5 April 2018
Auto-enrolment – the first step up in DC contributions takes place
This Friday, the minimum contributions payable to money purchase qualifying pension schemes will increase under the phasing rules that were finally settled in the then Chancellor’s 2015 Autumn Statement. For many this will mean total contributions rising from 2% to 5% of earnings between the lower and upper earnings limits for national insurance purposes (with the employer paying at least 2% of the 5%).
In a year’s time the phasing rules will deliver a further increase from 5% to 8% of such qualifying earnings (with the employer paying at least 3% of the 8%).
This an important stage in the auto-enrolment journey, albeit accompanied by fears that opt out rates may increase. Hopefully inertia will work against this, both this April and next.
Other changes taking place on 6 April 2018
This Friday is also the day when a number of other changes are taking place to pensions legislation that have been previously flagged in the Pensions Bulletin. They include the following:
- Bulk transfers of DC benefits between occupational pension schemes without member consent will be able to take place under a new independent advice regime, replacing the DB-focussed actuarial certification route
- DC investment charges and transaction cost information will be subject to new disclosures to scheme members
- Contracted out rights will be able to be bulk transferred without member consent to schemes that have never been contracted out – removing a technical blockage that arose with the ending of salary-related contracting out two years ago
- The “deferred debt arrangement” will become available as a new option for employers withdrawing from multi-employer DB schemes who do not wish to pay their share of the buyout deficit; and
- The £30,000 threshold above which individuals must obtain independent advice before transferring or converting “safeguarded benefits” into “flexible benefits” (ie turning DB into DC) must be tested by reference to the best estimate of the value of such safeguarded rights where their actual value is calculated on a more generous basis
All of these initiatives have been brought to completion by the DWP whilst at the same time it has been preparing the White Paper on the DB regulatory regime – a topic on which the DWP is likely to focus on in the coming months.
Non-advised drawdown – not all engage with what they are taking on
This is the key finding by the Financial Conduct Authority from a sample of non-advised drawdown sales that took place between April 2015 and April 2017. Whilst firms are broadly meeting their obligations to communicate clearly with customers, the FCA found that some customers appear not to be fully engaging with this information and therefore are potentially putting themselves at risk of harm. The FCA goes on to say that:
- Many customers are choosing to access their benefits ahead of their intended retirement date; and
- Customers have often not thought about the investment choices of drawdown – particularly when their main aim is to access the tax-free lump sum, without taking any immediate income – with the result that they can remain in “low-risk assets”, including cash funds
The FCA also observes that despite receiving a large amount of information to help customers make informed decisions, they do not always read this information before they access their pension savings.
Last July, the FCA said that it was minded to intervene in the non-advised drawdown market (see Pensions Bulletin 2017/30) as it was concerned that there may not be sufficient consumer protection. Hopefully, by the time we get to the end of June 2018 we will know what the FCA intends to do in this and other areas as it delivers its final report on its Retirement Outcomes Review.
CMA publishes more material on its investigation into investment consultancy
The Competition and Markets Authority has published more documents supporting its market investigation into the supply and acquisition of investment consultancy and fiduciary management services to and by institutional investors and employers in the UK.
The first is a working paper that examines one aspect of the CMA’s assessment as to whether investment consultants are providing value for money in relation to the quality of their services.
“Asset manager product recommendations” reports on a quantitative analysis undertaken in order to test whether asset management products which are recommended by investment consultants outperform their respective benchmarks. The conclusion is that this is only the case before account is taken of asset management fees. Once these are taken into account, no evidence has been found that there is outperformance to a statistically significant extent on average.
The second is the results of a large scale survey of trustees commissioned by the CMA to gather evidence on how pension scheme trustee boards use investment advisory and fiduciary management services and how they view these markets.
Amongst the findings are high satisfaction rates, a clear desire to bring in investment expertise, but with relationships that tend not to last much beyond ten years. There is also concern expressed by a minority of trustee boards that investment consultants can use their position to steer clients into their own fiduciary management service offerings.
The CMA’s inquiry remains ongoing and it continues to aim to publish its provisional decision report in July 2018.
More on 21st Century Trusteeship
The Pensions Regulator has released some further guidance under the initiative in which it is seeking to raise standards among trustees and improve the way that occupational pension schemes are managed.
“Advisers and service providers” looks at a number of issues surrounding the appointment, management and oversight of such advisers and providers. The guidance includes several case studies showing both where things went wrong and where they went right – and links to further sources.
HMRC reports on a miscellany of issues
As is becoming increasingly the custom, HMRC’s latest pension schemes newsletter runs across a number of issues, predominantly with an administrative focus.
Amongst the topics covered, some time is spent on further adjustments to the operation of relief at source to account for Scottish income tax, there is a promise to deliver a newsletter about the new pensions online service, a descriptive error on the annual allowance calculator is noted and new guidance on the tapered annual allowance is launched.
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.