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Pensions Bulletin 2018/12

Our viewpoint

DB White Paper published

The long-awaited White Paper on the regulation of DB schemes was published on Monday, more than a year after the equally long-awaited Green Paper (see Pensions Bulletin 2017/08).

It contains measures designed to deliver a stronger Pensions Regulator, improve the scheme funding process and offers the prospect of facilitating consolidation of the DB pension sector in order to better manage the run off of DB liabilities.

For further details please see our News Alert.

Comment

This is a significant development in DB pensions policy, but it will be some time before many of the measures set out in the White Paper pass into law, if at all.

Master Trust regulations – the Government responds

The Government has published its response to last autumn’s consultation (see Pensions Bulletin 2017/51) about the new regulations setting up the authorisation and supervisory regime for DC master trusts.

The Government states that the main provisions and overall approach have not been amended but some points of detail have been altered or clarified.

Arguably the biggest headline in the response (and it’s not that big) is that the Government has finalised the flat authorisation fees for the new regime and these have reduced from what was proposed:

  • For new master trusts from £24,000 to £23,000; and
  • For existing master trusts from £67,000 to £41,000

The Government states that it intends to lay the draft regulations before Parliament in time for them to come into force on 1 October 2018.  The Pensions Regulator has stated its intention to launch consultation on its Code of Practice on 27 March.

Comment

The Government has stood by its previous position on the principles of the new regime including that existing master trusts should pay more to be authorised and that non-commercial master trusts should be within the scope of the new regime.  As we previously stated, industry-wide schemes or multiple employer schemes with a “community of interest” (eg linked through religious or educational connections) should check whether they will be within scope of the new regime.

Next week, the Code of Practice should set out the real nuts and bolts of what the Regulator is expecting and could come as quite a shock for some affected schemes.

Second DB landscape report published

The Pensions Regulator said that it would produce a DB landscape report annually and the first part of the latest edition looks very similar to that produced in November 2016 (see Pensions Bulletin 2016/47).  Since then more DB schemes have closed to new entrants and/or future accrual bringing down the number of people accruing DB benefits outside the public sector to just 1.3m.

New for this year is a report on the schemes’ funding valuations on a common date of 31 March 2017.  92% of DB membership is covered in this analysis, with data unavailable for the remaining 8%.  They show an overall deficit, on a technical provisions basis, of £275bn, with only around 10% of schemes in surplus.  Most schemes have a deficit of no more than 25% of their technical provisions, but some are less than 50% funded.

There is also new reporting on the various approaches that schemes take to increasing pensions in payment, which shows the continued dominance of RPI-linked increases when compared to the CPI measure that has been used in the public sector since 2011.

The extract for this year’s report has been taken from those schemes on the Pensions Regulator’s register on 31 March 2017.

Comment

This report (accompanied by a blog) provides a useful overview of aspects of the DB landscape that will be of interest to policymakers, but one cannot help think that the Regulator has much more detail on the landscape that it is choosing not to make public.

PPF strategic plan shows significant growth expected through to 2021

This year’s three-year look forward from the Pension Protection Fund highlights a number of unrelated issues, starting with one of the key themes in the White Paper – expressed by the PPF as “opportunities to better challenge the kind of corporate behaviour that increases risks to [the PPF] and [its] levy-payers”.

The 2018-2021 strategic plan also covers the following:

  • A decision to raise a further Fraud Compensation Levy in 2018/19 – of 25p per member (as in 2017/18)
  • The opening of a new Cannon Street office in the City of London, as part of the PPF’s desire to in-source more investment activities
  • The significant step up in 2020/21 in assets and individuals covered, when it is expected that the impact of the British Steel and Carillion pension schemes currently entering PPF assessment will come through; and
  • The likelihood that by the end of March 2021 the PPF will have more than £37bn in assets and will be covering over 380,000 people whose DB schemes have failed

The PPF also says that it remains on track to meet its self-sufficiency funding target in 2030.

Comment

This is a further solid report of where the PPF is at and where it intends to be going over the next three years.  Whilst the PPF’s operating environment is, by its very nature, uncertain, the expectation is that any rise in insolvencies and claims on the PPF will remain limited in this three-year period.

Collective Defined Contribution Schemes – the debate moves on

There has been an about turn on the possibility of enabling legislation for such schemes with the pensions minister, Guy Opperman, now telling the Work and Pensions Committee last week that the Government is currently working with Royal Mail to explore how CDC schemes might be introduced in the UK.

It seems that the Government is now considering using secondary legislation to amend the Pensions Act 2011, rather than build on the CDC architecture contained within the Pension Schemes Act 2015.  However, in his remarks, Mr Opperman concluded that there is “still a long way to go”.

Comment

Only a few weeks ago the same minister was saying that he was unlikely to turn to this area soon (see Pensions Bulletin 2018/06).  Although CDC now also gets a brief mention in the White Paper, what is not clear at this stage is whether the behind the scenes discussions will lead to anything tangible.

UKSA expresses concerns over the “widespread use of the RPI”

In response to a new report published by the Office for National Statistics examining the shortcomings of the Retail Prices Index as a measure of inflation, Sir David Norgrove, the chair of the UK Statistics Authority has expressed concern about the continued “widespread use” of the Index to measure changing prices.

The report discusses the background to the concerns and the RPI’s loss of National Statistic status in 2013.  The ONS reiterates its position that the RPI is a poor measure of inflation and that “there are other, better measures available and any use of RPI over these far superior alternatives should be closely scrutinised”.  However, the report does acknowledge that there are still legacy needs for the RPI to continue to be published in its existing form.

The report consolidates previous research into the RPI and its shortcomings, looking in particular at the “formula effect”, the treatment of housing costs, and weaknesses in its data collection and classification systems.

Comment

There are no new revelations in this new report, but it underscores the UK Statistics Authority’s concerns about the continued widespread use of the RPI.

FCA and Pensions Regulator set out their initial ideas on working together

Following on from their announcement last month that the Financial Conduct Authority and the Pensions Regulator would be working together on a pensions regulatory strategy (see Pensions Bulletin 2018/07), both organisations have now issued a “joint call for input” ahead of the stakeholder events planned for March and April.

Much of the document is background in nature, but it does contain a number of issues where both bodies feel that there is merit in acting jointly over the next five to ten years.  These comprise the following:

  • Getting saving off to a good start: access to pensions
  • Making sure pensions are well run and funded: effective governance and secure funding
  • Making sure pension savings are safe
  • Making sure pensions offer good value for money; and
  • Supporting good choices and outcomes for consumers and members

The paper also identifies a number of “macro-trends” which it believes are highly likely to drive change across the retirement income sector.

Consultation closes on 19 June and information on the final strategic approach is promised for the autumn.

Comment

There is little real meat in this paper, with much of its content taken up in reciting what the two bodies are currently doing separately, before going on to ask what the two bodies could do jointly.  Nevertheless, hopefully it serves the purpose of providing a framework on which views can be gathered.

Security of DC assets – responding to a changing environment

In a further follow-up to its February 2016 report (see Pensions Bulletin 2016/05), the Security of DC Assets Working Party has issued a guide that seeks to answer the question as to how trustees should monitor and respond to potential changes in the security of their DC assets.

The guide quite rightly makes the point that whilst it is all very well to carry out some initial work to assess risks, with the passage of time, risks are likely to change.  And not only may risks change as a result of decisions taken by trustees (such as the funds being offered to members, or a change in platform provider), but changes made by providers themselves (such as to the legal structure of an underlying fund) may have an impact.

The guide says that whatever the change, after carrying out the necessary analysis, trustees may need to revisit information in a scheme’s statement of investment principles, the Chair’s statement and any member communications in booklets, literature or websites.

Comment

This is a useful reminder that risk identification generally and its subsequent mitigation is a neverending task.  And whilst security of DC assets is generally of a high standard, it is important for trustees to appreciate what could go wrong and what protections they have in place should this happen.

Royal Assent for the Finance Bill

The Finance Bill that started its passage through Parliament following the Autumn Budget (see Pensions Bulletin 2017/51) has now received Royal Assent.

As before, the one measure directly impacting pensions within the now Finance Act 2018 is Schedule 3 that widens the circumstances in which HMRC may refuse to register a pension scheme, or alternatively decide to de-register a scheme.

Comment

These new HMRC powers have been cast widely leading to fears that legitimate schemes may inadvertently be de-registered with potentially disastrous consequences for them.  But assurances have been given by the Government that HMRC will only de-register a scheme where it is satisfied that the scheme is not being operated for the provision of legitimate retirement benefits.

HMRC puts through changes to foreign pension schemes taxation regulations

Regulations have been laid before Parliament containing some “complex and technical” changes to the regulations that set out how funds in foreign pension schemes which have benefited from UK tax relief are calculated for the purpose of UK tax charges, including how they are reduced.  The amendments have been necessitated by the changes to the treatment of foreign pension schemes that were delivered in the Finance Act 2017 – ie the introduction of the overseas transfer charge from 9 March 2017 and the revised member payment provisions from 6 April 2017.

The regulations set out how to calculate the new “ring-fenced transfer funds” and the associated “ring-fenced taxable asset transfer funds” that arise from transfers of UK pension savings made on or after 9 March 2017 to qualifying recognised overseas pension schemes (QROPS).  They also expand the order in which payments out of funds which have benefitted from UK tax relief (such as QROPS and those that have attracted migrant member relief) or other events, such as setting funds aside to be paid as a drawdown pension, will reduce the funds that can be subject to UK tax charges.

The Pension Schemes (Application of UK Provisions to Relevant Non-UK Schemes) (Amendment) Regulations 2018 (SI 2018/373) come into force on 6 April 2018.

Comment

These regulations will be of interest to specialists in the UK taxation of foreign pension schemes, but they seem to be doing no more than is necessary to ensure that the sudden changes announced on Budget Day a year ago are fully reflected in the law governing the UK taxation of foreign pension schemes.

Fixing the tax law for returning transfers

If an occupational pension scheme member chooses to transfer their benefits to an overseas pension scheme, the working assumption for many years is that the funds would never come back to the UK.  But with the introduction of pension flexibility in April 2015 there is increasing evidence of transfers being made back from a QROPS to a UK registered pension scheme.

This is the background to a set of technical changes to pensions tax legislation whose purpose is to ensure that where benefits have been put into payment in the overseas scheme, either as a pension or income drawdown, but the individual wishes to transfer their pension funds back to a UK-registered scheme (or to another overseas scheme), then, subject to certain conditions, the transfer is “recognised” and so treated as an authorised payment and there are no untoward tax consequences, such as further testing against the lifetime allowance, by virtue of the pension or income drawdown being set up in the receiving scheme.

The Relevant Overseas Schemes (Transfer of Sums and Assets) Regulations 2018 (SI 2018/372) come into force on 6 April 2018.

Comment

These provisions follow on from enabling legislation put into place following the imposition of the overseas transfer charge in 2017 and would appear to bring this specific technical issue to a neat conclusion.

Auto-enrolment earnings parameter settled

The Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2018 (SI 2018/367) which gives effect to the 2018/19 earnings parameters agreed in December (see Pensions Bulletin 2017/53), has completed its passage through Parliament.  The Order contains the annualised lower and upper limits of the qualifying earnings band (£6,032 and £46,350 respectively) and by reference to other pay reference periods.  As the earnings trigger remains unchanged at £10,000 this is not mentioned.

NEST Order becomes law

The Order that allows employers to contractually enrol workers into the National Employment Savings Trust after their staging date and which also covers a number of other matters (see Pensions Bulletin 2018/05) is now in its final form.

The National Employment Savings Trust (Amendment) Order 2018 (SI 2018/368) comes into force on 6 April 2018.

Spotlight on pension scams

And finally, the Pensions Advisory Service has produced an updated version of its hints and tips document, aimed at the general public, looking at how to spot and stop a pension scam, how to stay safe from such scams and what to do if you think you’re being or have been scammed.

There is little comfort for this last group, and they are also warned not to fall victim to “secondary scamming” – where unsolicited assistance is offered to help recover funds lost to the primary scam.  Apparently, this is now common too.

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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