Pensions Bulletin 2014/44

Government moves to next stage in implementing better workplace pensions

The Department for Work and Pensions (DWP) has published another command paper that sets out its next steps to improve the quality of workplace defined contribution (DC) schemes. This follows the paper published in March that set out a range of measures such as a charge cap on default funds, a ban on inappropriate charges and proposals to introduce minimum governance standards and improve transparency (see Pensions Bulletin 2014/13).

The latest paper contains the DWP’s response to its March consultation on minimum governance standards and on transparency. It also has within it a consultation on draft regulations relating to charges and governance in occupational pension schemes. Although the key decisions on policy in both areas have now been taken, there have been some developments in its detailed application and so comments are being sought on this as well as whether the draft Occupational Pension Schemes (Charges and Governance) Regulations 2015 deliver the overall policy intent.

Charges

Looking first at charges, the regulations provide, from April 2015, for a charge cap in relation to the default arrangements of most money purchase occupational pension schemes used as qualifying schemes for auto-enrolment purposes (including stakeholder pension schemes). The cap is set at 0.75% of funds under management, or equivalent to 0.75% for schemes with combination charge structures.

The only permissible such combination involves a percentage of funds under management along with either a percentage of contributions of no more than 2.5% of the contributions to the default arrangement, or a flat amount of no more than £25 pa. Where such a combination is used the percentage or flat amounts need to be assessed via look up tables to establish the maximum permissible percentage of funds under management. So, for example, the NEST 1.8% contribution charge implies that a further charge of no more than 0.5% of funds under management is permissible (compared to the 0.3% actually charged).

The cap covers all Member-Borne Deductions (MBDs), excluding transaction costs, costs resulting from pension sharing, complying with court orders and scheme wind-up. Any commission payments must be counted as MBDs.

The regulations ban, from April 2016, Active Member Discount (AMD) structures from qualifying schemes. Prior to this any such AMDs must not result in the level of charges faced by members who cease contributing going over the charge cap.

Trustees will be legally responsible for ensuring that there is compliance with all of the above.

Governance

Turning to governance, the regulations apply, with some exceptions, to money purchase occupational pension schemes, no matter whether they are being used as qualifying schemes for auto-enrolment purposes. They also apply to the non-AVC money purchase benefits accrued in otherwise non-money purchase occupational pension schemes.

The regulations provide for:

• Trustees to ensure that default arrangements are designed in members’ interests and kept under regular review, that core financial transactions are processed promptly and accurately and that the trustees assess the value of all transaction costs and charges borne by scheme members (not just those who are protected by the charge cap)
• Independence requirements for master trusts (other than NEST) – they must have a minimum of three trustees, the majority of whom (including the chair) must be independent. These independent trustees are subject to limited terms
• The appointment of a trustee chairman responsible for signing off an annual statement on how the minimum governance standards have been met. This statement also describes how trustees have the relevant knowledge and understanding to run the scheme effectively
• The trustees not to be restricted as to who provides administrative, fund management, advisory, or other services to the scheme

Consultation closes on 14 November 2014, following which the DWP intends to lay the regulations in early 2015 to come into force on 6 April 2015.

Transparency of costs and charges

The Command Paper reprises the DWP’s view that improving the transparency of costs and charges is essential to address what it sees as the current weaknesses in the workplace pensions market and to enable an effective review of the charge cap in 2017 (see below).

So in addition to the governance measures outlined above, the DWP intends to consult in 2015 on regulations under duties in the Pensions Act 2014 requiring information about transaction costs to be disclosed to members and others and the publication of costs and charges information.

In relation to transparency in defined benefit schemes, the paper weighs up the views reported to it and promises to “look specifically at whether regulation for additional transparency in DB schemes is required”.

Other matters

The paper also highlights where action is being taken in related areas. In particular:

• From April 2015 providers of workplace personal pensions will have new duties to establish Independent Governance Committees (IGCs) to oversee the value delivered by the schemes they supervise, including the design and performance of the default arrangement, standards of administration and the value of costs and charges. A consultation by the Financial Conduct Authority (FCA) on rules to introduce IGCs closed recently (see Pensions Bulletin 2014/32). A separate consultation by the FCA on the charges measures will start shortly
• From April 2015 member-borne adviser commission and consultancy charges in all qualifying workplace personal pension schemes will be banned. Rules and regulations are promised to achieve this
• From April 2016 commission charges in occupational pension schemes used as qualifying schemes will be banned. The DWP intends to consult on the necessary regulations in 2015
• In 2017, the charge cap will be reviewed, to see whether it should be lowered and whether it should include some or all transaction costs

In a linked development the Pensions Regulator chairman, has announced that the Regulator will publish a series of guides in the New Year to help support trustees of defined contribution schemes once the details of proposed pension reforms are confirmed by Government, in areas such as minimum governance standards, charge controls and changes to decumulation. The Regulator has also acknowledged that trustees are experiencing a great deal of change and that guidance will be provided as soon as possible. Its DC code, in particular, will be updated next year.

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.

ACA calls for rethink on auto-enrolment details as staging moves to smaller employers

The Association of Consulting Actuaries (ACA) is calling for the Government to look at some of the important details of its auto-enrolment policy as the staging focus switches from larger to smaller schemes. Specifically, the ACA wants the informal link of the earnings trigger (the level below which employees are not auto-enrolled) to the income tax personal allowance to be reviewed and, secondly, the suitability of current auto-enrolment policy to the three-quarters of a million micro-employers (with one to four employees) to be re-examined

This is contained within its latest pension survey of businesses employing less than 250 people.

The ACA believes that a policy review is needed in 2015 because:

• the significant increase in the income tax personal allowance during this Parliament has resulted in the exclusion of a high number of employees in large and mid-sized firms, which is likely to accelerate as smaller firms stage; and

• in a climate of modest earnings growth the generally much lower average earnings in smaller firms together with the increase of contributions (operating from October 2017) soon after staging for such firms could result, in high opt outs.

Turning to the survey itself, amongst the key findings are the following:

• Changing workforce demographics – Today, employers expect around half of their employees to retire at age 65 and just 8% at age 66 or above. But in just six years’ time employers expect that three-quarters of their employees will retire at ages 66-67 as the increases to State Pension Age start to come into effect

• “Freedom and choice” pension reforms – Nearly six out of ten smaller employers are supportive of the new pension reforms, announced at the 2014 Budget, with just one in ten opposed

• Guidance guarantee – where employers have taken a view, ‘face-to-face’ meetings are seen as likely to be the most popular channel for the guidance guarantee, followed by web-based tools and then telephone guidance

• Pension contributions tax relief – 56% of employers support a refocusing of tax relief towards those with lower incomes, with over a third also saying that reliefs should be further restricted for those on higher incomes

• Opt-out – the median opt-out level of employees from auto-enrolment reported to the survey falls in the 11-15% band

• Auto-enrolment scheme – where small and micro employers have made decisions (most have not) by far the majority have decided to enrol all eligible jobholders into NEST or another multi-employer scheme. Amongst those employing 10-49 employees, 57% are proposing this route; amongst those with 1-9 employees, the figure reaches 70%

• Staging dates – upwards of nine out of ten employers yet to auto-enrol feel that a delay or pause in staging should be considered until the current raft of pension reforms that are unresolved is finalised

NAPF launches its pensions manifesto

The National Association of Pension Funds (NAPF) has launched a pensions manifesto at last week’s NAPF Conference, setting out what it believes should be the next Government’s priorities in the pensions space.

The NAPF’s six recommendations are that the next Government should:

• Commit to the continued rollout of automatic enrolment on the current legislative timetable. The NAPF believes that auto-enrolment has been very successful so far but acknowledges that as smaller, less well-resourced employers reach their staging date there could be higher rates of employee opt-out and employer non-compliance. The NAPF also points out that the retirement outcomes from auto-enrolment are as yet unknown and there is a danger that individuals who have “done the right thing” by auto-enrolling could still be disappointed at their retirement outcome. The NAPF acknowledges “there are no easy solutions”

• Plan for the long term through an Independent Retirement Savings Commission. The NAPF believes that establishing an independent Commission will help ensure pension policy is looked at for long-term results rather than short-term (political) results. The NAPF proposes that such a Commission should be established in time to present its first annual report to Parliament in 2017, at the same time as the already planned review of auto-enrolment

• Enable pension schemes to be effective investors in the economy. The NAPF states that it is important that the Government makes infrastructure investment important and cost-efficient for long-term investors, presumably meaning such vehicles as the NAPF’s own recently established “Pensions Infrastructure Platform”

• Manage European legislation. The NAPF states that the Solvency proposals put forward by the European Commission are “one of the biggest threats to DB pension provision in the UK” and calls on the government to oppose any further attempts by the European Commission to drive up funding requirements through the creation of a “Holistic Balance Sheet”

• Drive higher standards of governance and reduce tick-box regulation. The NAPF proposes that high-level principles should be set but there should be a move away from detailed regulations and codes

• Supplement the guidance guarantee and monitor people’s outcomes after using guidance. The NAPF observes that the old work-retirement model is changing rapidly and that these changes are creating uncertainty about the retirement process. To help alleviate this, the independent Commission (as above) should have a role reviewing the advice, products and solutions available to those retiring and the government should use the review of the Money Advice Service and the establishment of the guidance guarantee to increase the amount spent on information and education on retirement

Pensions guidance providers unveiled

HM Treasury has announced that the guidance guarantee service due to start next April (see Pensions Bulletin 2014/30) will be delivered by the Citizens Advice Bureau and the Pensions Advisory Service. The Citizens Advice Bureau will provide face to face guidance and telephone guidance will be provided by the Pensions Advisory Service.

An online service will also be designed by the Government as part of the scheme.

A new Schedule to the Pension Schemes Bill has now been tabled that names these providers and sets out the role of HM Treasury and the Financial Conduct Authority (FCA). Amongst other things, the FCA is required to make general rules requiring information about the availability of the guidance guarantee to be given by the trustees or managers of a relevant scheme to members with a right or entitlement to cash balance benefits or other money purchase benefits.

So what type of pensions guidance do consumers want?

This is the essence of an illuminating study commissioned by the Chartered Insurance Institute that gauged consumer views towards the Government's pension guidance service now being worked up for its April 2015 launch.

The research was undertaken with over 1,000 consumers who were all within five years of retirement, who had defined contribution pension pots and other assets of less than £100,000 and did not have a financial adviser.

The results included the following:

• 92% said that they would, or probably would make use of the service provided that they are satisfied that those delivering it are impartial and qualified. But to engage they would need to receive official and personalised correspondence, specifically from the Department for Work and Pensions, about the guidance service, six months to two years prior to their intended retirement. They would also value reinforcing messages from other parties connected with their pension – including, but not just limited to, their pension provider

• Most envisage that pension guidance will be of value as a generic advice service – sitting outside the boundary of regulated advice – provided it is sufficiently personalised to edit their choices, navigate the information relevant to them and build their confidence to make good decisions

• Face-to-face is the overall preference for delivery – 57% placing this first with only 6% placing telephone first. But 34% place a self-completion questionnaire on-line first

• Consumers expect to use a number of sources of information to help them decide how to use their DC pension pot – on average four. But when asked to choose their most likely follow-up action, a third say “make their own decision through shopping around” and a quarter say they would seek professional financial advice

The report concludes with some recommendations for the Government and the Financial Conduct Authority – in particular for the Government to work on what constitutes “success” as soon as possible after next April, through follow up with consumers who have used the service.

The 2015+ pension regime – updated draft HMRC guidance published

HM Revenue & Customs has updated its draft guidance about the tax aspects of the planned pensions flexibilities from April 2015 announced in the Budget, following the introduction of the Taxation of Pensions Bill to Parliament last week.

The Bill is to a large extent similar to earlier draft clauses issued in August, but there were some clarifications and new points of detail – see our Taxation of Pensions Bill Special Bulletin 2014/43 for what the proposed tax regime looks like as a consequence.

The updated draft guidance reflects this but we note two points:

• Death benefit charges –the guidance confirms that indeed, the Bill will need further changes to fulfil the plans for death tax for 2015/16 as set out in the Chancellor’s announcement on 29 September 2014 (see Pensions Bulletin 2014/40)

• Reporting, tax deduction and Real Time Information (RTI) requirements –as we noted in our Special Bulletin the Bill contains many new burdens on pension scheme administrators related to the new “£10K Money Purchase Annual Allowance” measure, and scheme administrators might want to read the draft guidance chapter on this to get a flavour of what will be involved. The guidance also sets out the tax that providers will be expected to deduct before paying over the new flexible payments (the uncrystallised pension fund lump sum and income from flexi-access draw down). This will inevitably, mostly if anything, be weighted towards more tax than is actually due, so the guidance also sets out changes to RTI reporting to enable HMRC to identify whether the correct tax has been paid. But the outlined changes are noted as “subject to change”

HMRC’s RPSM catches up with the Budget changes that applied from March 2014

HM Revenue & Customs has updated its Registered Pension Schemes Manual primarily to catch up with the changes made effective from 27 March 2014 (temporarily by parliamentary resolution at the 2014 Budget and then consolidated by the Finance Act 2014 in July) including the new tax law limits for some small benefit cash-outs (see our News Alert 2014/01); and to link Individual Protection guidance into the RPSM. And the sections about Scheme Administrators and registration/ de-registration processes have been rewritten.

All change at the Pensions Ombudsman

The Department for Work and Pensions has announced that it will shortly commence recruitment for a new Pensions Ombudsman and a Deputy Pensions Ombudsman.

Tony King, the current Ombudsman, will stand down from his post in late spring 2015. Jane Irvine’s second term as Deputy Ombudsman ends next autumn. Both post holders will be flexible about their departure dates to ensure a smooth transition when the new Pensions Ombudsman and Deputy Pensions Ombudsman take up their posts.