Pensions Bulletin 2018/49
6 December 2018
Pension dashboard available next year?
After what might politely be called a lengthy period of contemplation by Government, it looks like the concept of a pension dashboard may be happening. Under this, an individual should be able to access online some standardised key information about their benefit entitlements from each of their pension schemes, state included, to assist them with their retirement planning.
On 3 December the DWP set out its thoughts on how Government should facilitate industry-led pension dashboards, asking 15 questions of interested parties with a short response deadline of 28 January and a promise to respond by the end of April 2019. The consultation paper also contains the findings from the much delayed DWP feasibility study.
Delivery will be overseen by the new Single Financial Guidance Body (SFGB) which will convene and oversee an industry delivery group to enable successful implementation.
The intention is that multiple dashboards will be available. These will exist alongside a non-commercial dashboard hosted by the SFGB which the DWP intends to be introduced in 2019.
For either to happen pension schemes will need to supply data from next year, initially on a voluntary basis. But legislation will also compel schemes to supply data and we anticipate that the beginnings of such law will be contained in next year’s Pensions Bill. The DWP recognises that it will be more challenging for DB schemes to plug their datasets into a dashboard and they will be permitted a longer lead in before “onboarding” – potentially three to four years from the first dashboards becoming available to the public. Rather oddly, the consultation paper does not set out what data needs to be supplied by schemes.
State pension data will be part of the service but only “ultimately”.
The project will use a single “Pension Finder Service”, essentially a bespoke search engine, to find a member’s data among all the schemes that will be compelled to onboard. This is to be run on a non-profit basis and with strong governance.
“Appropriate and robust controls” are promised to protect the consumer.
The financing arrangements remain opaque, but the Government expects the pensions industry to foot most of the bill and if this is not forthcoming there is a strong hint that compulsory levies will be raised.
This is an ambitious timetable given the 40,000 or so pension schemes in scope, a standing start in terms of the necessary legislation and it really only being now that the Government has started to respond to last October’s roadmap from the ABI of what needed to be done to get the system up and running (see Pensions Bulletin 2017/17). But at least we are now beyond the phase of contemplation and delay and starting to move into delivery.
“CDC could provide … potentially higher retirement incomes”
An interesting report investigating how Collective Defined Contribution schemes could work in the UK gives cause for cautious optimism for the proposed Royal Mail benefit design whilst highlighting there are still issues to be resolved.
Published by the Pensions Policy Institute, and co-sponsored by Royal Mail and the Defined Contribution Investment Forum, the paper compares the legislative framework proposed by the DWP (see Pensions Bulletin 2018/45) with the structures already adopted in other countries. It also highlights some of the features adopted by the proposed Royal Mail scheme, and how they appear to address a number of issues encountered in countries such as the Netherlands, Canada and Denmark.
Key features of the proposed Royal Mail CDC Scheme include:
- Total contributions of 19.6% of pensionable pay to cover both a CDC section targeting 1/80th of pensionable pay plus increases and an additional DB lump sum section accruing 3/80ths of pensionable pay plus increases
- Target increases of CPI+1% both in deferment and retirement, but these are not guaranteed and are completely dependent on experience
- Funding and benefit calculations performed on a “best estimate” basis, with no built-in buffers in order that the potential for intergenerational unfairness can be limited; and
- The effect of experience usually spread over the future lives of all members by changing the future increase (or potentially decrease) rate for everyone – so other than in extreme events both good and bad news are spread over a number of years
The report emphasises the importance of good communication with members, noting how in Holland the experience of seeing benefits reduced came as a surprise to many. But it is the pooling of longevity risk combined with the investment freedom afforded by a lack of any guarantees, or indeed buffers, in the proposed Royal Mail scheme that largely contribute to the belief that, compared to individual DC, CDC could provide higher, more stable retirement incomes for members.
The CDC debate is hotting up, and we welcome discussion on the pros and cons of this potential alternative to DB and DC pension provision. Steven Taylor’s recent blog highlights some of the key features and challenges for CDC schemes further.
New VAT bill for insurers looms
We reported in Pensions Bulletin 2017/42 about a change of HMRC VAT practice regarding services supplied to pension schemes by insurance companies.
Last October, in Revenue and Customs Brief 3/2017, HMRC stated that such services supplied to “special investment funds” (such as DC schemes) will remain VAT exempt because of a European Court decision. However, services supplied by insurance companies to other schemes will no longer be VAT exempt. HMRC originally said in this Brief that the end of VAT exemption would be from 1 January 2019, but by November 2017 this deadline had changed to 1 April 2019.
We now understand from industry discussions that the schemes affected will be a subset of those that had been announced – ie only those where services are provided by the insurance company under an investment management agreement. Those where the service is provided under a contract of insurance will remain unaffected.
In practice this may mean that DB schemes invested in pooled funds will be unaffected, but insurance companies managing segregated accounts for DB schemes would have to charge 20% VAT on their fees.
We further understand that although HMRC will not be providing a further update to its Brief, it will reflect this position in guidance. In the meanwhile, it may be prudent for trustees of DB schemes with segregated accounts with insurers to enquire how the insurers intend to manage this change.
It is unsatisfactory that just a few months before a significant change in the tax treatment of investment services comes into force we have no official confirmation about how important distinctions between VATable and non-VATable services are to be drawn. Hopefully HMRC will publish its final position soon.
Purple Book points to continued significant risk exposure for the PPF
In the thirteenth edition of the Purple Book, the Pension Protection Fund points to the significant risk that DB schemes present to it, despite an increase in the aggregate funding level in such schemes in the year ending 31 March 2018.
While this funding level, on a section 179 basis, has risen 5.2% to 95.7%, with a net deficit of £70.5bn, nearly two-thirds of schemes remain in deficit, and their combined deficit is £187.6 billion. It is these schemes that matter of course, should their employers fail.
The PPF says that reasons for improvements in DB scheme funding over the year are higher gilt yields driving down liability values, a rise in equity markets and the use of more up-to-date section 179 valuations, along with the continued shrinking of the DB universe (see below).
The Purple Book also show the average scheme funding recovery plan length has not shortened and remains high at 7.8 years.
The Purple Book data also reveals the following:
- The proportion of company DB schemes open to new members has stayed steady at 12%
- The number of PPF-eligible DB schemes has decreased from 5,588 schemes in 2017 to 5,450 in 2018; and
- A continuation of de-risking trends, with the number of equities held decreasing and bonds increasing – and within equities a shift in the share of UK-quoted equities which has decreased to 18.6%, from 20.5%, while exposure to overseas equities has increased
Whilst this latest snapshot as at 31 March 2018 will be largely pleasing for the PPF, it is well aware that in an environment of stock market volatility and economic and political uncertainty things can easily change. Naturally it wishes to see schemes adopt stronger risk reduction strategies and mend deficits earlier where possible.
The next measurement point is two days after the UK is due to leave the EU.
Pensions Regulator finds success in funding action against Southern Water
In what looks to be the first of its kind, the Pensions Regulator says that its interventions in relation to the Southern Water Pension Scheme have resulted in its concerns regarding the trustee’s and company’s approach to scheme funding being addressed.
The Regulator was concerned that the scheme was carrying unnecessary risk due to an inappropriately long recovery plan and being treated unfairly relative to the company’s shareholders.
The details are spelt out in the Regulator’s section 89 regulatory intervention report, much of which is specific to the scheme, but it does seem that this is one of the handful of cases where the Regulator has taken a formal step in the use of its scheme funding powers by issuing a warning notice under section 231 of the Pensions Act 2004.
The timeline at the back of this report shows what a protracted process this can be. In the event, the warning notice was enough and nearly a year after its issue, the Regulator agreed to cease all regulatory action knowing that the recovery plan had been shortened and a dividend sharing mechanism was to be introduced.
The Regulator says that this is just the latest of many valuations agreed in circumstances where it has been prepared to use its section 231 powers to impose recovery plans on employers who can clearly afford to do more to address scheme deficits. But it has still yet to put a case before its Determination Panel. What will be interesting to witness is how the Regulator’s behaviour will change when it gets its new powers under this very same section of the Pensions Act 2004, along with a much more directional DB funding code, details of which we expect to start to emerge in the New Year.
Auto-enrolment parameters for 2019/20 announced
The Government has announced the earnings trigger and qualifying earnings band for auto-enrolment purposes for 2019/20. As last year (see Pensions Bulletin 2017/53) the earnings trigger will remain at £10,000 and both the lower and upper earnings limits will continue to be aligned to the national insurance contribution thresholds. Therefore for 2019/20:
- The upper limit of the qualifying earnings band will be £50,000
- The lower limit of the qualifying earnings band will be £6,136
- The automatic enrolment earnings trigger will be maintained at £10,000
2019/20 will be a critical year for the success of the auto-enrolment project since the second phased increase in minimum contribution rates will take place to a headline figure of 8% (in total), so it is not surprising that the Government has opted for continued stability in its approach to setting these parameters.
ScamSmart campaign succeeds in improving awareness of pension scams
The Financial Conduct Authority has issued a press release celebrating the fact that the number of people seeking information about pension scams has soared since the launch of its joint “ScamSmart” campaign with the Pensions Regulator this summer (see Pensions Bulletin 2018/33).
According to the FCA, in the 55 days before the launch around 31,000 people visited the ScamSmart website. In the same period after the launch this rose five-fold to more than 173,000 people. Additionally, the FCA says that over 370 pensions holders were warned about an unauthorised firm after using the Warning List, an online tool whose purpose is to help consumers check a list of firms operating without authorisation.
Whilst it is good that awareness of pension scams has increased, as we said in August, regulatory action to combat this scourge has been painfully slow and is still not yet complete.
“Back to 60” win right for judicial review of State pension rise
The Backto60 campaign group has been successful in the High Court in its application for a judicial review of successive Governments’ handling of the raising of State Pension Age for women born in the 1950s.
This means that at a future hearing Backto60 will be able to argue their case that the taper mechanism used to raise State Pension Age for women, in combination with an alleged failure to properly inform women of the changes, amounted to gender and age discrimination. This hearing is expected in early 2019.
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.