Government to legislate for collective DC schemes
Wednesday’s Queen’s Speech included mention of two more Pensions Bills – to deliver the retirement income reforms revealed in the Budget and collective defined contribution (CDC) schemes.
The Pensions Tax Bill, which will be sponsored by HM Treasury, will give effect to the changes to the pension tax rules as announced at the Budget, giving individuals greater freedom and choice over how to access their defined contribution (DC) pension savings. The Bill will also introduce anti-avoidance provisions to prevent individuals taking advantage of the new flexible arrangements for tax avoidance purposes.
The Private Pensions Bill, which will be sponsored by the Department for Work and Pensions (DWP), will primarily make provision for defined ambition pensions and in particular enable the establishment of CDC schemes that pool risk between members and potentially allow for greater stability around pension outcomes compared to DC schemes. There will be a number of measures relating to the valuation and reporting requirements for such schemes.
In addition, the Bill will:
- Provide for the “guidance guarantee” for individuals with a DC pension who are approaching retirement
- Enable legislation to be brought forward to ban transfers out of unfunded public sector defined benefit (DB) schemes; and
- Depending on the outcome of the HM Treasury Freedom and Choice in pensions consultation, allow the DWP to either bring forward legislation to implement a ban on all transfers out of private sector DB schemes or not
Comment
After many years’ wait it is pleasing to see that the Government is to start to legislate for defined ambition pensions. We must await the detail, but right now it seems that only one particular type of risk-sharing scheme is to be put on the statute book. There is a danger that the Government has therefore missed an opportunity to introduce “DB-lite” pension arrangements that could have simplified the existing complexity in DB pensions and served as an alternative to DC for future accruals.
As for CDC, given that employers will need to focus on revising their retirement processes and communications in the light of the new flexibilities announced in the Budget, not to mention the challenges arising from auto-enrolment and the end of contracting out, it is likely to be some years before such schemes are considered by employers as a possible form of pension provision.
Pensions Institute calls for full investment management charges disclosure
A recent discussion paper published by the Pensions Institute has called for all costs of investment management, both visible and hidden, to be fully disclosed to investors.
This paper takes as its starting point the acceptance in May by the Financial Reporting Council of an Investment Management Association proposal that in annual reports and accounts published after March 2015 investment managers disclose:
- An ongoing charges figure – which includes the investment manager’s fee and recurrent operational costs (such as keeping a register of investors, calculating the value of the fund's units and asset custody costs); and
- All dealing costs and stamp duty paid when the manager buys and sells the fund’s assets
However, the Pensions Institute wants disclosure to go further, by including the indirect transaction costs and then investigating how the hidden non-cash costs could be disclosed.
Comment
Pension funds will be pleased that investment management costs are in the spotlight. Whilst we support transparency of charges it is clearly important that the costs and practicality of providing information are not prohibitive.
Money Advice Service review announced
The Treasury has announced the details of an independent review of the Money Advice Service (MAS). Christine Farnish, former Chief Executive Officer of the National Association of Pension Funds, will lead it.
The MAS, which is a body set up by government to provide consumers with financial education and advice, has come under severe criticism in recent months.
The review will:
- Make an assessment of the need for consumer education and advice, including how this may evolve as, for example, individuals have greater freedom over their retirement options as a result of the Budget announcements, and the role that the MAS should play in the wider consumer education and advice landscape
- Assess how effectively and efficiently the MAS is meeting this need through its current approach and delivery models; and
- Recommend any changes to the MAS’s approach and delivery models that would enable it to better meet this need
A call for evidence is expected to be published shortly. The review will conclude by the end of 2014.
Comment
In March the Government agreed to this review. This followed a report published by the National Audit Office (NAO) in December 2013 which found that the MAS had failed to achieve value for money in its provision of generic money advice and shortly before that a Treasury select subcommittee finding that the service was "not fit for purpose". At this stage it is not clear whether the timing of this review, which Parliamentarians had asked to report by this summer, effectively rules out the MAS from being a potential provider of the Government’s guidance guarantee, which must be up and running by April 2015.
Labour proposes lowering auto-enrolment earnings threshold
Speaking at a recent Resolution Foundation seminar, Shadow Secretary of State for Work and Pensions Rachel Reeves revealed that Labour is supporting calls to change the scope of auto-enrolment so as to revert to the proposal originally made by the Pensions Commission in 2005 that it should include all employees earning in excess of the lower earnings limit for national insurance purposes (£5,772 pa in 2014/15).
Currently, the threshold for auto-enrolment is £10,000, so this proposal would extend the scope of auto-enrolment to potentially include 1.5 million workers on zero-hour contracts or in part-time low-paid jobs, the majority of whom are women.
The Government’s argument for setting the threshold where it is now is that to auto-enrol workers earning less would simply take money out of tight household budgets without the added benefit of tax relief. The contributions paid by many would also be tiny.
Institute of Directors warns that Britain faces a pensions time bomb
The Institute of Directors has published a report which warns that pensions are a time bomb for which business leaders are simply not prepared.
Responding to Global Risks: A practical guide for business leaders claims that business leaders are not doing enough to prepare for the risks – such as government debt crises, extreme weather events and social instability – that arise from our increasingly inter-connected world.
The report warns that total unfunded pensions liabilities could easily double the UK’s debt-to-GDP to more than 200% at which level the risk is that rather than companies or governments being brought down by pensions liabilities, promises will simply not be honoured.
Pensions Regulator publishes research on DC trust-based pension scheme features
The Pensions Regulator has published research which found that master trusts that are being used for auto-enrolment and large defined contribution (DC) schemes are the most aware of its 31 DC quality features which are designed to help schemes deliver good outcomes for retirement savers.
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.
