23 January 2020
New calls for an independent Pensions Commission
Two think tanks from opposite sides of the political spectrum have published a report calling for an independent Pensions Commission to be established.
The Fabian Society and Bright Blue suggest that the Government establishes a one-off review of pensions policy modelled on the 2003-05 Turner Commission before making the Commission a permanent scrutiny body like the Office for Budget Responsibility. This Commission would provide regular forecasts and analysis and host major thematic reviews of policy every ten years.
The report suggests that the initial review should look chiefly at auto-enrolment and pension decumulation. The future of State pension age should be excluded from the initial review, but the permanent Commission should be the home for the six-yearly statutory review of State pension age.
A number of organisations and commentators have over recent years called in vain for a permanent Pensions Commission to be established so it is of note that these think tanks are reflecting what senior politicians across the political spectrum are now telling them. This interesting report was supported by the pensions minister Guy Opperman, suggesting that there could be further developments in the near future. The report also says that the Labour Shadow pensions minister, Jack Dromey, warmly supports a new Pensions Commission.
Purple Book illustrates risks presented to the PPF by DB schemes
In the latest edition of the Purple Book, the Pension Protection Fund reveals a strong link between investment risk and underfunding in DB schemes. It finds that underfunded schemes tend to be more heavily invested in equities than those schemes that are currently overfunded (on a section 179 basis), thus resulting in the potential for more volatile outcomes for the PPF should their sponsors fail.
It also finds that as at 31 March 2019, 57% of schemes were in deficit, with an aggregate deficit for these schemes of £160bn. It is these schemes that matter of course, should their employers fail.
However, the Purple Book also reveals that since 31 March 2018 the aggregate funding ratio on a section 179 basis has improved from 95.7% to 99.2% and the overall trend for de-risking has continued, with only 24% of scheme assets invested in equities, compared to 27% of scheme assets in 2018.
The PPF acknowledges the potential extent of future claims, represented by the £160bn, whilst pointing out a particular concern with a long tail of small underfunded schemes – 58% of schemes with 100-999 members are less than 75% funded.
Summing up, the PPF’s probability of being self-sufficient by 2030 reduces slightly from 91% as at 31 March 2018 to 89% as at 31 March 2019.
Each year’s Purple Book is a timely reminder than no matter how well run, the PPF is continually at risk of being swamped by section 179 deficits of the schemes of failed sponsors. Although this year had a record low number of schemes fall into assessment (26), they represented, thanks to the Kodak Pension Plan No 2, the highest annual claims on the PPF ever (£1.9 bn).
What the PPF needs above all else is for the Pensions Regulator to deliver a new DB funding regime that makes significant progress in reducing this risk. At least the larger schemes tend to be better funded and further along in their de-risking journey, thus reducing the risk of the PPF’s own funding position being materially weakened by a cluster of large events.
Former BHS boss, Dominic Chappell issued with Contribution Notice for £9.5m
On 14 January the Pensions Regulator published a Determination Notice setting out the decision of its Determinations Panel to issue Contribution Notices for £9.5m against Dominic Chappell in respect of the two DB pension schemes connected to the collapsed high street chain BHS. The Contribution Notices were actually approved by the Determinations Panel in January 2018 but disposing of Mr Chappell’s appeals took until last summer.
The 51-page Notice brings more information into the public domain about the process that led up to the sale of BHS by Sir Philip Green to Dominic Chappell and what happened in the short time afterwards before BHS filed for bankruptcy. However, what is of particular note is the logic set out by the Panel that led to its decision to support the Regulator’s desire to impose these penalties. In essence it was held that:
- The sale of BHS and the events subsequent to the sale constituted a series of acts or failures to act which detrimentally affected in a material way the likelihood of accrued scheme benefits being received (the material detriment test)
- The detriment was quantified by comparing the estimated dividend to the schemes on BHS going bust at various points post-sale compared to BHS being declared insolvent immediately prior to the sale. The detriment varied over time but was taken to be between £36m and £56m when measured as at 17 November 2017. Interestingly the Panel held that it was also possible to argue that material detriment occurred other than through a quantitative analysis – for example as a result of the appointment of inexperienced directors who then failed to implement a turnaround plan
- The statutory defence available against the material detriment charge was not remotely satisfied. Broadly, Dominic Chappell would have had to convince the Panel that ahead of the acts or failures to act any potential detriment was identified and appropriate mitigation put in place
- It was not reasonable for Dominic Chappell to act in the way that he did – with a number of facts being set out to support this conclusion
- The quantum to be sought should be determined by reference to three categories of payment that were “extracted” from BHS – those directly or indirectly for Mr Chappell or his family’s benefit (£4.3m), payments to other directors (£2.8m), and (unusually in this case) professional fees for advice in relation to the sale (£2.4m)
Although this case is extreme, seeing the contents of such a Determination Notice is a very useful insight into how the Regulator builds its case when seeking to impose a Contribution Notice.
The effect of this particular Contribution Notice is to create a debt to be enforced by the Pension Protection Fund. It is unclear how much will be recovered in practice and this illustrates perceived weaknesses in the existing framework now being addressed in the Pension Schemes Bill.
The Bill introduces powers for the Regulator to either impose a financial penalty or bring a criminal case (with an unlimited fine and/or up to 7 years in jail) on grounds very similar to the material detriment test. From the information in this Determination Notice Dominic Chappell could well have been at risk of both of these had the Bill’s provisions been in place at the time of the BHS scandal. Furthermore, if the Bill is enacted, failure to pay a Contribution Notice will itself expose the target to criminal proceedings or a financial penalty of up to £1m.
Is the annual allowance about to be reformed?
National newspapers are reporting that, in response to the senior doctors’ pensions tax crisis, HM Treasury is considering raising the threshold income for the annual allowance taper from £110,000 to £150,000. However, this proposal is receiving short shrift from doctors’ representatives as not addressing the fundamental problem of doctors limiting the work they do in order not to suffer significant tax charges on their pension accrual.
The annual allowance for pension contributions / benefit accrual tapers down from £40,000 to £10,000 as “adjusted income” rises from £150,000 to £210,000, but this taper only comes into play if the individual’s threshold income exceeds £110,000. Threshold income is broadly the individual’s taxable income, whilst adjusted income is broadly threshold income plus employer pension contributions / cost of benefit accrual using the annual allowance methodology.
If this were the sole change made, the first effect of raising the threshold income to £150,000 would be to take any question of a taper away for those on incomes between £110,000 and £150,000. But for those with incomes above £150,000 nothing changes. They will remain subject to the taper and face the same level of annual allowance charge as had threshold income remained unchanged at £110,000. And there would continue to be a cliff-edge (a bigger one than currently), although it would now apply for those at £150,000: at this level an extra £1 of overtime would typically lead to a big extra tax bill.
Given the level of incomes and pensions involved, this may solve the key problem for the more junior doctors, but it leaves the issue unresolved for the more senior doctors. It is perhaps the Government’s latest opening offer in its dispute with the doctors; easy to implement quickly in legislation.
But what many are asking from the Government is the complete abolition of the horribly complex taper that was introduced in 2016, reverting to a single annual allowance for all (doctors or not). Or indeed a much more significant overhaul to the pensions tax regime – for example (as recommended by the Office of Tax Simplification and reportedly supported by the BMA) abolishing the annual allowance completely for DB savings, leaving its relief to be constrained solely by the lifetime allowance.
ACA calls on Government to deliver on auto-enrolment policy alongside tax and benefit simplification
The Association of Consulting Actuaries has issued the final report on its 2019 Pension trends survey – this time covering auto-enrolment and pension contributions, pension tax reform, pension dashboards, DB simplification and GMP equalisation.
On auto-enrolment there is support for a modest increase, from, say April 2021, in the auto-enrolment minimum contributions to 10% of total earnings (with minimum 5% employee contributions) subject to a cap. Furthermore, 82% of employers support a contribution scale that starts on the first £1 of earnings and 85% support reducing the minimum eligibility age to 18. The ACA uses this to call on the Government to set out a timetable for action.
On other topics 69% say the tapered annual allowance should be abolished, 70% are opposed to dashboards being launched without the inclusion of State pension benefits, 55% say that DB scheme consolidation would be more likely if benefits could first be simplified and 64% of employers running DB schemes say that it will take more than two years to complete their GMP equalisation exercises, with administrative complexity topping their concerns. The ACA calls on the Government to begin a thoughtful and collaborative review of the pensions tax regime and to develop a comprehensive strategy to allow defined benefits to be simplified.
These are familiar topics on which there may be some progress over the coming years, but we suspect that there are also likely to be disappointments, most notably on how the dashboard is rolled out and the extent to which the Government takes heed of calls for DB benefit simplification.
MaPS launches Financial Wellbeing strategy to achieve ten-year vision
MaPS defines financial wellbeing as being about feeling secure and in control, knowing that you can pay your bills today, deal with the unexpected tomorrow and are on track for a healthy financial future.
MaPS states that poor financial wellbeing has knock-on effects for mental health, physical health and relationships and that:
- 5 million people have less than £100 in savings to fall back on
- 9 million people often use credit to pay for food or essential bills
- 22 million people say they don’t know enough to plan for their retirement; and
- 3 million children aren’t getting a meaningful financial education
The new UK Strategy for Financial Wellbeing establishes five “agendas for change” and sets goals to be achieved by 2030. These are:
- Financial Foundations: 8 million children and young people getting a meaningful financial education – an increase of 2 million from 2019
- Nation of Savers: 7 million working age people who are “struggling” and “squeezed” saving regularly – an increase of 2 million
- Credit Count: 2 million fewer people often using credit to pay for food or bills
- Better Debt Advice: 2 million more people getting the debt advice they need; currently only 32% of those who need debt advice access it
- Future Focus: 6 million people understanding enough to plan for their later lives, and during them – an increase of 5 million
The strategy will also examine factors which can make people particularly susceptible to financial detriment, such as mental health conditions and gender. It will be delivered in collaboration with a broad range of organisations and experts from all sectors.
We read with delight the UK strategy for financial wellbeing from MaPs and fully support the approach of involving the wider market to improve financial literacy, inclusion and options to support a financially healthy nation.
LCP was pleased to be part of the listening events that contributed to this purposeful strategy. There is a long road ahead to achieving these ambitious goals and they will only be reached by everyone embracing them – from providers, advisers, employers, community leaders and individuals themselves. The benefits are clear – improved financial knowledge leads to improved confidence which ultimately improves financial capability.
FCA launches second review of pensions and investment advice
The Financial Conduct Authority has announced the launch of its “Assessing Suitability Review 2” which will focus on the advice that consumers receive around retirement income. This follows on from signalling given in the FCA’s 2019/20 business plan (see Pensions Bulletin 2019/16) that the FCA remained concerned about two areas of consumer harm related to pensions – these are defined benefit pension transfer advice and advice on high-risk investments.
The new second review will build a view of the retirement income advice market with a report setting out the results scheduled for some time in 2020. The accompanying portfolio letter addressed to CEOs and Directors of financial advice firms makes it very clear that the FCA remains concerned with market practice in these areas.
The FCA continues with its focus on pension transfer advice in response to poor market practices at British Steel and elsewhere. We are also awaiting their consultation response on contingent charging in Q1 2020 (see Pensions Bulletin 2019/30), which is likely to further shake up this market. And so, 2020 is set to be a big year of change for IFA firms. Trustees and employers will wish to keep a close watching eye to ensure that they remain comfortable with the risks that their members are exposed to and that their members have appropriate access to financial advice.
The Pensions (Amendment) Bill returns
The Bill sponsored by Lord Balfe, last seen shortly before Parliament was dissolved ahead of the General Election, has reappeared in the House of Lords, this time introduced by the former pensions minister, Baroness Altmann.
As before it removes the PPF compensation cap, seemingly for those currently receiving PPF compensation, as well as those due to receive it – and for any future recipients of PPF compensation. It also requires Pensions Regulator and scheme trustee approval before corporate dividends are agreed.
We do not expect this Bill to become law, but what it may well do at Committee stage is draw out the Government’s position on these issues.
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.