LCP reports that de-risking is at its most affordable level for 9 years

It is the most affordable time to consider an insurance buy-in or buy-out since before the 2008 banking crisis, according to LCP’s pensions de-risking report, published this week.

With one in five FTSE 100 UK DB pension plans now over 80% funded on a buy-out basis and the average buy-out funding level improving by nearly 10% since August 2016, scheme sponsors might find the cost of buying out their pension scheme benefits is lower than they had thought.

The report also notes that:

• Pensioner buy-in pricing has improved over 2017, with a typical pension plan seeing a funding gain where gilts are exchanged for a buy-in (even when measured against the latest mortality projections)
• Longevity swap structures have evolved to reduce costs and better meet pension plans’ needs; and
• Insurer capacity for buy-ins and buy-outs has increased to over £25bn, but insurers are being increasingly selective on which deals they prioritise in 2018 as demand from pension plans has also increased significantly

Comment

It may surprise some trustees and sponsors that had parked the idea of buying out as a far-off dream, but mortality not improving as expected has played a part in making this type of de-risking more affordable.  And with demand for buy-ins and buy-outs as great as ever, it’s worth considering whether the time is right for your scheme.

DWP addresses bulk transfer of contracted-out rights problem

Nearly two years after inadvertently preventing most occupational pension schemes from transferring contracted-out rights to new schemes as part of a bulk exercise, the DWP has put forward a solution in the form of draft regulations.

Since 6 April 2016 it has only been possible to make a bulk transfer of contracted-out rights without members’ consent to a scheme that itself had been a contracted-out salary-related scheme.  This restriction has had a significant and growing impact on scheme reconstruction work as since 6 April 2016 it has not been possible to bulk transfer contracted-out liabilities into a new scheme since by definition such a scheme could not have been contracted-out.

During consultation on amending regulations ahead of April 2016 the DWP received a suggestion that schemes which were not formerly contracted-out should be able to receive bulk transfers provided sufficient safeguards and protections were put in place.  Although sympathetic, the DWP said that there was insufficient time to draft such changes.

The DWP has now found the time and is proposing that the bulk transfer of contracted-out rights can take place without member consent to schemes that have never been contracted-out in certain circumstances.  These circumstances are, broadly, as follows:

• GMPs – although they cannot be GMPs in the receiving scheme, they have to be treated to all intents and purposes as if they are – in other words, with the same rules regarding payment (such as revaluation and indexation) as if the transfer had not taken place
• Section 9(2B) rights – the transfer must not alter these rights so that the benefits, or future benefits, to which they relate would or might be less generous in the receiving scheme; and an actuarial certificate must be given by the actuary to the transferring scheme to the effect that the benefits acquired in the receiving scheme are broadly no less favourable than the rights being transferred

The regulations apply to any member – whether active, deferred or pensioner.

Consultation closes on 17 January 2018 and the DWP intends to have the regulations in force by 6 April 2018.

Comment

Although the devil will be in the detail (and we are not convinced with the detail of the proposed approach for section 9(2B) rights), this does appear to be a logical solution to the problem as its approach is broadly consistent with the current requirements for a without consent transfer to a formerly contracted-out scheme.  We hope that the consultation will iron out the technical issues and that from this April, schemes will no longer face this technical blockage when there is a need to restructure.

2016/17 Annual Allowance charges – reporting and (some) paying deadlines imminent

HMRC’s Pension Schemes Newsletter 94 covers a miscellany of points on reporting/paying tax.  As well as some points on relief at source for Scottish tax and some Real Time Information glitches, it asks schemes to remind members “that those who have exceeded the annual allowance for 2016 to 2017 to declare this on their Self-Assessment tax return (the deadline for submitting this is 31 January 2018).  They’ll also have to pay a tax charge”.

Other items in the newsletter include the announcement of a review to “simplify pensions language” and some updates on the HMRC chasers to some schemes to register for the online service.

Comment

Schemes and members face the complexity of the tapered annual allowance for the first time, for 2016/17.  It is less likely than ever that schemes/employers can spot all members likely to be triggering an annual allowance charge – most individuals potentially impacted will have to do lots of the work themselves, or with a tax adviser (it is ultimately a personal responsibility).

HMRC’s newsletter could helpfully have highlighted an associated deadline taking on new significance.  The law surrounding the taper means some schemes are offering Scheme Pays using the “voluntary” mechanism far more widely than ever before, or perhaps for the first time.  For this, schemes must make sure the annual allowance charge payment they are paying on the member’s behalf reaches HMRC by 31 January 2018, to avoid the risk of late payment penalties on the member.  If using the Q4 2017 “Accounting for Tax” mechanism to do so, schemes will need to submit this earlier than usual to meet this deadline (this is all much tighter than the deadlines for paying the annual allowance charge if the member is actioning a statutory right to (so-called “mandatory”) Scheme Pays).

FRC issues its draft Plan and Budget for 2018/19

The Financial Reporting Council has published a consultation paper setting out its three year (2018-21) strategy and its budget for the 2018/19 financial year.

Insofar as the pension levy is concerned, in 2018/19 the FRC wishes to raise £1.2m (down from a budgeted £1.4m in 2017/18) from those occupational pension schemes with 5,000 or more members and will, in the first quarter of 2018, confirm the levy rate to be applied, after considering data on scheme membership provided by the Pensions Regulator.  The current levy rate for such schemes is £3.12 per 100 members (with smaller schemes being exempt).

Consultation closes on 28 February 2018.

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.