Freedom and choice in pensions – the government responds
The lead pension story this week is Monday’s publication of the government’s response to its consultation paper “Freedom and choice in pensions” that accompanied the Budget announcements (see Pensions Bulletin 2014/12).
From next April there will be far greater flexibility in accessing defined contribution (DC) retirement savings, along with a new “guidance guarantee” service available at retirement to all individuals with DC savings. Significantly, the government has decided that there should be no ban on private sector defined benefit (DB) to DC transfers (so DB members can also access the flexibility).
We report on this development in a special LCP News Alert. This summarises the government’s latest decisions and sets out some initial thoughts on what they mean for DC and DB schemes, their members and their sponsoring employers.
Comment
Important details are still awaited but all those involved with pension provision need to start planning now for the new regime that will open up next April.
FCA consults on the guidance guarantee
Accompanying the publication of the government’s response to its Budget proposals, the Financial Conduct Authority (FCA) has set out its proposals on three related matters:
- The proposed standards that will apply to those delivering the guidance guarantee
- How the levy to fund the provision of the guidance will be collected
- The rules that contract-based scheme providers will need to follow in the light of the guidance guarantee to signpost their customers to the guidance
On the first of these the FCA is proposing a suite of principles-based standards covering such matters as ensuring the guidance is free at the point of delivery, consistency and quality and record-keeping. But perhaps of greatest interest is the proposed content of the guidance session. It seems that in addition to reviewing an individual’s pensions entitlements (through a proposed “pensions passport”), information will be requested about financial and personal circumstances ahead of the session and from this a discussion of relevant options and the consequences of following each is to ensue. Issues to cover along the way could include life expectancy, the danger of running out of money during retirement and possible long-term care needs. The guidance session concludes by setting out next steps for the individual to take forward, with appropriate signposting. There must be no recommendation of specific products, providers or financial advisers.
On the second, the FCA seeks views on its proposals on levy methodology, which firms to levy and how to spread the levy amongst them.
On the third the FCA proposes changes to the rulebook including a requirement for signposting customers to the guidance, outlawing behaviour which seeks to circumvent the spirit of the guidance guarantee and providing customers with a description of the potential tax implications of exercising their various options.
Comment
At this stage in the policy implementation it is not yet clear how in depth the preparations for and the delivery of the guidance session will be, still less its length and hence the per-capita cost of its delivery. The government calls the shots on the total levy cost so we may see a tension develop between what is desirable and what those who are to foot the bill are willing to stomach.
Pensions Advisory Service finds new delivery channels
In its latest annual report the Pensions Advisory Service (TPAS) highlights the growth of its customers’ real time access to information (telephone helpline and web-chat) channels. These saw an increase to 62,243 customers from 57,638 (8% up) compared to the previous year. This was in part influenced in the last quarter by the Budget announcement and also in response to radio and TV coverage of TPAS. A further 15,000 customers were redirected to more appropriate services.
In addition:
- TPAS helped over 1.7m people “find the answers to their pensions questions”
- The top five issues they were contacted about were decisions at retirement, contract terms and eligibility, financial advice and general legal rights
- The 5,000 web chats since the launch of this service in August 2013 are thought to have reduced the number of written enquiries by 8,000 (40%)
- An evening service has been piloted since the start of 2014
- There has been a reduction in TPAS’s traditional dispute resolution workload of 7% to just over 4,300 which is thought is explained by earlier resolution of complaints resulting from their improved techniques for explaining pension complexities
This TPAS budget was around £3.2m, about the same as last year. This is overwhelmingly paid for by a “grant in aid” from the Department for Work and Pensions.
Comment
TPAS will be one of the lead providers of the “guidance guarantee” which will support the Freedom and Choice flexibilities. As such, we can expect both its profile and budget to rise significantly over the coming years.
Money Advice Service reports on its activities
Another contender as a guidance guarantee provider is the Money Advice Service, a statutory body with an £80m pa budget which provides general financial education services. In its latest annual review it highlights the following:
- 16.5m customer contacts (dramatically up from 2.1m the previous year)
- 175,000 free debt advice sessions (many via separate debt management advisers, up from 158,000 the previous year)
- 102,000 face-to-face money advice sessions delivered compared to 100,000 the previous year
FCA finds failings in enhanced transfer value advice
The Financial Conduct Authority (FCA) has found evidence of poor advice by some financial advisers in relation to enhanced transfer value (ETV) exercises carried out during 2008-12.
This has been revealed in the results of its thematic review into such exercises, based on examining 300 cases.
The prompt for this review was the FCA coming across case files giving it “cause for some concern” during the course of firm-specific supervision of such exercises where employers provided an incentive for members of their defined benefit schemes to transfer their pension rights.
In the review itself the advisory process was found to result in an unsuitable outcome in 34% of cases. In 74% of cases the way in which the financial adviser communicated with the member was found to be unacceptable. The failings were not equally spread across the advisory firms examined.
Drivers of suitability failings included:
- Generic templates which were inadequately ‘tailored’ so the advice did not reflect specific member circumstances or give sufficient priority to the members’ own requirements
- Advice where the outcome focused solely on critical yield analysis without full consideration of wider member circumstances
- Not establishing adequately the level of risk a member is willing and able to take
- Fund recommendations which did not match the assessed risk profile of the member
- The use of default receiving schemes (in some cases with uncompetitive charging structures) and limited consideration of the suitability of a member’s other existing pension arrangements
- Limited consideration of the tax and, in a small number of cases, means-tested benefit implications of accepting the offer
The review highlights a particular concern about so-called “insistent customers”, that is, members who were advised that it was not in their long term interests to transfer but did so anyway, often because of the upfront cash on offer. These accounted for 59% of the transfers the FCA examined.
In the next few weeks the FCA intends to follow up its concerns with individual financial advisory firms and ask them to contact members and offer redress where appropriate. Although the FCA notes that in two thirds of the cases reviewed it found no evidence of unfair customer outcomes, it asks all financial advisers who provide pension transfer advice to review their arrangements in the light of its report.
Comment
Since the introduction of the Code of Practice for Incentive Exercises in 2012 standards have risen. Banning cash incentives is one reason for this and others include the FCA-introduced use of more realistic assumptions for green-lighting under critical yield analysis and more personalised, rather than generic advice.
Employers who have conducted ETV exercises before 2012 may find that their employees (and ex-employees) are approached by financial advisers as part of the FCA’s redress activity and should be ready to field questions from them if necessary.
With this week’s announcement that all transfers from defined benefit to defined contribution schemes will require supporting financial advice, demand for regulated financial advice may well explode. Looking at the issues revealed by the FCA probe many advisers may decide that it is not worth the risk.
Positive year pushes PPF surplus to £2.4 billion
A funding level of 112.5% equating to a surplus of £2.4 billion are the headlines from the Pension Protection Fund’s (PPF’s) 2013/14 Annual Report and Accounts which was published this week. The comparable figures for 2012/13 were £109.6% and £1.8 billion.
The PPF now believes it has a 90% chance of reaching its goal – a “self-sufficient” state by 2030, up from 87% last year. (By self-sufficient the PPF appears to mean that there is sufficient money to cover the remaining risks, including longevity and claim risks, after 2030 with limited future levies being raised).
A variety of things have improved the PPF’s funding position at the end of March 2014 and its chances of self-sufficiency at 2030:
- A relatively low level of schemes falling into the PPF (UK Coal was the largest scheme to do so) – the value of PPF compensation attributable to schemes entering PPF assessment fell by 40%
- Assets outperforming the liability benchmark over the year by 2.9%
- An increase in long-term gilt yields
- Improvements in the credit ratings of sponsoring employers
The report notes the PPF’s intention to bring member administration in-house over the next twelve months, a move described as “the biggest operational development we have undertaken”.
As in previous years, the accounts are accompanied by a PPF Long-Term Funding Strategy Update. The Update outlines how the PPF’s funding objective has been modelled and highlights the risks to achieving that objective with a series of sensitivity tests.
Perhaps surprisingly, the risks associated with CPI inflation are considerable. Should no market in CPI investments emerge and the difference between RPI and CPI narrow to 0.4%, the probability of meeting the funding objective would be significantly reduced (possibly by 8%).
Comment
There are calls in the press for the PPF to translate the surplus into reduced levies for the PPF eligible universe. That seems unlikely – the PPF knows it has a finite time to secure funding for DB scheme benefits and is likely to further de-risk before offering hand outs to the remaining DB scheme sponsors.
Finance Act 2014 – Royal Assent and nearly there for IP14 registrations to begin
The Finance Act 2014 received Royal Assent on 17 July 2014. It includes the provisions for Individual Protection 2014 (IP14) and those changes announced at the Budget which apply ahead of April 2015 – with both having some retrospective effect.
Additionally, two sets of regulations (both effective from 18 August) have been made which are necessary for the IP14 regime to work:
- The Registered Pension Schemes and Relieved Non-UK Pension Schemes (Lifetime Allowance Transitional Protection) (Individual Protection 2014 Notification) Regulations 2014 which set out the process for applying for IP14 and the issuance of certificates; and
- The Registered Pension Schemes (Provision of Information) (Amendment) Regulations 2014 which make consequential changes to the provision of information.
Comment
This means that the window to register for IP14 is all set now to open on 18 August 2014 (as previously announced – see Pensions Bulletin 2014/28) and remain open until 5 April 2017.
The regulations are essentially unchanged from the draft versions issued last December (along with draft guidance that was updated in February 2014 – see Pensions Bulletin 2014/06); a little disappointing as it seems to us to require members to submit more detailed numbers to HMRC than necessary. However, we look forward to seeing (and reporting on) the actual forms and process when they emerge on HMRCs website, presumably on 18 August!
Pension flexibility – transitional easement guidance published
HM Revenue & Customs (HMRC) has published its draft guidance (see the entry for 17 July 2014) to the temporary facility included in Finance Act 2014 to help individuals who had recently drawn a tax-free retirement lump sum from a scheme – or intend to do so ahead of April 2015 – but want to access the new flexibilities announced at the Budget (most of which will not be available until after April 2015) for the balance of their money purchase funds in the scheme (see Pensions Bulletin 2014/27).
The draft guidance includes a number of examples illustrating how the easements might be used. Example 5 in particular confirms that the legislation is relevant for not just DC schemes: these easements can also be used where an individual has both DB and DC benefits in one scheme, wants to draw the maximum PCLS that would be allowed all from their DC funds but still defer deciding how they use the balance of their DC funds.
Comment
The law on the easements is difficult to read and its application might be complex for a member with both DB and DC benefits. Many schemes may choose not to offer these easements, given the expected complexities and detailed points to consider (and associated costs). This may be particularly true for a case where the same result can be obtained by instead allowing a partial transfer of some of the DC funds to another scheme, as shown by example 6 in the draft guidance (this option works less well if a member has protected lump sum rights). Or schemes may prefer to suggest that members wanting flexibility delay drawing benefits until the new regime is in force.
“Money purchase benefits” redefinition goes live
On 24 July, the legislation changing the definition of “money purchase benefits” came into force, along with complex and lengthy provisions whose main purpose is to ensure that the backdating of the revised definition to 1 January 1997 does not require events and actions that took place between these two dates to be revisited.
See our May News Alert for the key issues.
Workplace pension provision widens
According to research published by the Department for Work and Pensions, the participation rate of private sector employees had risen from 26% in 2011 to 35% in 2013 – the first increase in a decade.
This is one of a number of findings from qualitative research into employer pension provision, undertaken via a telephone poll of 3,079 private sector employers.
But worryingly, 77% of employers who had not yet reached their auto-enrolment staging date admitted to having “not done anything”.
Comment
Amid all the back-slapping about how swimmingly auto-enrolment is going this might be a warning about trouble ahead as vast numbers of small employers approach their staging dates without any preparation, or even any conception about what auto-enrolment will involve and cost.
Lower enhancement for deferring the single-tier state pension announced
The Pensions Minister Steve Webb has announced that the new single-tier state pension will be increased by 1% for each nine weeks a person reaching State Pension Age chooses to delay collecting their pension. The rate, set following a report from the Government Actuary, is considerably lower than the uplift of 1% for each five weeks available for deferring the Basic State Pension.
Therefore someone who chooses to delay their single-tier state pension by a year will only receive a 5.8% increase compared to the 10.4% increase available to those deferring the Basic State Pension, so the increase has almost halved.
The change only affects those reaching State Pension Age on or after 6 April 2016.
Draft regulations confirming the increase should be brought forward later this year.
Comment
In the current economic climate the existing enhancements awarded to those deferring the Basic State Pension seem very generous, so lower increases for the new single-tier pension are not surprising. That they have been cut by almost half will seem excessive to many, but actually the new levels of increase are in line with the enhancements members of occupational pension schemes who defer taking their pension might receive.
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.
