Pensions Bulletin 2019/09
7 March 2019
Pensions Regulator issues annual funding statement for DB schemes
On 5 March the Pensions Regulator published its 2019 DB funding statement setting out its key messages for trustees and sponsors who are undertaking valuations – with a particular focus on valuations with effective dates between 22 September 2018 and 21 September 2019, as well as schemes undergoing significant changes that require a review of their funding and risk strategies.
The Regulator wants all DB schemes to set long-term funding targets, distinct from and higher than technical provisions, and be prepared to evidence that their shorter-term investment and funding strategies are aligned with this long-term funding target via journey plans. As highlighted in 2018, it expects trustees to focus on the integrated management of three broad areas of risk – covenant, investment risks, and scheme funding plans. It also expects advisers to alert trustees to the risks to funding and investment from increasing scheme maturity, particularly those experiencing high levels of transfer activity.
This year’s funding statement reveals a further step in the journey being taken by the Regulator in setting out expectations that vary according to scheme characteristics – with each of the A to E segments from last year’s statement being divided into two (ie relatively immature and relatively mature) and expectations for each of the now ten sub-divisions being arranged separately under the headings of covenant, investment and funding.
The Regulator also reprises messages about the need for schemes to be treated equitably with other stakeholders, promising to continue to intervene where it has concerns. It mentions its concerns with covenant leakage, long recovery plans and late submissions and makes clear that trustees and employers should be fully prepared to justify their approach to funding and investment with evidence of “robust negotiations” having taken place.
This is an important development in the regulation of DB funding. Please see our News Alert for further analysis and commentary.
FCA proposes hard disclosure of investment administration charges and transaction costs for workplace DC pension schemes
The Financial Conduct Authority has published a consultation setting out proposed rules that require pension scheme governance bodies, such as Independent Governance Committees, to disclose costs and charges to scheme members on an ongoing basis.
The proposals are designed to improve the quality of information available to pension scheme members, allowing workplace DC pension schemes to be better held to account by their members and promoting more effective competition between firms in the interests of consumers.
The consultation follows on from the rules and guidance that the FCA introduced with effect from January 2018 to improve the disclosure of administration charges and transaction costs by FCA-regulated firms managing money on behalf of DC workplace schemes (see Pensions Bulletin 2017/40) and the regulations made in February 2018 by the DWP for publishing and disclosing costs and charges information for workplace pension schemes regulated by the Pensions Regulator (see Pensions Bulletin 2018/09). This in turn stemmed from the joint call for evidence undertaken by the FCA and DWP in March 2015 (see Pensions Bulletin 2015/10).
In light of this background, the FCA’s proposals are intended to mirror the DWP’s regulatory approach, except where differences in the structure of underlying schemes and the contract/occupational regulatory regimes make this inappropriate or unfeasible. Amongst the proposals are that regulated firms must ensure that scheme governance bodies:
- Set out in the Chair’s report information about the transaction costs and the administration charges imposed on scheme members for each default arrangement and each alternative fund option that the member is able to select
- Include an illustration of the compounding effect of the aggregated costs and charges
- Publish all of this costs and charges information, free of charge, on a publicly available website at least yearly and within seven months of the end of each scheme year; and
- Provide scheme members with an annual communication which includes a brief description of the most recent of the above costs and charges information available and how it can be accessed
Consultation closes on 28 May 2019 and the FCA hopes to publish the final rules in a Policy Statement later in the year, with the rules expected to come into force from April 2020.
This consultation has been running late for some while (it had been expected in the second quarter of 2018), but now we have it, we are on our way to having consistent member disclosures on administration charges and transaction costs whether the DC scheme is occupational or contract-based.
PASA launches data guidance
The Pensions Administration Standards Association has issued a near 40-page document that addresses the review and cleansing of pensions data in order to ensure that the information held by pension schemes meets the needs of all stakeholders.
Launched at PASA’s annual conference on 27 February, the guidance is divided into three sections:
- Assessment of data quality dimensions – which suggests areas to consider before setting out an assessment approach, highlighting the barriers that can arise
- Managing risk and meeting compliance – which focuses in more detail on some of the data items needed to ensure that a scheme is being administered in a way that helps to manage risk and meet compliance requirements
- Impact assessment – in which a table is set out to assist with the delivery of a data cleansing project
The guidance concludes with a case study.
This PASA guidance, which is supported by the Pensions Regulator, builds on the Regulator’s record-keeping guidance. Of particular value is the second section as each potential data item is analysed in turn, with suggestions made as to appropriate data cleansing solutions.
Having good data is an important aspect of the governance and risk management of any pension scheme, and, as PASA makes clear, there are some important projects coming up, such as the pensions dashboard and GMP equalisation, in which data issues must be resolved before they can start.
NEST research suggests that the April 2019 auto-enrolment contribution rise will be a breeze
Research published by NEST suggests that fears that the upcoming rise in member (and employer) contribution rates could lead to a round of cessations and opting out are misplaced. Surveying NEST members before and after last year’s auto-enrolment contribution rise, the research finds that:
- Very few members (around 5%) think too much of their income goes into their pension. However, there was a decrease in members disagreeing with the statement (from 70% before the increase to 62% after) which may be an early warning sign that sensitivity to contribution levels is increasing
- After the increase, 28% thought about further increasing their contributions
- 51% of NEST members didn’t notice the increase in their pension contributions
- After the rise, there was a very slight overall increase in confidence in being able to provide for retirement, and members aged over 60 became more likely to consider their pension as their main source of income in retirement
- There was no evidence to suggest that there had been a negative adverse impact on levels of overall debt or non-pension savings
For many people, the increase in contributions this year will be of the same order as the increase last year, so hopefully this latest insight from NEST will hold true once more. However, what is clear to everyone in the auto-enrolment debate, is that a total contribution of 8% of earnings between the lower and upper limits of the qualifying earnings band will not deliver anything like an adequate retirement income, other than for those on very low earnings for whom auto-enrolment retirement income will largely be nugatory.
Guidance body named
The single financial guidance body, set up by the Financial Guidance and Claims Act 2018, has been given its official name in a set of Regulations laid before Parliament. From 6 April 2019 the body will be known as the Money and Pensions Service.
The Financial Guidance and Claims Act 2018 (Naming and Consequential Amendments) Regulations 2019 (SI 2019/383) also set out a number of consequential changes to legislation as a result of this decision, including wherever there are references in legislation to the Pensions Advisory Service and TPAS.
As a result of these regulations, pension schemes and other bodies that signpost to the Money Advice Service, the Pensions Advisory Service and Pension Wise, rather than the single financial guidance body, will need to change their communications and signposting so that it refers people to the Money and Pensions Service.
As the 2019/20 tax year looms …
Some reminders – all assuming that the Spring Statement on 13 March does not turn into a pensions-changing Budget.
- The lifetime allowance (LTA) will rise from £1.03m to £1.055m on 6 April 2019, under the automatic CPI link now in legislation. Pensions managers should make sure all retirement calculation processes and communications appropriately reflect the imminent new level
- The various lifetime allowance underpin levels put in place by registering for one of the Fixed Protections (FPs) or Individual Protections (IPs) remain unchanged as the CPI indexation does not impact them. The window to apply to HMRC for FP16 and IP16 remains open indefinitely (for those who qualify) to obtain a LTA underpin of somewhere between £1m and £1.25m, but there are good reasons to get on with the registration as soon as possible – among them being that after 5 April 2020, schemes do not have a legal obligation to provide IP16 registration valuations on request (some IP16 underpins may already be lower than the current level of the general LTA, but it might be still worth registering them in case there is a further reduction to the LTA in future)
- With the general annual allowance (AA) still set at £40,000, 2019/20 is the fourth year of the taper that can cut in for those with taxable income (from all sources) of more than £110,000, resulting in an income-related personal AA potentially as low as £10,000. With individuals still wanting to earn valuable pension benefits, 2019/20 may be a bumper year for incurring AA charges: individuals exceeding the AA in the tax year will be looking at little or no unused AA to carry forward from the past three years. Certainly, more individuals will have to get familiar with the intricacies of the taper calculations. For anyone counting as having DB benefit that uses up AA (either as an active member, or a deferred member without the AA “carve out”) the CPI allowance for 2019/20 is 2.4% (down from 3% for 2018/19)
- AA “Scheme Pays” will be more important than ever, taking a lot of the sting away for members where an AA charge does arise, both by easing the timing of paying the tax and potentially by reducing the amount of tax to pay. So trustees who have not considered this yet might want to get it onto their agendas
- And as time passes, more and more individuals will, as they reach 55 (or in some cases even 50) think about using a DC flexibility from one of their schemes, that means they fall under the Money Purchase AA (MP AA) regime – such that any DC contributions by or for them thereafter fall into the “£4,000 and no carry forward” AA test. Employers might want to send out general explanations about this pitfall to all employees coming up to age 50
Even in a “no change” year for pensions tax there are still a number of things that it is important not to forget, whether being a pension manager, trustee, employer or simply a confused scheme member!
… and an Annual Allowance action point for March 2019
As ever, the payment by employers running DC schemes of contributions in respect of March requires careful management. It is common for contributions to be received by the provider in the month after the pay point to which they relate. In the case of “for March” contributions that may mean the contributions are received just before or just after 6 April.
For AA usage in DC arrangements, it is (usually) the date that the scheme receives contribution for the member that matters. So a “for March 2019” contribution received after 5 April 2019 would count against 2019/20 AA (the exception is employee contributions to a scheme operating tax relief using the Net Pay system as is typical for occupational pension schemes, where broadly AA usage reflects the date of deduction from pay).
Employers, particularly those operating a new option for some members, such as capping at £833 per month (so targeting the lowest tapered AA of £10,000 a year) may wish to check the processes in place for March contributions to achieve this.
The run-up to 5 April is also the last chance for individuals to use carry forward from the 2015/16 tax year, when there was no AA taper; so (as well as this perhaps helping out any 13-contribution problem) that may mean some individuals make some last minute large DC contributions.
The timing of pension contributions as the tax year draws to a close has always been full of pitfalls, but now that the AA charge has a much wider impact than a few years back it is doubly important to ensure that what is intended to be paid across does not get recognised in the “wrong” tax year.
FCA asks transferred out members of the British Steel scheme to complain
The Financial Conduct Authority is asking any former member of the British Steel Pension Scheme who was given financial advice to transfer out of the scheme and is unsure if the advice was suitable, to make a complaint – first to the advisory firm and then, if necessary, to the Financial Ombudsman Service.
This initiative is part of the FCA’s investigations into the suitability of the advice firms gave to members of the scheme. Separately, the FCA promised back in December 2017 to collect data from all firms who hold the pension transfer permission with the intention of assessing practices across the entire market. It is not yet clear where the FCA has reached with this wider aspect of its inquiry.
DWP to make significant savings from ending access to Pension Credit and pension age Housing Benefit for “mixed age” couples
The DWP has published an analysis showing the substantial savings it will make through withdrawing access to the Pension Credit and pension age Housing Benefit for “mixed age” couples – ie those where one individual is above and the other is below State Pension Age. This follows a ministerial statement from Guy Opperman in January and the subsequent laying of a commencement order with associated regulations.
Pension Credit is intended to provide long-term support for pensioner households who are no longer economically active because of their age. When single people claiming benefits reach State Pension Age, they move from much lower working age benefits to pension age benefits. Until this reform, mixed age couples requiring income-related benefit support could choose to claim a working age benefit (for new claims this will be Universal Credit) or pension age benefits (Pension Credit and/or pension age Housing Benefit).
The change, which was legislated for in 2012, will take place in relation to new claims from 15 May 2019 with over £1bn forecast to be saved over the next five years.
There is a big difference between Pension Credit levels and those for Universal Credit, so for some “mixed age” couples this announcement will result in a substantial cut to the income support from the State they may have been anticipating whilst only one of them is over State Pension Age.
Auto-enrolment earnings parameters settled
The Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2019 (SI 2019/374), which gives effect to the 2019/20 earnings parameters agreed in December (see Pensions Bulletin 2018/49), has completed its passage through Parliament. The Order contains the annualised lower and upper limits of the qualifying earnings band (£6,136 and £50,000 respectively) and also tabulates them by reference to other pay reference periods. As the earnings trigger remains unchanged at £10,000 this annualised figure is not mentioned, but the rounded figures for other pay reference periods are included in the table noted above.
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.