Government legislates for risk sharing
The Government has today laid the Pension Schemes Bill before Parliament which includes provisions “designed to encourage arrangements that offer people different levels of certainty in retirement or that involve different ways of sharing or pooling risk”. In particular, the Bill allows Collective Defined Contribution (CDC) schemes to be set up should employers wish to do so.
The Bill contains the following:
- Categories of pension scheme –the Bill defines three categories of pension scheme based on the different types of promise offered to members as benefits accrue and when they are taken. This promise will either refer to all of the benefits (defined benefits scheme), some of the benefits (shared risk scheme), or there will be no promise (defined contributions scheme) A scheme can also be treated as more than one scheme for the purposes of this categorisation, in relation to different promises to members
- Collective benefits – the Bill defines the concept of collective benefits (whose purpose is to enable risk pooling among members) and contains regulation-making powers in relation to such benefits. These cover matters such as the setting of targets in relation to benefits, funding, valuation, reporting requirements and governance. Importantly, schemes that offer collective benefits will be exempt from the employer debt legislation
- Consequential changes to pensions legislation – amendments are made to existing legislation, as a consequence of the change to scheme definitions set out above, with the aim of ensuring that current legislative requirements relating to scheme governance and administration apply in the appropriate way to the new categories, and to enable requirements on governance and administration to apply to the specific needs of members of shared risk schemes. In particular the Bill:
- Contains measures relating to the preservation and revaluation rules of pension rights according to benefit type, together with transfer values for members leaving a scheme before normal pension age
- Provides new regulation-making powers to exclude pensions of a prescribed description from the indexation requirements (but defined benefit schemes still have to provide indexation)
- Other changes to pension legislation – finally changes unrelated to the risk- sharing agenda are made. These include:
- A regulation-making power to restrict transfers from public service defined benefits schemes into defined contribution arrangements
- Removal of the statutory requirement for regulations to provide that the Pensions Regulator compiles and maintains a register of trustees
The Department for Work and Pensions has also published its response to its consultation paper “Reshaping workplace pensions for future generations”, issued last November, which outlined broad “defined ambition” proposals to enable greater innovation in risk sharing in private pension arrangements.
The response says that introducing new legislation to make it easier to sponsor defined benefit schemes will not be the Government’s priority at the present time. To make enough of a difference to employers, the suggested changes would need to apply to accrued pension rights which the Government has decided should not happen. Instead, the greater prize is to deliver changes that enable collective schemes and greater ability to share risks in the defined contribution world.
Comment
And so, after much discussion and waiting, we have a Pensions Bill almost entirely dedicated to facilitating the development of certain types of private sector risk-sharing schemes, particularly CDC schemes. This in itself is good news, although those looking for the facilitation of DB-lite arrangements will be disappointed.
The decision to break with the current legislative dichotomy of money purchase and non-money purchase in order to facilitate a “shared risk” middle way with its own governance requirements may be essential, but there is likely to be much devil in the detail. For example, it appears to be a retrospective categorisation at scheme level. Also, the tax legislation may need to be revisited before employers can innovate and deliver new risk-sharing designs.
But for those who thought that the Government would never get round to delivering in this area, today’s development has to be a welcome first step.
Tax-free cash sum a target of IPPR proposals
The Institute for Public Policy Research (IPPR) has proposed that the amount of tax-free cash people can take from their pension scheme at retirement should be restricted to £36,000.
This is a figure put forward by the Pensions Policy Institute last year (see Pensions Bulletin 2013/30) which would be expected to leave 75% of retirees unaffected and generate potentially £2 billion a year from the remaining 25%.
In its report “The Condition of Britain”, the IPPR suggests that the pension changes announced by the Chancellor in the Budget warrant a review of what it describes as the “regressive” pensions taxation system. In particular, the IPPR suggests that the money saved from limiting tax-free lump sums could be used to help fund free part-time child care for children aged between two and four and set up an Affordable Credit Trust to help those in debt.
Labour leader Ed Miliband was the keynote speaker at the launch of the report, and appeared in favour of its contents.
Comment
Pension funds are a large part of the public’s wealth and the tax relief available to them appears too tempting a target for those influencing policy.
The £2 billion per year saving assumes there is no transitional protection for those who have built up rights to a lump sum of more than £36,000 to date. But it seems unlikely that it would be politically acceptable to deliver such a retrospective form of taxation, particularly when a number of those with mortgages are relying on the tax-free cash sum to pay off the outstanding capital. And the alternative of introducing it for future accrual/contributions introduces unwanted complexity without the immediate tax advantages for Government.
Regulator to tackle record-keeping quality assessment apathy
The Pensions Regulator’s latest annual survey of record-keeping target reveals a “highly disappointing” proportion of schemes that still do not see the assessment of record-keeping quality as a priority.
Following on from its thematic review back in March (see Pensions Bulletin 2014/14), the Regulator’s fifth annual survey has identified a slowdown in the rate at which schemes are taking action to measure their common data for the first time. The figures are almost unchanged since last year’s survey, suggesting a ceiling is being reached in terms of schemes engaging with the process, with the main reasons for inaction being “not a priority” and “lack of time”.
The survey measures the progress of schemes improving their common data (data items used to identify members such as name, address, NI number, etc) and conditional data (scheme-specific data such as pensionable salary or contributions). Key findings from this year’s survey include:
- 63% of members of all trust-based schemes are in schemes that have a common data score of more than 95% (though that figure drops to 33% when small schemes are considered). There are still 10% of schemes that have not measured their common data
- There continues to be a high proportion (42% in 2014, compared with 46% in 2013) of schemes where conditional data is not formally measured. This increases to 71% when considering small schemes
The Regulator now plans to overhaul its strategic approach to improving the quality and skills of the people responsible for running pension schemes in order to address what it has found to be consistently weaker governance and administration standards in smaller schemes.
Comment
The Regulator has led all the horses to water and now seems to be left with those that don’t want to drink. It will be interesting to see what strategies the Regulator uses to try to force particularly the smaller schemes to engage with record-keeping quality assessment.
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.
