 Budget.
In publishing the interim findings of its Retirement Outcomes Review, the FCA finds that although consumers have welcomed the pension freedoms, there are concerns that many are simply taking their entire pot, in part because they do not trust pensions, on drawdown consumers are not shopping around, nor seeking advice for the best drawdown product, annuity providers are leaving the open annuity market and (just as the DWP has discovered when reviewing NEST) there is limited product innovation by pension providers.
Given this the FCA is minded to provide additional protections for consumers who buy drawdown without advice, bring forward measures to promote competition for consumers who buy drawdown without taking advice, make it easier for consumers to shop around for drawdown products and deliver tools and services to help consumers make good choices.
Consultation closes on 15 September 2017 following which the FCA will reflect further on whether it should intervene and how it could do this most effectively. The FCA intends to publish its final report in the first half of 2018.
In an ideal world all this would have been thought through before the pension freedoms became a reality. At least for many, quite sensible decisions appear to be being taken (such as cashing in small pots and not spending more substantial pots), but as the amount of retirement savings grow, so does the consequences of inappropriate or sub-optimal choices being made. And the scammers are ever present, ready to separate individuals from their hard-saved retirement funds. This is an area in which the FCA will have to keep a close watching brief.
Plain sailing as the PPF approaches half-way in its journey to self-sufficiency?
The Pension Protection Fund has issued its long-term funding strategy update, analysing a number of the risks most likely to hinder its progress to “self-sufficiency”.
The PPF was set up on 6 April 2005, so it is now approaching the half-way point in its journey to self-sufficiency in 2030. Last week in its Annual Report and Accounts (see Pensions Bulletin 2017/29) the PPF confirmed that the news continues to be good, with the funding ratio up to 121.6% (from 116.3% last year) and the probability of successfully reaching self-sufficiency in 2030 remaining at 93%.
However, there is no room for complacency, as the insolvency of a major employer could reduce the probability of successfully reaching self-sufficiency by 2030 by 19%. By comparison, the worst of three scenarios investigating the uncertainty surrounding Brexit reduces the probability of reaching self-sufficiency by 8%.
As an aside, based on information that schemes have submitted to the Pensions Regulator, the ratio of liabilities calculated on a buyout basis compared to those calculated on a Section 179 (PPF levy) basis has increased significantly to 156% from 140%.
When it comes to DB schemes delivering on their pension promises we expect the solvency of the employer to be more important than the prevailing economic conditions. It is perhaps surprising that for the PPF, with thousands of “employers”, the solvency of a single one is still more important than the expected market impact of something as fundamental as Brexit.
Pensions Ombudsman’s workload increases again
It has been yet another busy year for the Pensions Ombudsman, with a 22% increase in enquiries, around 70% of which are now received online. This and the actions that the Ombudsman’s office continues to take to streamline its processes and address the backlog form the main themes to this year’s annual report published last week.
The informal system of complaint resolution, which has been running for just over a year, is showing signs of success. In 2016/17 70% of investigations were completed informally (ie they did not need a written Ombudsman’s determination). But the average age of open investigations at the year-end continues its climb – up from 5 to 10 months over the last four years. This is likely to worsen until the backlog is reduced and then eliminated. The 1,600 completed investigations target for 2016/17 was also missed – by nearly 200 – but by the end of the year the Ombudsman had experienced a slight fall in the number of investigations in hand at just over 1,000.
The Ombudsman’s office is going through a period of significant change, with only a modest increase in headcount, whilst at the same time coming under pressure as a result of receiving more enquiries. It does seem to be on track to improve customer experience, and is enjoying improved staff morale, but all this could be at risk if the number of complaints it has to handle (having more than doubled in four years) continues to climb.
NEST continues to grow
It was a make or break year for NEST – the Government-subsidised DC Master Trust set up in recognition that the private sector could not deliver a retirement savings vehicle across all segments of society as an essential component of the Government’s auto-enrolment policy. And in its latest report NEST shows that it has been up to the task – in this case enrolling more than 240,000 new employers and 1.5 million new members in the year ending 31 March 2017. Assets under management have also increased to £1.7bn.
The hectic activity continues, with NEST reporting that as at 2 July it had over 5 million members, over 398,000 employers signed up and assets of £1.8bn. NEST expects 2017/18 to be even busier.
Self-service for employers (and their delegates) and members has been key to NEST’s success and will remain an essential element of its operations going forward.
However, all this has been achieved at the price of a massive Government loan, standing at £539m as at 31 March 2017 and predicted to rise to £1.2bn by 2026 before being paid off by 2038. In addition to this, the Government passes over significant sums in the form of grant income in recognition of NEST’s public service obligation. Income from the 1.8% contribution charge and the 0.3% annual management charge remains modest, but is expected to experience a substantial step up as the higher minimum levels of contributions kick in from 2018/19 onwards.
In 2017/18 NEST is expected to spend £100m more than it receives, with much of it going to Tata Consultancy Services – its scheme administrator. It is not clear from the accounts how NEST’s indebtedness will grow through to 2026, nor what risk factors are at play, but for now the Government must be thankful that all seems well operationally at NEST with it doing what it was set up to do and enjoying some successes along the way such as winning industry awards and achieving good investment returns.
TPAS accounts show pensions engagement continues to rise
In what might be its penultimate report and accounts before merging with the Money Advice Service and Pension Wise some time after autumn 2018, the Pensions Advisory Service has revealed another increase in the number of people using its services.
The Pensions Advisory Service, which also runs the telephony channel of Pension Wise, helped some 180,499 customers in the year to 31 March 2017, up from 177,896 the previous year. Website visits were also up to 3,364,631 from 2,739,481 the previous year, whilst customer satisfaction increased from 97% to 98%. But the high demand for the service caused the abandonment rate on telephone calls and webchats to increase from 8% to 15%.
The costs of providing the Pension Wise telephony fell significantly, from around £2.9m to £1.9m this year, with a small increase in the other Pensions Advisory Service administration costs up to £3.7m from £3.5m the previous year.
So, what do professional trustees do?
The Pensions Regulator has published what amounts to a qualitative survey of the professional trustee landscape as part of its 21st Century Trustee initiative. It spoke to a wide range of organisations offering professional trustee services and found a diverse range of structures, sizes and ways of working.
Since conducting the survey the Regulator has asked representatives of the professional trustee industry to produce a set of quality standards and accreditation.
The Regulator has expressed concerns about what it sees as variable quality across the professional trustee market. This survey is no more than an initial snapshot of the landscape – indicating the nature of the players and where their focus is. Assessing quality will be far more difficult, if that is where the Regulator is headed.
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.