A lower than expected September CPI measure sets the scene for next year’s pension benefits and limits

The announcement on 17 October that the Consumer Prices Index rose by 2.4% over the twelve months to September 2018 sets the scene for a number of pension benefits and limits next year.

State pensions

• It seems that the “triple-locked” Basic State Pension (currently set at £125.95 pw) and the Single Tier State Pension (£164.35 pw) will increase next April by a measure of earnings growth as this is likely to be higher than both the CPI figure of 2.4% and the 2.5% fixed amount.  Quite what rate is to be used is not yet clear, but our understanding is that it is usually based on the increase in one of the Whole Economy averages over three months to July 2018, estimates of which exceed 2.5%
• SERPS and S2P entitlements will increase by 2.4% next April

Occupational pensions

• Next year, schemes that apply the Limited Price Indexation rules to pensions in payment will have to increase them by 2.4% for both the pension that accrued between 6 April 1997 and 5 April 2005 and for the pension that accrued after 5 April 2005
• GMPs that accrued after 5 April 1988 will also increase by 2.4%
• The one year minimum revaluation of that part of a deferred pension in excess of any GMP will be 2.4% for both the 5% and 2.5% capped orders

Pensions tax

• Following the CPI linkage introduced by Finance Act 2016, the £1m lifetime allowance for pensions tax purposes should increase to £1,054,800 on 6 April 2019
• For those accruing defined benefits or cash balance, the increase in the CPI of 2.4% is effectively the inflation allowance made before the annual allowance starts to be used up in the 2019/20 tax year

Over the same period the Retail Prices Index rose by 3.3% and the CPIH by 2.2%.

Comment

Earnings growth has been looking up in recent months as price inflation has abated and so we are not surprised to see earnings drive increases in core state pensions.  The likely new level of the lifetime allowance sets a benchmark for the Budget in less than a fortnight’s time.

PPF writes to capped members about Hampshire

Further to last month’s European Court ruling in favour of Mr Hampshire (see Pensions Bulletin 2018/36), the PPF has started writing to those members receiving compensation subject to the compensation cap that it believes might be receiving less than half of their old scheme pension, and therefore may be due an uplift.  The PPF will be asking for confirmation of the members’ benefits in their old scheme, as they do not currently have all the information they need to implement the judgment.

The PPF has also outlined the interim process it intends to put in place whilst it liaises with the DWP to change the legislation.  Under this:

• The member’s scheme benefits will be valued at the PPF assessment date and then compared to the value of PPF compensation from the assessment date
• Where compensation is less than 50% of the scheme benefit, a one-off increase to compensation will be made to increase the value of compensation. The revised compensation will be in the same form as currently (ie keeping the same indexation/revaluation, etc)

A similar process will be undertaken for Financial Assistance Scheme members.

Comment

The PPF is pushing forward with the data exercise required to calculate the required enhancements to member benefits.  It appears to be taking a pragmatic approach to increasing member value before legislation changes – a year-on-year test was suggested in the judgment, but a one-off increase to the same value, on the PPF’s existing benefit scale, is considerably more efficient and administratively manageable.

Master trust fined for not processing contributions in a timely manner

In the first case of its kind, the Pensions Regulator has fined the trustees of a master trust for failing to process and invest employer contributions promptly.  Over 9,000 members spread out across nearly 1,000 employers were affected, with £1.4m of contributions being processed late.

The Regulator’s intervention report implies that it was the Salvus Master Trust’s use of a manual process to allocate contributions (presumably to members and then to their investment choices) that was at the root of the issue.  It seems that the issue has now been resolved and affected members have had their accounts adjusted so that the value of their DC pots in respect of these late processed contributions are no different to had they been processed in a timely manner.

Comment

Since 6 April 2015, trustees of most DC schemes have been required to process core financial transactions “promptly and accurately”.  No further detail is given in the legislation as to when processing is not “prompt” (and there is not an explicit definition in the Regulator’s guidance), but clearly in this particular case it was not.  What is surprising is how low the fine (of £5,000) was – due in this instance to the fact that of the four trustees, one was an individual.

Lost pension pots could total £20 billion

Research from the Pensions Policy Institute claims that the total value of lost pension pots in the private DC pensions market could total nearly £20bn with around 1.6 million pension pots unclaimed.  This is six times higher than previous estimates of the value of lost pension pots.

The research, carried out on behalf of the ABI, covered firms representing about half of the private DC pensions market and found 800,000 pots worth an average of nearly £13,000 marked as “lost”.  These figures were then doubled to reach the headline numbers above.  The survey excludes lost pensions held in the public sector and trust-based pension schemes so the true scale of the problem is likely to be even larger.

The ABI claims these figures prove the proposed Pensions Dashboard is now more important than ever as it would provide a digital solution to tracking members in future.

Comment

The scale of currently “lost” pensions is large, especially given it excludes the potentially larger DB “pots” found in public sector and trust-based pension schemes.  Whilst some of the DC pensions may well be claimed when the owners reach retirement, substantial proportions remain unclaimed despite belonging to members who are already of retirement age.

The Pensions Dashboard is clearly likely to help reunite lost pension pots with members, but only if the latter are willing to access it and follow through.

FCA starts a discussion on climate change and green finance

The Financial Conduct Authority has published a discussion paper on climate change and green finance, seeking assistance in four areas, one of which is ensuring that those making investment decisions in workplace personal pension schemes take account of risks including climate change.

On this, the document reprises the FCA’s response to the Law Commission’s report on Pension Funds and Social Investment (see Pensions Bulletin 2018/25) in which the FCA announced its intention to consult on rule changes requiring independent governance committees to report on their firm’s policies on evaluating environmental, social and governance (ESG) considerations, including climate change, how they take account of members’ ethical and other concerns and stewardship.

At the same time as consulting on these matters (scheduled for the first quarter of 2019), the FCA will also consult on introducing related guidance for providers of workplace personal pension schemes.  This is intended to clarify how providers should consider financial factors (such as ESG and climate change risks and opportunities) and non-financial factors (such as responding to members’ ethical concerns) when making investment decisions.

Comment

Reforms in this area have already been settled for occupational pension schemes – by means of an extension to the Statement of Investment Principles requirements (see Pensions Bulletin 2018/36).  We suspect that something quite similar will be delivered for the workplace personal pension sector.

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.