17 October 2019
Queen’s Speech signals the Pension Schemes Bill
Monday’s Queen’s Speech contained, as expected, outline details of the Pension Schemes Bill, with the background briefing notes making clear that the Bill would cover the following:
- Collective defined contribution schemes – providing a framework for their establishment, operation and regulation (see Pensions Bulletin 2019/11)
- Pensions Regulator powers – strengthening existing powers and the sanctions regime, to include introducing new criminal offences, with the most serious carrying a maximum sentence of seven years’ imprisonment and a civil penalty of up to £1 million
- Information and redress powers – giving the Regulator powers to obtain the right information about a scheme and its sponsoring employer in a timely manner and ensuring that the Regulator can obtain redress for pension schemes and members when things go wrong – this is a reference to the adjustments to be made to the notifiable events legislation, the new “statement of intent” in relation to certain corporate events and the extension to more generic information powers, and changes to the moral hazard legislation
- Pensions dashboard – providing a supporting framework, including new powers to compel pension schemes to provide accurate information to consumers, with provisions for regulators to ensure relevant schemes comply (see Pensions Bulletin 2019/14)
- Right to transfer – “creating regulations to set out circumstances under which a pension scheme member will have the right to transfer their pension savings to another scheme” – this refers to the proposed restriction in the statutory right to transfer in order to tackle pension scam concerns (see Pensions Bulletin 2017/35)
- DB funding – improving the defined benefit scheme funding system “by requiring a statement from trustees on their funding strategy” – but the Pensions Regulator will also be given sufficiently wide powers to deliver a new DB funding code with regulatory teeth
- Pension Protection Fund – amending the PPF legislation “to enable the PPF to continue to apply the compensation regime as intended and amend the definition of administration charges” – this relates to adjustments following the Beaton judgment to ensure that a member’s pension built up within a scheme and any fixed pensions granted on transfer in are assessed against the PPF compensation cap together, rather than separately (see Pensions Bulletin 2018/36)
Three of the above seven topics come from the DB White Paper (see Pensions Bulletin 2018/12), with the key omission from the White Paper being the proposals on DB consolidation, including the authorisation and regulation of the new DB superfunds. This currently seems to be in the “too hard” pile, but that is not to say that it may not be introduced during the passage of the Bill through Parliament.
The Bill itself was published on Wednesday.
So much as expected. We understand that the Regulator will launch its much delayed consultation on DB funding (see Pensions Bulletin 2019/19) in early 2020.
Cross-border schemes – no-deal Brexit guidance issued
On 8 October, with less than a month to go before a potential “no-deal” Brexit, the Pensions Regulator published guidance aimed at assisting cross-border schemes should the UK find itself in this situation.
For a number of years occupational pension schemes located in one EEA state (including all EU countries) have needed to apply for authorisation and approval to accept contributions from employers employing members who are subject to the social and labour law of another EEA state.
Despite being facilitated by both EU Pensions Directives, this system of cross-border schemes has not really taken off, but the Pensions Regulator reckons that there are some 40 schemes that operate cross-border between the UK and another EEA state – with probably most in relation to Ireland.
The guidance points out that in the event of a “no-deal” Brexit the legislation governing such schemes will cease to apply with immediate effect and that given this:
- UK-based schemes will need to check whether EEA employers are still able to contribute to their scheme; and
- UK employers using a scheme based in the EEA will need to check it complies with UK rules
The Regulator states that in some cases it will be possible to keep existing pension arrangements, including automatic enrolment, in place, whilst in other cases schemes and/or employers will need to make changes.
The Regulator expects all employers to be compliant with the guidance as soon as is practical after exit day and recommends that schemes should check their status on a regular basis. The guidance gives contact details for the regulatory bodies in four EU states and asks affected schemes to consider the guidance ahead of 31 October and put in place contingency plans.
All far too late in the day, but hopefully the Pensions Regulator has long been in direct touch with those schemes and employers it thinks are affected so that they have their contingency plans already in place.
ESG and Climate Change – Pensions minister puts pressure on largest schemes
It has now come to light that, towards the end of September, Guy Opperman wrote to the 50 biggest UK pension schemes setting out their new responsibilities when it comes to policies on environmental, social and governance (ESG) and climate change factors.
We understand that he has asked a number of questions of the pension schemes, including what substantive changes they have made to their investment strategy to take account of ESG and climate change, to their stewardship policy and to their policy on taking members’ views into account, when these changes were made, and whether there are plans to make further changes.
He is also being reported as requesting sight of the ESG/climate change, stewardship and non-financial factors (members’ views) section of each scheme’s statement of investment principles so that he can compile a record in order to monitor compliance and highlight best practice.
In a related matter, on 7 October in response to a Parliamentary written question from a Conservative MP, Mr Opperman set out three actions that the Government is taking to ensure that pension schemes consider the impact of climate change when taking investment decisions. But the first two actions (with a January 2019 date) are currently in abeyance as they depend on the delivery by the Pensions Regulator of its new governance code.
We cannot think of a precedent for a minister to write directly to pension schemes in this way as ministers normally constrain themselves to delivering policy, leaving information requests to regulatory bodies – the Pensions Regulator in this instance – and Select Committees.
LCP publishes a guide to the new responsible investment requirements
Over the past year we have reported on significant changes that have been made to legislation governing occupational pension scheme investment, much of which Guy Opperman is championing (see article above). These include new policies to be included in the statement of investment principles, an implementation statement to be included in annual reports, and online publication of these documents.
Some of these requirements came into force at the beginning of this month, whilst others are being phased in over the next year or so.
We have now brought all these requirements together in the form of an LCP guide to these new “responsible investment” requirements.
We are expecting that both Government and regulators will look critically at how schemes comply with these requirements. Subject to changes at the political level, enforcement is likely to be strict, with further requirements introduced in due course.
September’s CPI sets the scene for next year’s pension benefits and limits
The announcement on Wednesday that the Consumer Prices Index rose by 1.7% over the twelve months to September 2019 sets the scene for a number of pension benefits and limits next year. Over the same period the Retail Prices Index rose by 2.4% and the CPIH by 1.7%.
It seems that for the second year running the “triple-locked” Basic State Pension (currently set at £129.20 pw) and the Single Tier State Pension (£168.60 pw) will increase next April by a measure of earnings growth as this is likely to be significantly higher than both the CPI figure of 1.7% and the 2.5% fixed increase. 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 2019, estimates of which appear to be around the 4% mark.
SERPS and S2P entitlements will increase by 1.7% next April.
Next year, schemes that apply the Limited Price Indexation rules to pensions in payment will have to increase them by 1.7% for both the pension that accrued between 6 April 1997 and 5 April 2005 and the pension that accrued after 5 April 2005.
GMPs that accrued after 5 April 1988 will also increase by 1.7%.
The one-year minimum revaluation of that part of a deferred pension in excess of any GMP will be 1.7% for both the 5% and 2.5% capped orders.
Following the CPI linkage introduced by Finance Act 2016, the £1.055m lifetime allowance for pensions tax purposes should increase to around the £1.073m mark on 6 April 2020, but the Government will confirm the exact figure in due course.
For those accruing defined benefits or cash balance, the increase in the CPI of 1.7% is effectively the inflation allowance made before the annual allowance starts to be used up in the 2020/21 tax year.
Once more there has been significant real earnings growth which has benefited those in receipt of State pensions. The actual increases should be confirmed by the DWP later in the autumn, with perhaps some being broadcast earlier in Budget 2019 – now planned to be held on 6 November.
Office for Tax Simplification calls for improvements at key life events
A new report from the Office for Tax Simplification published on 10 October makes a number of recommendations to improve people’s experience of the tax system at key events in their lives.
In relation to pensions the report covers the following ground:
- Member contributions – noting that those whose income is below the personal allowance receive less generous tax treatment in relation to their contributions if their employer uses a “net pay” scheme rather than a “relief at source” scheme, the OTS says that the Government should consider the potential for removing or reducing the difference in tax outcomes between the two systems, but without making it more complex for those affected arrangements
- Annual allowance and lifetime allowance – noting the reductions in these allowances in recent years and the way that both work being complex and, in certain situations, can lead to disproportionate outcomes, the OTS says that HMRC should provide clear guidance on the tax issues, and the Government should continue to review the allowances taking account of the distortions (such as those affecting the National Health Service) they sometimes produce
- Money purchase annual allowance – the OTS says that the Government should review the operation of this allowance, gathering better evidence, considering whether it meets its policy objectives, is set at the right level and is sufficiently understood, given the present potential for disproportionate outcomes
The OTS is also concerned that the smooth operation of the PAYE system can be disrupted by life events such as first drawing a pension, or having multiple pensions, with it taking a long time to catch up with changes. It asks that HMRC factors these issues into its ongoing work to improve the operation of the PAYE system.
This latest report from the OTS is frustrating when one gets into the pensions detail. Whilst quite rightly identifying significant areas of concern, it only starts to scratch the surface when considering potential reforms, with the clear risk that Government does not pick up the baton, with the possible exception of the annual allowance taper given the impact on senior clinicians in the NHS.
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.