Pensions Bulletin 2018/39
4 October 2018
DC master trust law comes into force as more schemes signal their exit from the market
After months of build-up, the new authorisation regime for master trusts, designed to drive up standards in the DC master trust marketplace, finally came into force on 1 October 2018. Although the Pensions Regulator issued a press release to mark the occasion, we expect that existing master trusts will take full advantage of the six month window they now have to apply for authorisation in order to maximise their chances of a successful application.
Alongside the press release, the Regulator issued new figures showing that 30 master trusts are exiting or have exited the market. This number has risen from about 20 in July and shows that, as the reality of the authorisation process hits home, some master trust providers have decided it is not for them.
The Regulator notes that it is aware of 58 remaining master trusts that will need to either apply for authorisation or exit the market shortly (these numbers have fluctuated slightly over recent months as some scheme trustees grapple with the definition of master trust to decide if they fall within it or not). The Regulator expects more schemes will leave the market before the authorisation window closes in April next year.
Additionally, various materials related to master trusts has been issued which we summarise below.
- A second batch of documents to aid pension schemes seeking to become authorised master trusts has been published. The new material includes forms and guidance to assist with the “fit and proper person” checks, and a financial information checklist. This latest material complements that published at the start of September (see Pensions Bulletin 2018/35)
- The Regulator has also published its response to the consultation on its master trust supervision and enforcement policy. The main change from the original draft (see Pensions Bulletin 2018/31) is that the Regulator has moved away from a binary “routine”/”additional” supervision model to a “spectrum of supervisory intensity”. The Regulator also promises to issue further guidance in relation to triggering events, significant events and the supervisory return after further liaison with market participants to refine its thinking in this area
- Finally, connected to the coming into force of the master trust regime, HMRC has updated various forms and guidance to recognise this. The material updated is guidance on how to Apply to register a pension scheme, Send pension scheme reports (this covers the new reportable event of becoming or stopping being a master trust), Information requirements for pension schemes, Managing a registered pension scheme and the associated APSS578 form
Most, if not all, of the material issued is quite detailed and only of great interest to those actually applying for master trust authorisation. However, the bigger picture is how many master trusts will achieve a successful authorisation over the coming months – and watching the market shake down and seeing which master trusts will still be standing in six months’ time will be fascinating. As we have said several times already, those that wish to continue to operate in this market, whether by accident or design, have significant regulatory hurdles to clear over the coming months.
Budget Day confirmed – let the rumours begin!
This year’s Budget will be held early and, in a break from tradition, on a Monday. HM Treasury has confirmed that the Chancellor will be making his Budget statement on Monday 29 October and so now, in less than a month – and two days before Halloween – we will know whether any of the rumours about further cuts in tax relief for members of pension schemes will come to pass.
The main current Government measures for reducing tax relief are of course the lifetime and annual allowances. Some limited insight into their impact is to be had from the publication of HMRC statistics on 28 September, although these are not easy to decipher. Not at all surprisingly, they indicate that the tax raised from those exceeding these two allowances increased substantially year on year.
Perhaps most interesting is the fact that the total value of pension “contributions” exceeding the annual allowance reported through self-assessment increased from £143m to £517m. Deciphering this (assuming the tax rate applying typically being 40%), the annual allowance tax charge take jumped from c£60m to c£200m. And the statistics show that the number of individuals facing this charge jumped from 5,430 to 16,590.
The statistics also show that in 2016/17 HMRC raised £102m in lifetime allowance charges, compared to £66m in 2015/16, with the number of members affected nearly doubling to just over 2,100.
A huge jump in annual allowance tax receipts and how many people faced this charge is absolutely to be expected given the introduction of the annual allowance taper for 2016/17.
We suspect that most of these will be in defined benefit schemes (many in the public sector). But the overall impact of the measure on the Government’s fiscal position is wider when you add in the saving on tax relief from many higher paid DC savers limiting contributions to £10,000 rather than grapple with the complexity of the taper to work out if they could pay more without a charge. On the other hand, such is the complexity of the new regime, we suspect many individuals will not have spotted they have a charge to report at all.
The lifetime allowance charge mostly only arises as individuals actually draw their benefit and depends on how they draw them, so the rise in charge reflects many different factors, including no doubt the reduction of the lifetime allowance to £1m in 2016.
The Chancellor will be tempted to see if any more can be milked from these sources. A rumoured further drop in the annual allowance would be particularly easy to make in legislation – but it would mean a huge increase in those actually and potentially affected, widening the impact of this complex measure.
The Government confirms direction of travel on civil partnerships
The Prime Minister Theresa May has announced that all couples in England and Wales will be able to choose to have a civil partnership rather than get married.
This follows on from the Supreme Court’s declaration in June that legislation which provides that same sex couples can either marry or enter into civil partnerships, but opposite sex couples can only marry is incompatible with the European Convention on Human Rights (see Pensions Bulletin 2018/27).
The Government has noted that there are "a number of legal issues to consider, across pension and family law" and that ministers would now consult on the technical detail. Equalities minister Penny Mordaunt has promised that the change in the law would happen "as swiftly as possible", but as yet we have no firm indication of timescale.
Faced with the choice between abolishing civil partnerships altogether or letting opposite sex couples in, the Government has chosen the option which may well have a negative impact on the finances of DB pension schemes. Trustees, sponsors and advisers will therefore keenly await the consultation now promised.
Workplace pension saving coverage continues to rise
The latest annual report from the Pensions Regulator on auto-enrolment reveals that 84% of employees now save into a workplace pension – an increase from 77% last year. The total amount saved by eligible employees in 2017 was £90.3bn, up from £86bn in 2016. However, the average amount being saved per employee has reduced.
The publication, which is packed full of statistics on auto-enrolment, also shows that the Regulator’s enforcement activities rose dramatically in the year ending 31 March 2018, as more than half a million small and micro employers reached their staging date in this period. For example, nearly 35,900 penalty notices were issued in 2017/18, up from about 14,700 the previous year.
With staging now complete, the auto-enrolment policy has reached a “steady state”, but this does not mean that the Pensions Regulator can wind down its activities. With many tens of thousands of new employers a year being subject to the duty, auto-re-enrolment and the April 2019 increase in minimum contributions to DC arrangements, the Regulator will continue to be busy checking up on whether all affected employers are doing what the law requires of them.
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.