Pensions Bulletin 2018/27
5 July 2018
FCA continues with its stately progress on DC retirement outcomes
The next stage in the FCA’s intervention in the DC contract-based retirement income market was signalled on 28 June with the publication of the final report of its Retirement Outcomes Review along with the launch of CP18/17, the first of two consultations. However, a process that started two years ago, and had its interim findings published last July (see Pensions Bulletin 2017/30), is not likely to complete until July 2019 and there is no firm date yet by when the measures the FCA is now proposing need to be in force.
The FCA’s remedy package aims to protect consumers from poor outcomes, improve consumer engagement with retirement income decisions, and promote competition by making the costs of drawdown clearer and comparisons easier.
As last year the main focus is on the unadvised drawdown market, but before then, the FCA wants to see:
- “Wake-up” packs, including retirement risk warnings, from age 50, with a single page summary document (also known as a “pension passport”) – both of which are intended to maximise consumer engagement
- A repeat of these packs every five years until consumers have crystallised all their DC pension pot; and
- Improved guidance, some of which will follow as a result of the Government setting up the Single Financial Guidance Body (see Pensions Bulletin 2018/19)
The FCA also suggests that the Government should consider the merits of “decoupling” tax-free cash from other pension decisions, arguing that “many consumers focus solely on taking their tax-free cash at this time and do not engage with the decision of what to do with the rest of their pot. Separating the decision to take the tax-free cash from the need to move into drawdown will let consumers put off deciding what to do with the rest of their pot, until they are ready to focus on it”. However, the FCA acknowledges that major changes to the pension tax regime would be needed to achieve this.
At the point of entering drawdown or buying an annuity, the FCA intends to deliver a more structured set of options to help consumers engage with their investment decision, consider their retirement objectives, and match their retirement solution to these. Key to this is the concept of three potential investment pathways for drawdown – to answer the following needs:
- “I want my money to provide an income in retirement”
- “I want to take all my money over a short period of time”
- “I want to keep my money invested for a long period of time and may want to dip into it occasionally”
This is conceptually different to the default pathway that some had been advocating, including the Work and Pensions Select Committee, as it recognises that retirement income needs differ across consumers.
The FCA believes that if it can get the architecture that surrounds the drawdown decision right it can help to address the clear policy concerns that individuals that do not take advice are not thinking through what they want and how best to arrange their pension investments in order to achieve it.
The FCA also wants to:
- Improve the effectiveness of the information prompt for consumers potentially eligible to purchase enhanced annuities
- Amend its rules to make sure that the annuity information prompt works for consumers requesting income-driven annuity quotes
- Amend the information consumers receive on entering drawdown to ensure the prominence of charges information and consistency in calculation of illustrations
- Require firms to provide consumers with a one-year single drawdown charge figure pre-contractually
- Require firms to provide charges information to consumers in circumstances where they have moved into drawdown in their existing pension scheme; and
- Amend its rules on the, ongoing, annual information a firm must provide to a consumer taking income in drawdown, including to make sure that it is also provided to consumers who have entered drawdown but not taken any income
Although this consultation is only directly relevant to contract-based DC provision, it is likely that occupational-based master trusts will take an interest as some of them develop their own retirement income solutions for their members. The DWP may also take an interest in aspects of the proposals, such as the wake-up packs, and apply them in due course to DC occupational schemes.
The deadline to respond to much of the consultation is 9 August 2018. A further consultation will be launched in January 2019, with the intention that the FCA will issue a Policy Statement and final set of rules in July 2019.
There has been a regulatory gap in the DC market ever since George Osborne dropped his pension freedoms bombshell in the 2014 Budget and signalled the end for annuities as the de facto default mechanism for turning DC pots into retirement income. The hope that product providers would innovate has proved to be misplaced. NEST has been trying to do the right thing by its members but has been held back by the Government. At last, the FCA is mapping out a solution for the product providers – the three ready-made drawdown investment pathways. This is a welcome step as the evidence accumulates that those drawing down on their pots are not getting value for money, are probably invested incorrectly and are exposed to the ever-present risk of pension scams. But all of this should have been thought through as part of the pension freedoms package. And although it is now being addressed, it will be quite some time before it is delivered.
Supreme Court tells Government to make up its mind about civil partnerships (in effect)
When civil partnerships were introduced in 2005 they were only available to same sex couples because the purpose of the legislation was to address discrimination against same sex couples who, unlike opposite sex couples, could not then legally marry. From 2014 the law changed so that same sex couples can marry and so opposite sex couples then became victims of discrimination, in breach of their human rights.
So says the Supreme Court in the case of R v Secretary of State for International Development in which an opposite sex couple with conscientious objections to the institution of marriage challenged the Government on the continued unavailability of civil partnership for opposite sex couples.
The Government’s arguments that it was taking a wait and see approach to addressing the discrimination were unequivocally rejected by the Supreme Court. The Court unanimously held that, as it was the Government that had created the discrimination (by passing the Marriage (Same Sex Couples) Act 2013), then it “had to eliminate the inequality of treatment immediately”.
Pretty clear. Opposite sex couples’ rights to family and private life which are enshrined in Article 8 read together with Article 14 of the European Convention on Human Rights are infringed and the Supreme Court has accordingly made a declaration of incompatibility.
As the judgment itself recognises, a declaration of incompatibility does not oblige the Government or Parliament to do anything, but this decision may make it difficult for the Government to stall much longer (see Pensions Bulletin 2018/20). They will have to decide whether to abolish civil partnership altogether or let opposite sex couples in.
As there are around 3.2 million such unmarried couples, even if a relatively small proportion enter into civil partnerships this may have a negative impact on DB pension scheme finances as we and Royal London noted earlier this year.
Pensions Advice Taskforce seeks to raise standards for independent financial advisers
The Personal Finance Society has announced via a blog that it has set up a Pensions Advice Taskforce whose main focus will be to create a common set of professional standards for independent financial advisers, encourage the sharing of good practice and provide a code of conduct that gives clear guidance in areas of ambiguity for everyone involved in retirement planning. Membership of the taskforce includes some well-known industry names such as former pensions minister Sir Steve Webb (now at Royal London) and Margaret Snowden OBE of the Pensions Administration Standards Association. We understand that the Financial Conduct Authority is supportive of this initiative as is the Treasury.
The intention is that advisory firms, many of whom are small and who find it difficult to benchmark themselves against the wider market, will, after meeting some necessary criteria, sign up to what will be a voluntary scheme and in so doing will be able to demonstrate to the market and to consumers seeking assistance with their retirement planning that they have the necessary expertise and, as importantly, ethical approach.
Being able to access independent financial advice is an absolute necessity under the pension freedoms, but unfortunately, not only has this been difficult for a number of people, but some advisers have proved to be less than ethical in their conduct (as exposed by the British Steel Pension Scheme saga on which MPs were, back in February, very critical – see the chapter headed “Vultures”).
We welcome this initiative, which should not only benefit the public, but also reputable advisers, who amongst other things should hopefully find that, not only do they have happy clients, but happier professional indemnity insurers.
Cold-calling ban delayed
News has emerged that HM Treasury is running behind on the regulations required to introduce the ban on pensions cold-calling that is required by the Financial Guidance and Claims Act 2018 (see Pensions Bulletin 2018/19).
Under the Act, regulations may be laid before Parliament “prohibiting unsolicited direct marketing relating to pensions” but if before the end of June in any year the regulations have not been made, the Government has to publish a statement by the end of July explaining why they haven’t and setting out a timetable for making the regulations.
We now understand that HM Treasury will launch a short consultation on the draft legislation and lay the required regulations before Parliament this autumn. An official statement will also need to be published by the end of this month.
Whilst clearly very disappointing we are not surprised at this news. As little, if anything is known right now as to how this ban is to be defined and enforced we welcome the news that there will be a consultation – no matter how short.
Updated guide to the DC Chair’s Statement published
Like the original Guide, the updated version sets out the Regulator’s expectations as to how trustees should meet the legal requirements in relation to the Chair’s Statement. The guide sets out a checklist of what should be within each section of the Chair’s Statement and examples of good practice. It also lists common mistakes that the Regulator has seen in statements submitted so far.
The updated Guide is accompanied by a Technical Appendix that summarises the legal requirements and legislative references in relation to the Chair’s Statement. The Regulator suggests that trustees may wish to refer to this in their own Chair Statements rather than detailing the specific provisions.
Most DC schemes must now include the Chair’s Statement in their annual report and accounts and also freely publish the Statement on the internet for scheme years ending from 6 April 2018 (see Pensions Bulletin 2018/09).
The updated Guide is basically “more of the same” as the original guide. It also serves as a reminder of how seriously the Regulator views Chair’s Statements. Bland generic phrases are unlikely to pass muster with the Regulator, nor will “cookie-cutter” Statements produced without proper consideration of a scheme’s specific circumstances. It is apparent that the Regulator wants detailed and clear explanations of how trustees are governing their schemes and meeting their duties. This should drive up governance standards and we support this.
Master Trust Code of Practice finalised
The Pensions Regulator has published its finalised Code of Practice for authorisation of Master Trusts and its consultation response following the consultation earlier this year (see Pensions Bulletin 2018/13).
Overall the finalised Code is little changed from the previous draft.
The most significant changes are that the Regulator states (following feedback) that it is doubling the minimum financial reserve required under the “basic method” from £75,000 to £150,000. Additionally the Regulator has reduced the “haircuts” to be applied to scheme revenue and scheme income in a Master Trust’s Costs, Assets and Liquidity Plan (CALP).
The Code is now before Parliament and, assuming that no issues are raised there, will come into force after the requisite period.
With the publication of the finalised Code of Practice, schemes attempting to achieve Master Trust authorisation by the end of 2018 should really now be putting maximum effort and resources into putting together a robust and detailed application.
DB scheme funding continues to improve (as at 31 March 2016)
Good investment returns and continued deficit reduction contributions have offset lower gilt yields to improve the funding position of DB pension schemes with valuation dates between 22 September 2015 and 21 September 2016 (ie “tranche 11” schemes with an average valuation date around 31 March 2016).
The Pensions Regulator’s latest annual scheme funding statistics (see also the technical annex), that reports on schemes in the above tranche that have submitted their valuations, show the average funding level of these schemes to be 87% on a technical provisions funding basis, a 5 percentage point improvement from the same valuations submitted three years ago. It’s also good news that the most mature schemes (those whose liabilities are 75% or more in respect of pensioners) are over 90% funded on average.
The average recovery plan length is 7.8 years for those schemes in deficit with average deficit reduction contributions of 2.1% of technical provisions.
The average real discount rate for all these schemes is just 0.09%, with many using negative real rates of return. This is a big drop from the equivalent valuations performed three years ago, when the average real rate of return was 0.87%. In a change to recent trends, the average mortality tables used have slightly lower life expectancies than the equivalent valuations three years ago.
In recent years many DB schemes have become closer to full funding on a technical provisions basis. But, as this report demonstrates, much of the good work being done by investment returns and additional employer contributions has been undone by generally decreasing gilt yields.
Pension schemes newsletter 100
HMRC celebrates the 100th pension schemes newsletter with the usual reminders, promises and policy statements.
Perhaps most significantly, towards the end of the newsletter, HMRC states that following a review of the current process for flexible pension drawdown payments, it has concluded that the existing PAYE treatment – ie the use of emergency tax codes – “remains the most effective method of deducting tax in these cases and it reduces the risk of underpayment of tax arising”. This is despite concerns expressed by the Office of Tax Simplification (see Pensions Bulletin 2018/22).
In the promises and delivery bucket is making the annual allowance calculator available once more (from 6 July), hopefully having addressed the errors, and greater transparency (from 1 July) on the format of the fortnightly-updated list of those overseas pension schemes that are “recognised” under HMRC law (“ROPS”) to enable the changes made to each country section to be easily found.
The raft of reminders include a mention of the new online “Manage and Register Pension Schemes Service” that has been available since 4 June, a robust item highlighting which of the functions and declarations that can only be made by the scheme administrator (ie cannot be delegated) and a reminder of the circumstances in which HMRC will respond to a query from a scheme administrator as to whether a member’s proposed receiving scheme for a transfer is registered and the form in which it will do so.
There is also an item that discusses the submission of relief at source claims along with some minor changes being made to the relevant forms. The item further discusses the extension of the residency status report from January 2019 to contain a “C” code, (presumably standing for Cymru), where the individual is resident in Wales and so potentially subject to different income tax rates from 6 April 2019 as a result of the devolution of certain income tax raising powers to the Welsh Assembly.
It is disappointing that HMRC does not appear to be engaging with finding a more equitable solution to the taxation of lump sum withdrawals from DC funds at this time, with lower income taxpayers potentially continuing to be asked to pay additional tax on a temporary basis. And, while we welcome the return of the annual allowance calculator, we would reiterate the cautionary comments that we made in April when it was originally taken offline (see Pensions Bulletin 2018/16). However, the audit trail facility being introduced into the ROPS list, enabling users to see at a glance what amendments have been made since the previous publication is most welcome!
Framework for improving transfers and re-registrations published
The long-awaited report from an industry group that set itself the task of improving response times for certain transfers and re-registrations within the UK investment and pensions industry has now been published.
First proposed in December 2016 (see Pensions Bulletin 2016/50), the Transfers and Re-registration Industry Group (which itself was set up in February 2016) has now finalised a “framework” setting out its agreed position on what providers are expected to deliver to consumers, in relation to the timeliness of transfers and re-registrations, and communications during the process. Good practice standards are supported by illustrative examples on what at the end of the day is a voluntary framework.
Transfers are defined as the movement of assets in the form of cash between providers. Re-registrations are defined as when the assets themselves are moved between providers.
Although the focus is on the FCA-regulated sector, the framework also applies to transfers from DC occupational schemes (but not from DB schemes or transfers to overseas pension schemes).
In relation to DC pensions, the Group says that the standard for transfers in cash between two contract providers should be 10 business days, whilst that for occupational transfers should be 15 business days. However, it is accepted that processing can take longer in some circumstances.
Each step in a transaction should take no more than two business days, with the exception of pension cash transfers. And a step starts when an organisation can begin processing, not when it chooses to do so. The ability to “stop the clock” is to be extremely limited, but does include where a pension scam is suspected.
Four examples are published – transfer of an ISA or group ISA between providers, a SIPP to SIPP transfer, a cash transfer between two group personal pension schemes and a pension cash transfer between two DC occupational schemes. The process for each is sub-divided into the steps for which the two business day standard applies.
The intention is that data will be collected from those signed up to the framework in order to report to regulatory authorities as to whether these timescales are being met.
The hope is that this industry-led initiative, along with modern technology, will speed up and make more consistent the means by which consumers can switch providers. If it fails, there is a clear risk that the FCA and DWP will intervene at some point in the future.
Fixed pensions on transfer-in to be attributable to pensionable service for PPF compensation cap purposes
The DWP has launched a quick consultation containing draft regulations to head off a High Court decision last October that is against the DWP’s policy intention and PPF current practice when schemes that have granted fixed benefits following a transfer in fall into the Pension Protection Fund.
In the case of Beaton vs the PPF, the High Court found that fixed pensions granted on transfer in should be tested against the PPF compensation cap separately to other scheme benefits, as they were not attributable to pensionable service within the scheme.
The DWP now wishes to reverse the effect of this judgment, stating that fixed benefits should be added to scheme benefits when testing against the PPF compensation cap. This treatment brings fixed benefits in line with added years transferred in pensions (that the High Court had noted were attributable to pensionable service within the scheme). The DWP also notes that the logic used by the High Court in reaching its verdict would have the following detrimental implications for the PPF compensation delivered in respect of fixed transfers in:
- Survivor benefits of members who were not active at the start of the PPF assessment period would be lost
- Indexation would be lost; and
- Revaluation following the start of the PPF assessment period would be lost
The regulations also confirm the relevant definition of “pensionable service” can include notional service for PPF compensation purposes. Consultation closes on 24 July 2018.
The DWP notes that primary legislation would be required to fully resolve this issue and the Government will seek to bring that forward at the earliest opportunity.
This was a problem of the DWP’s own making – caused when amendments were made to PPF compensation law in 2014 in order to make clear that pension credit benefits following divorce were treated separately to that same individual’s scheme benefits accrued as a result of pensionable service. It was not for the High Court to weigh up the policy problems that its interpretation of DWP’s faulty law created, but at least there is now to be a resolution of the issue.
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.