Further changes made to the Pensions Bill with more to come?
Report Stage in the House of Lords this week has seen some further movement in the Pensions Bill as follows:
- Disclosure of transaction costs – a Government amendment was accepted which requires it to make regulations to force disclosure of “some or all” of the transaction costs in DC workplace schemes. This followed a ministerial statement made on Monday
In introducing the amendment, Lord Freud said that it followed on from the suggestion made in the charges consultation last year for there to be improved disclosure. Consultation is promised before regulations are made, but, initially at least the costs required to be disclosed are likely to include stamp duty and bid-offer spreads.
(Lord Freud also said that although the Government already had the power to regulate for information on transaction costs to be made public, it needed the amendment to provide for flexibility and to “future-proof the legislation”. He also indicated that the amendment itself may be subjected to further tweaking, perhaps in consultation with Lord Lawson, in order to deliver the power that the Government needed).
Lord Freud indicated that the Government’s desire for greater transparency of scheme costs and charges could cover all schemes – and so there might be an extension to defined benefit schemes. He also made clear that the Government intended to take action to control charges in default funds used for auto-enrolment before the 2015 General Election.
- Single tier pension – following a vote, an Opposition amendment was accepted into the Pensions Bill, whose purpose is to enable low paid workers (for instance those with zero hours contracts), with more than one job, to elect to amalgamate their earnings for the purpose of meeting the contribution conditions for entitlement to the single tier state pension. Currently, low paid workers with a number of jobs all of which individually pay less than the Lower Earnings Limit do not build up any entitlement to a State Pension on the strength of their combined earnings and this system was to continue under the single tier pension
- Pot follows member – an Opposition amendment whose purpose was to modify that part of the Pensions Bill introducing the “pot follows member” automated transfer system, so as to enable other solutions to be developed, was defeated but only after the House divided. Immediately prior to the debate the NAPF published a letter to the Financial Times that it and other bodies had co-signed, in support of the now lost amendment
The Government has also promised to publish its response to the consultation on charges, along with proposals on quality and transparency in workplace pension schemes very soon. This is now also to contain further details about the implementation and timing of the transaction cost disclosure measures.
Comment
It now seems clear that, despite the announcement made a few weeks back (see Pensions Bulletin 2014/03), the Government intends to take firm action on charges, initially through disclosure and then through charge capping. We await developments over the coming days with interest.
It also seems to be full steam ahead with pot follows member although the next steps are frustratingly unclear.
FRC goes ahead with greater benefit flexibility within Statutory Money Purchase Illustrations
Following consultation the Financial Reporting Council (FRC) has published a revised version of the standard that sets out how pension providers must prepare statutory money purchase illustrations (SMPIs) for pension scheme members. The changes will enable providers to issue statements that more closely reflect an individual’s circumstances.
The final version of Actuarial Standard Technical Memorandum 1 (AS TM1) is little changed from that consulted on last November (see Pensions Bulletin 2013/48) and as proposed it comes into force for SMPIs issued after 5 April 2014.
From this date, providers will be able to present SMPIs that allow for:
- A lump sum to be taken prior to the calculation of the illustrated pension
- A dependant’s pension of other than 50% (including none at all) to be assumed; and
- A pension increase of other than inflation (including none at all) to be assumed
whereas at present the SMPI has to assume that the accumulated fund is applied in its entirety to purchase an index-linked annuity with a 50% survivor entitlement.
As previously announced, the FRC intends to undertake a comprehensive review of the actuarial basis set out in AS TM1 in 2014. The consultation sought views on what aspects of AS TM1 should be covered as part of this review. Rates of inflation, mortality, expenses and risk and uncertainty emerged as the areas most respondents wished to see considered, with the most common theme being the desire for the FRC to consider ways in which to promote greater consistency with the Financial Conduct Authority’s rules for point of sale projections.
Comment
The explicit confirmation that any allowance made for lump sums taken at retirement must be disclosed in real terms is especially welcome – the new flexibilities mean that the benefits illustrated may well be different from those quoted in the past and any ambiguity around the disclosure of the lump sum would contribute to any potential confusion.
Limitation on survivors’ pension benefits for civil partners upheld
The Employment Appeal Tribunal (EAT) has made an important ruling in Walker v Innospec that survivor benefits for civil partners do not have to be provided in respect of pensionable service before 5 December 2005 (the date the Civil Partnership Act 2004 came into force). This overturns an earlier ruling by the Manchester Employment Tribunal in January 2013 in which it was held that this limitation in UK law was invalid under EU law (see Pensions Bulletin 2013/04).
What this means for trustees of occupational pension schemes (barring any further appeal) is that access to survivor pensions for civil partners can continue to be restricted in accordance with the exemption set out in the Equality Act 2010.
The EAT reached a different conclusion to the Employment Tribunal by referring back to the principles already established in sexual discrimination cases and, critically, also the principle that pensions are deferred pay, earned today and then paid at an appropriate later time. On this basis the EAT ruled that although it was discriminatory not to provide civil partners with rights to survivor pension benefits accrued before 5 December 2005, it was not unlawful under EU law to do so. As part of its reasoning the EAT noted that when pay differences on the ground of gender were made illegal there were no provisions for retrospective claims and the EAT ruled that the same principle applied here.
For good measure the EAT went on to conclude that even if the exemption set out in the Equality Act 2010 was unlawful under EU law, it was clear from the drafting of the exemption that the UK Parliament did not intend to retrospectively make such discrimination unlawful. As such, any other interpretation by a court would stray over the line of attempting to rewrite legislation rather than just interpreting and applying it.
Finally, the suggestion that the exemption should be disapplied was rejected on the grounds that the discrimination in this specific case fell outside the scope of EU law at the time that it was occurring.
Comment
This ruling does not mean that schemes cannot provide civil partners with spouse pensions based on all of a member’s pensionable service; just that they do not have to. However as we noted last year, the cost of providing such benefits may be marginal in the grand scheme of things so trustees and employers may still want to review their policy in this area. Having said that, employers will be grateful that this ruling has, for the moment, removed the prospect of another tranche of liability needing to be funded being imposed on schemes retrospectively. But this may not yet be the last chapter in this story as the Secretary of State is obliged under the Marriage (Same Sex Couples) Act 2013 (see Pensions Bulletin 2013/30) to review the differences in treatment under occupational pension schemes of same sex and opposite sex survivor benefits. This review, which must be published before 1 July 2014, may cause further movement in this area.
EIOPA reports on a single market for personal pensions
The European Insurance and Occupational Pensions Authority (EIOPA) has published its preliminary report to the European Commission on the issues that will need to be considered if the EU wishes to promote a pan-European single market in personal pension schemes. This is the latest stage of a process that has been going on for some time (see Pensions Bulletin 2013/22 for the Discussion Paper) and which may eventually result in EU legislation affecting personal pension schemes.
This legislation is recommended by EIOPA to consist of:
- A directive to introduce common consumer protection rules for all existing and future personal pensions covering transparency and information disclosure, distribution practices, professional requirements and product governance arrangements (but not prudential regulation – the providers are already adequately regulated by financial services legislation)
- A regulation to set up a “2nd regime”, a concept whereby a regulatory framework is set up as though there is a 29th EU member state; personal pension providers could then choose to opt into this instead of their home country regulation
The report says that workplace or group personal pensions are in a grey area. The suggestion is that Member States should be able to determine whether such schemes fall within the current “IORP” directive and aspects of the above legislation should apply to those that don’t.
The next stage in the process is for the Commission to formally respond to EIOPA which will then enable it to submit its final advice.
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.
