Scheme funding Code finalised
The Pensions Regulator has published its finalised materials setting out its revised approach to the regulation of funding of defined benefit (DB) schemes. In addition to the response to the consultation (for details of which see Pensions Bulletin 2013/50), the materials comprise the following:
- Code of Practice 3: “Funding defined benefits” – designed to assist pension trustees in meeting the requirements of the scheme funding legislation
- Defined benefit regulatory strategy – setting out at a high level the Regulator’s risk-based approach to tackling issues in DB pension schemes; and
- Defined benefit funding regulatory and enforcement policy – describing in some detail the Regulator’s approach to regulating DB funding issues
The Regulator has also published an essential guide to the DB code for employers and trustees.
The main changes from the draft code issued in December 2013 are:
- A general requirement for recovery plans that are appropriate to the circumstances of the scheme and employer, rather than the previous emphasis on affordability of contributions; and
- More recognition of the upside scenarios that can arise through the risks being run by a pension scheme and a greater focus on managing risk rather than mitigating it
The code has been laid before Parliament in draft form. It should come into force in Great Britain sometime in the next few months. It will then apply to all schemes with valuation effective dates from this date onwards.
Finally, the Regulator has published its third annual funding statement and associated analysis, which provides market commentary and direction for schemes with valuation dates between 22 September 2013 and 21 September 2014 (known as “Tranche 9” schemes).
This significant milestone is analysed in LCP’s News Alert where we have taken the approach of summarising and commenting on the new regime, rather than focus on the differences between the Regulator’s consultation proposals and what has finally emerged. As a result, the content of this latest News Alert is similar in parts to that issued shortly after the Regulator published its proposals.
Freedom and Choice – consultation closes
Consultation closed yesterday on HM Treasury’s proposals (see our 20 March 2014 News Alert) to overhaul the tax framework for defined contribution (DC) retirement savings, with potential implications for defined benefit (DB) schemes.
LCP’s response focussed on what we see as the key decisions that need to be taken. It also comments on the challenges for successful delivery of this radical new policy:
- Private sector DB to DC non-pensioner transfers should continue to be permitted
- Adjustments to the existing tax framework to enable DC retirement savings to be accessed flexibly need to be carried out with care and with a clear objective in mind of keeping it as simple as possible
- Schemes should be enabled but not forced to provide for the new flexibilities
- The current age of 55 at which access to retirement savings is permitted should be retained for the time being; and
- The principle of providing some guidance to people is a good one but a great deal of thought is needed to develop a worthwhile but not overly ambitious guidance guarantee
All eyes are now turning to a formal response from HM Treasury which is expected by mid-July.
FCA updates retirement income market review following Budget changes to retirement choice
The Financial Conduct Authority (FCA) has updated the scope of its work on the retirement income market following the March Budget announcements which are making significant changes to the rules governing choices at retirement.
Prior to the Budget the FCA had published the results of a thematic review of the annuity market and had launched a study to further understand competition in this market (see Pensions Bulletin 2014/07).
In April the FCA published guidance (see Pensions Bulletin 2014/16) on the interim arrangements announced in the Budget, to help ensure customers are treated fairly before the wider changes come in to effect next year.
The FCA’s update now signals that:
- It intends to consult widely about the detail of the Government’s guidance guarantee over the summer, and then publish its final recommendations by the end of 2014
- The competition market study will continue, with a revised scope to include a forward-looking study into new financial products developed in response to the new landscape, and at the same time scaling back information required regarding small pots annuities. Instead of publishing interim results in the summer as originally planned, the FCA now intends to feed the results of this study into the development of the guidance guarantee
- Supervisory work on retention strategies and sales techniques will continue. This will look at the approach taken by pension providers when selling annuities to their existing customers and the FCA will work with firms to address any issues
Comment
Whilst in a normal policy development process it is perfectly understandable that recommendations on the guidance guarantee should take until the end of the year to emerge, this leaves little time for them to be discussed, agreed, put into force and be fully operational through the guidance providers by the required go live date of 6 April 2015. Either the FCA needs to accelerate its timescales or the government will have to acknowledge that this vital aspect of its reforms will not be ready in time.
Lock v British Gas Trading – invalid treatment of variable pay could have pension consequences
Lawyers are commenting that a recent judgment of the Court of Justice of the European Union (CJEU) in relation to holiday pay may have implications for the administration of pension schemes.
In Lock v British Gas Trading Limited the CJEU in effect ruled that British Gas were in breach of the Working Time Directive in relation to the right of workers to have paid annual leave of at least four weeks. This was because through taking leave Mr Lock suffered a subsequent and directly linked reduction in his overall monthly remuneration through not being able to generate any commission during his period of absence. In Mr Lock’s case, this variable income formed on average over 60% of his monthly wage, so the reduction following his return to work was material.
The CJEU ruled that employees who receive variable pay which is “linked intrinsically to … their contract of employment” including overtime, shift allowances and offshore allowances should be paid basic salary plus contractual variable pay during periods of annual leave. However, the CJEU also ruled that the precise method of calculating an employee’s entitlement should be left to the national courts.
Comment
This decision has a potential knock-on for the administration of pension schemes, but only if variable pay is expressed in the employment contract in such a manner that there is a breach of the Working Time Directive and further if scheme rules contain a pensionable earnings definition that includes variable pay (such as providing that all pay is pensionable).
In this case incorrect figures may then be used for the calculation of contributions and benefits. However, the differences are likely to be small given that the disadvantage will have been experienced in say only 4 out of 52 weeks.
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.
