Pension Schemes Bill makes further progress
The Pension Schemes Bill completed its Commons’ stages on Tuesday and is now scheduled for its Second Reading debate in the House of Lords on 16 December. There is now a further new version of the Bill available as presented to the Lords on Wednesday.
This is just as well because towards the end of last week the Government moved over 60 pages of changes, comprising 72 amendments, 33 new clauses and 1 new schedule. They were all voted into the Bill just before it left the Commons.
The changes include some of the long-awaited necessary adjustments to legislation sponsored by the Department for Work and Pensions (DWP) consequential to the pension tax freedoms being introduced in the Taxation of Pensions Bill (which is due to complete its Commons’ stages next Wednesday). These are driven off some new definitions – in particular a “flexible benefit” is (broadly) a money purchase benefit or a cash balance benefit.
A key concern here is whether the DWP’s definitions, which differ from those used by HM Treasury in the Taxation of Pensions Bill, will mesh sufficiently together.
In relation to transfer values, the Bill now provides for the following to come into effect from Royal Assent:
- Cash equivalents – the big change is a new Schedule 4 that rewrites much of the current transfer value legislation. Henceforth the right to a cash equivalent arises if the member has accrued rights to any “category” of benefits, no “crystallisation event” has occurred in relation to these benefits, the member is no longer accruing rights to those benefits and where the benefits are not flexible benefits the member stopped accruing those rights at least one year before “normal pension age”
- There are three permissible categories – money purchase benefits, flexible benefits other than money purchase benefits and benefits that are not flexible benefits
- A crystallisation event occurs in relation to a member’s accrued rights to benefits in a category when (a) payment of a pension in respect of any of the benefits has begun, (b) in the case of money purchase benefits, sums or assets held for the purpose of providing any of the benefits are designated as available for the payment of drawdown pension, or (c) in the case of a personal pension scheme, sums or assets held for the purpose of providing any of the benefits are applied for purchasing an annuity or insurance policy
- The key change is that henceforth the right to a cash equivalent operates on a category basis. The main beneficiaries will be those with money purchase benefits (such as AVCs) alongside non-money purchase benefits – they will be able to transfer the former to a new destination where they can access the new freedoms, whilst keeping the latter within the scheme (they can separately transfer these too, but subject to advice – see below)
- Independent advice in respect of conversions and transfers – with certain exceptions, trustees must check that a member or survivor with subsisting rights to a “safeguarded benefit” (any benefits other than money purchase benefits or cash balance benefits) who wishes to convert them into flexible benefits or make a transfer to another pension scheme to acquire flexible benefits has received “appropriate independent advice”. The six month time limit on transfer values will be lifted where the trustees have been unable to carry out the check by reason of factors outside their control, or the check did not confirm that the member had received appropriate independent advice
- Power to require employer to arrange advice – in certain circumstances (to be confirmed in regulations) an employer must pay for the appropriate independent advice. Where that is the case, in relation to employees or former employees, the cost of the advice will not be treated as a taxable benefit in kind for income tax purposes if certain conditions are met
- Restriction on transfers out of public service defined benefit schemes – a new clause prevents a member of an unfunded public service defined benefit scheme using that right to transfer to another pension scheme in which they can obtain flexible benefits, whilst funded public service defined benefit schemes are given the ability to reduce transfer values
Turning to the delivery of the new DC flexibilities within occupational pension schemes the Bill now provides for:
- Sums or assets that may be designated as available for drawdown – only assets held for the purpose of providing money purchase benefits can be used for drawdown purposes (applying to assets designated on or after 6 April 2015, for members and survivors separately) – this overrides any conflicting provision in scheme rules
- Conversion of certain benefits for drawdown – a power to make regulations allowing the conversion of non-money purchase (but flexible) benefits into money purchase benefits for drawdown purposes
- Calculation of lump sums – a power to make regulations in relation to the payment of lump sums in respect of non-money purchase flexible benefits
There are also some protective provisions that restrict conversion of benefits and payments of lump sums should the scheme be either winding up or being assessed for entry to the Pension Protection Fund.
Finally there are numerous amendments and new clauses added to the shared risk and collective benefits sections of the Bill; particularly the latter.
Comment
The House of Lords has its work cut out to make sense of and go on to scrutinise this Bill. Hopefully all the material changes have now been made so that all concerned can have a period of calm reflection on the policy that is being delivered and whether the wording achieves this purpose.
Taxation of Pensions Bill – Government rows back on the flexible access information burden
Recent Government amendments to the Taxation of Pensions Bill (the Bill which implements the majority of the April 2015 pension flexibilities) modify the proposed duties on scheme administrators and members to exchange information if and after a member flexibly accesses benefits under the new regime operating from April 2015.
(As a reminder, these duties are being put in place as part of the operation of the £10,000 Money Purchase Annual Allowance regime (the “£10K MPAA”), aimed at limiting the tax advantage that can be had from the new flexibilities. For more on how the £10K MPAA works and when a member counts as accessing savings flexibly, so triggering the £10K MPAA for all future money purchase savings, see Pensions Bulletin 2014/43 - Taxation of Pensions Bill special).
Broadly, from next April the duties as modified, after much initial criticism, will be that:
- When a member of a scheme flexibly accesses their pension rights, the scheme administrator must, within 31 days, identify this and notify him that he has done this and so falls under the £10K MPAA regime for all future savings
- When the member has received this notification, he has 91 days (13 weeks) within which he must inform the same to any other scheme where contributions are being paid by him or on his behalf to a money purchase arrangement, or in which he is accruing benefit under a cash balance or hybrid arrangement. If the member later starts accruing benefit in a scheme he must also tell that scheme within 91 days of such accrual starting
- Scheme administrators must, following a member transfer, tell the receiving scheme if they believe the member has ever flexibly accessed his pension rights (either in that scheme or another scheme). This must also be done within 31 days
- Where a scheme has a member that it knows is in the £10K MPAA regime (because of the above process), it needs to monitor the member’s position after each tax year, and (to the extent the member counts as accruing money purchase benefits) provide a full Annual Allowance pension savings statement after any tax year in which that member’s annual allowance usage (“pension input amount”) from money purchase arrangements in the scheme exceeds £10,000. (The member will still also be subject to the standard £40,000 annual allowance regime on total savings with the reporting processes required for that)
There are parallel reporting duties applying when/if an individual holding a pre-April 2015 drawdown fund has the fund converted to have the new “flexi-access drawdown” tax label applying.
Failure to comply with these reporting requirements by either the scheme administrator or individual gives HMRC power to apply the standard penalties for non-compliance which start at £300 for late information or £3,000 for incorrect information provided negligently or fraudulently.
Comment
The original draft of these reporting requirements received vocal criticism for some very obvious impracticalities (members only had 31 days to fulfil their part; and had to write to all the pension schemes in which they had benefits even where there was no accrual, let alone money purchase accrual). This latest version is a welcome shift in position by the Government. But it does demonstrate the dangers of the breakneck run up to implementation next April. It remains to be seen whether there are other impracticalities in the requirements.
Of course, the new disclosure burden laid on schemes is specifically to tell individuals after the member has taken the action that results in being in the £10K MPAA regime; and thereafter after the member has breached the £10K MPAA in the scheme for any tax year. The law’s concern is to maximise the chance that tax is collected. In practice of course members need to think about these matters before taking the actions. We hope that the Government’s guidance and HMRC web material will be sufficient to give members some chance of doing this. Otherwise more burdens will be placed, explicitly or implicitly, on scheme processes and communications.
Shared parental leave and pay legislation finalised – action required by pension schemes?
After a slight delay, the finishing touches have been made to the voluminous secondary legislation governing the new system of up to 50 weeks shared parental leave and up to 37 weeks of statutory shared parental pay that will be available in relation to children whose expected week of birth is on or after 5 April 2015 (see Pensions Bulletin 2014/11). Broadly speaking, under the new system mothers can choose to return to work early and share their remaining maternity leave and pay with the father.
The main provisions in relation to leave and pay are set out in the Shared Parental Leave Regulations 2014 (SI 2014/3050) and the Statutory Shared Parental Pay (General) Regulations 2014 (SI 2014/3051) respectively, both of which come into force on 1 December 2014.
This latest extension to employees’ childcare rights brings with it the same treatment of pension contributions as for other periods of paid family leave – ie:
- The employer will pay pension contributions as if the employee was earning their usual salary; and
- The employee will pay pension contributions on the basis of the pay actually received
Comment
As with other adjustments to childcare provisions it may be necessary for trustees to review scheme rules to ensure that they work appropriately – this time for shared parental leave and pay.
Regulator to list auto-enrolment vehicles available to any employer
In response to concerns that many small and micro employers will not be able to find information about pension schemes to use for auto-enrolment, the Pensions Regulator is consulting on a proposal to set up a temporary list of those schemes directly available to any employer, irrespective of how many workers they have or how much they pay them.
Four criteria are proposed for inclusion:
- Being available for use as a qualifying auto-enrolment scheme
- Accepting any employer (subject to reasonable terms and conditions), regardless of the amount paid to their workers (individually or on average) or when their staging date is
- Accepting employers directly (ie not exclusively via adviser introductions); and
- Agreeing not to refer to their presence on the list in marketing or promotional material
The list will include some other features of the scheme along with contact details.
Consultation only runs until 1 December as the Regulator is keen to get the list established as quickly as possible to help employers staging in 2015. The Regulator intends to withdraw the list at the end of the staging period in 2018.
Comment
Small and micro employers will need all the help they can get to fulfil their auto-enrolment duties. This is a sensible move by the Regulator.
Regulator reports on how it has seen off a pension liberation scheme
The Pensions Regulator has published a section 89 report on how it used its powers to put a stop to an innovative, but flawed, pension liberation model involving five schemes. This included its successful legal action at the High Court in May (see Pensions Bulletin 2014/21).
The report states that the model saw over 1,400 individuals transfer over £134m from occupational and personal pension schemes between August 2011 and June 2013, with fees of 11%, totalling more than £14.7m, being charged in connection with the transfers.
The report also makes clear that following the High Court judgment those controlling the schemes agreed to wind them up.
Comment
This is a welcome, but unsurprising outcome given the judgment in May.
Pensions Institute consults on the future of retirement income
The Pensions Institute has launched a consultation as part of an independent review of retirement income set up by Shadow Work and Pensions Secretary Rachel Reeves earlier this year (see Pensions Bulletin 2014/23). The accompanying consultation paper sets out 76 questions to guide potential contributors.
The consultation will examine how savers in defined contribution schemes can achieve not only the maximum possible income in retirement, but also an income that is more predictable than that provided by existing schemes.
The consultation, which runs until 20 February 2015, seeks views in five broad areas:
- How to ensure that workplace pension retirement products are best suited to giving people security and confidence in retirement
- The kind of support savers need to make the right choice at retirement for them and their family and how to build on the lessons of auto-enrolment
- How savers can be helped to manage longevity risk
- The role of the National Employment Savings Trust (NEST) in helping savers to access good quality retirement products; and
- The role of collective pension schemes and how these could be introduced in the UK
Comment
Whilst the consultation paper is mercifully short, many of the questions are challenging. It will be interesting to see what the Pensions Institute makes of the submitted “evidence”; still more its conclusions.
Lesley Titcomb is new Chief Executive of the Pensions Regulator
The Pensions Regulator has announced that Lesley Titcomb will become its chief executive from 2 March 2015. Stephen Soper has been interim chief executive since Bill Galvin left in June 2013.
Lesley Titcomb has been Chief Operating Officer and a Board member at the Financial Conduct Authority (FCA) since April 2013 and has responsibility for the FCA's operational platform. She led the work to deliver the transition to the FCA from the Financial Services Authority (FSA) and recently oversaw the work to bring the regulation of consumer credit from the Office of Fair Trading to the FCA.
Comment
Ms Titcomb has experience of the transition and transfer of responsibilities between regulators. One can only speculate if this will have any bearing on the future of the Pensions Regulator, as there have been several calls for all pension regulatory oversight to be under a single organisation rather than the current split between the Pensions Regulator and the FCA.
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.
