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Pensions Bulletin 2017/31

Our viewpoint

Government signals intent to bring forward State Pension Age rise from 67 to 68

The Secretary of State for Work and Pensions has now completed his part of the review process for State Pension Age required by the Pensions Act 2014 by publishing a report on the review.  In a statement to the House of Commons on 19 July David Gauke said that the Government intends to follow the key recommendation John Cridland made in his independent review to bring forward the increase in State Pension Age from 67 to 68 (see Pensions Bulletin 2017/14).  Bringing forward the increase date by seven years – ie from its currently legislated date of 2044-46 to 2037-39 – is expected to save £74bn to 2045/46 when compared to the State Pension Ages currently on the statute book.

Those affected are those born between 6 April 1970 and 5 April 1978 who will have to wait potentially an extra year before receiving their State Pension.

This intention to bring forward is just that, as there is no promise made by the Secretary of State to legislate in the current Parliament.  Indeed, as he and the report make clear, it will not be until after the next review is completed (by July 2023) that the Government will firm up on the proposed change.  The stated reason is in order to enable consideration of the latest life expectancy projections and to allow the Government to evaluate the effects of rises in State Pension Age already under way.  The Cridland report did not contain such caveats.

In the meantime the Government hopes that the conclusion of this review provides a clear signal that State Pension Age will change.  The Government intends to develop a clear plan for communicating changes to State Pension Age, presumably in order to avoid a reprise of the issues that have arisen in recent years as State Pension Age for women has increased rapidly.  It will also seek to provide a minimum of ten years’ notice for individuals affected by changes to their State Pension Age.

Not all of Cridland’s proposals have been accepted – in particular he recommended the removal of the State Pension “triple-lock” increases in what is now this Parliament.  But this is being kept as part of the Conservatives’ deal with the Democratic Unionist Party (see Pensions Bulletin 2017/27).

The report also reveals that the Government intends to maintain a universal State Pension Age, with those who cannot work until this point being supported through the benefits system.

Finally, given that the Government is “minded to commit” to “up to 32%” as being the right proportion of adult life to spend in receipt of a State Pension, it is quite possible that future reviews will see the introduction of even higher State Pension Ages.  But on this the report is conspicuously silent, saying no more than “we do not intend to formalise policy beyond 2037-39 at this stage”.

Comment

The Government appears to have squared the circle of being required by law to respond to the State Pension Age review with having no Parliamentary majority and no Parliamentary time to bring forward legislation to actually increase State Pension Age.  All we have is an intention to increase the State Pension Age, which might not come to pass.  Given that there is to be a further review before the proposed increase is actually legislated for, it is not much clearer, for those affected, as from when they are likely to be able to draw their State Pension.  The “Cridland increase” has in effect been kicked into the long grass by this Government, along with his proposals to mitigate the effects of bringing forward the increase in State Pension Age from 67 to 68.

Having said this, those impacted should accept the signal given out by the Government and plan for a further year without a State Pension. Insofar as pension schemes are concerned, there would seem to be little point in them taking any action until this change is confirmed or otherwise.

DWP health checks two aspects of the auto-enrolment legislation

In a call for evidence published on 19 July, the DWP is inviting views on how two completely separate aspects of auto-enrolment legislation are working in practice.

The alternative quality requirement for defined benefit schemes

In April 2015, in response to industry concerns, the DWP delivered regulations and guidance supporting a less onerous way in which DB schemes could demonstrate that they were of sufficient quality that they could be used as auto-enrolment vehicles (see Pensions Bulletin 2015/11).  This “cost of accruals test” also contained a transitional provision for certain formerly contracted-out schemes.  The package delivered included a separate test enabling hybrid schemes which met prescribed requirements to use the money purchase quality requirements.

As part of the review of automatic enrolment that the DWP is currently carrying out, the Secretary of State is under a duty to review these regulations.  The consultation asks questions in order to test to what extent the regulations are operating as intended, including whether there are any unintended consequences, and to what degree the provisions are continuing to deliver simplifications and efficiencies for employers and schemes.

Seafarers and offshore workers

Seafarers and offshore workers were initially excluded from auto-enrolment in order to allow for time to consider some potentially complex issues surrounding these groups.  Following a consultation in 2012, the DWP laid an Order that brought these two groups within the ambit of the auto-enrolment legislation.

In order to ensure the policy and legislation is operating as intended, the Secretary of State is required to review this Order by 1 July 2018.  Unusually, it has a “sunset clause” which provides (with some exceptions) that the Order ceases to have effect on 1 July 2020.  Following the review the Secretary of State will need to consider what to do about this.

The consultation seeks assistance with the quantification of the characteristics of these groups and asks questions around the implementation of the policy.

Consultation closes on 30 August.

Comment

We think it likely that this consultation will conclude that the status quo is working adequately in both situations.  However, on the first, this is a welcome opportunity for practitioners to relay any concerns they have with the much-welcomed easement delivered in 2015.

Regulations finalised to impose early exit charge cap and restrictions on member-borne commission

Regulations have now been laid before Parliament that implement a cap on early exit charges for occupational pension schemes and bring in the second stage of the ban on member-borne commission for occupational pension schemes used for auto-enrolment purposes (see Pensions Bulletin 2016/09 for details of the first stage, which applied to new and adjusted arrangements).

This follows the DWP publishing the response to the consultation on the draft regulations on 3 July.  This made clear that the finalised regulations are little changed than those proposed in April (see Pensions Bulletin 2017/15).

Under the now finalised regulations:

  • Early exit charges must not be applied to new joiners from 1 October 2017. For existing members on 1 October 2017 there cannot be early exit charges greater than 1%, any charges below 1% cannot be increased and new charges cannot be applied
  • Member-borne charges arising from arrangements in place before 6 April 2016 cannot be used to recover the cost of any ongoing payments made to advisers (but the regulations do not prohibit service providers from imposing member-borne charges to recover initial commission). However, service providers have six months from 1 October 2017 to comply with this prohibition, meaning that it will not be until 1 April 2018 that this ban takes place

The Occupational Pension Schemes (Charges and Governance)(Amendment) Regulations 2017 (SI 2017/774) come into force on 1 October 2017.

The DWP has also issued guidance on how market value adjustments and terminal bonuses should be treated for the purpose of determining the early exit charge cap.

Comment

It has taken an extraordinarily long time for the Government’s ban on existing member-borne commission to fully come into force.  First announced in March 2014, it will have been over four years before the last such charge is outlawed.

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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.

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