Blueprint for money purchase automatic transfers will affect scheme processes
Work-based money purchase schemes within the scope of the first phase of the Government’s plans for automatic transfers will, from October 2016, have to identify and flag data of eligible funds for transfer. Such schemes will need to record this data on their own or a third-party register.
This is the key action for affected schemes as a result of the Government publishing its framework document of how an industry-led “federated” model of a network of interoperable registers will work. Schemes will also need to carry out pot matching for new members and arrange for transfers to take place.
Phase 1 of the network will launch in October 2016. This will limit automatic transfers to a defined list of schemes chosen by their size and number of members (see Pensions Bulletin 2015/03). For an automatic transfer to happen both the receiving and transferring schemes must be listed. This list should cover most members within auto-enrolment. Phase 2 will widen the scope of automatic transfers but no timescale is given other than “as soon as practicable”.
A member’s money purchase pot will only become potentially eligible for an automatic transfer:
- Once the former employer tells the scheme that the member has ceased active employment; or
- The scheme has not received contributions in respect of the member in the 12 months preceding an annual benefit statement exercise. This deliberate policy decision means that in some cases a pot may not be eligible until nearly two years after the cessation of contributions
A pot will only be flagged for automatic transfer if:
- The first contributions were received in or after July 2012 (the launch of auto-enrolment)
- It is “pure” money purchase benefits with an employer connection where the value is under £10,000 at the point of valuation; and
- The member is saving in a charge-capped default arrangement in both the receiving and transferring schemes (see Pensions Bulletin 2015/06)
After a pot has been flagged, a transfer can happen if there is a positive match between the transferring scheme and the potential receiving scheme on date of birth, national insurance number and two of initials, surname and gender.
During Phase 1 the member will be contacted to tell them there is a match and to ask if they want to proceed (“opt-in basis”). Once Phase 2 commences members will be told the transfer will go ahead unless they choose to cancel it (“opt-out basis”).
Automatic transfers will only apply to “pure” money purchase schemes with an employer connection. There are exceptions for schemes where members effectively govern savings on their own behalf such as Small Self-Administered Schemes, Executive Pension Plans and single member schemes.
Comment
Affected schemes need to be aware of this forthcoming need for new IT and administration processes, potentially in less than 20 months, to enable automatic transfers to happen.
However, this framework document is just that. The Government has decided the principles but acknowledges that details in some areas are still needed and that the roll-out to Phase 2 will depend on the experience of Phase 1. It will be fascinating to see what the opt-in rate under Phase 1 is.
Regulator issues draft guidance to help trustees manage DB to DC transfers and conversions
Long-awaited draft guidance for defined benefit (DB) pension scheme trustees aimed at assisting them manage what is expected to be a significant uptick in DB transfer requests post April 2015 has been published by the Pensions Regulator for consultation. The 2008 technical guidance on calculating DB transfer values is not being updated.
The draft guidance provides a high level summary of the as yet not passed changes to the cash equivalent legislation and the as yet unseen requirements for “appropriate independent advice” to be taken in certain circumstances, including changes that will need to be made to member communications. It also states the Regulator’s view on a number of matters relating to trustees’ readiness to process and to assist members requesting transfer values.
Consultation closes on 17 March and the Regulator intends to publish the final version as soon as possible thereafter.
Comment
This is a very useful document from the Pensions Regulator, particularly for trustees of DB schemes whose transfer value processes will need to change in only a few weeks’ time.
Although the guidance would appear to need only minor refinement before being finalised, the section on appropriate independent advice has to be read with caution as the regulations covering this have yet to be published. It also, despite its title, does not cover conversions, nor does it address non-statutory transfers.
New disclosure requirements signalled for occupational schemes providing money purchase benefits
A Government response to a consultation concludes that few changes are necessary to proposals made last November to ensure that the Disclosure of Information Regulations work as intended in relation to the new public service pension schemes being introduced from April 2015 (see Pensions Bulletin 2014/46).
However, in the first public signal to date, the response, by the Department for Work and Pensions, says that these changes will be put together with separate (and as yet unseen) amendments to the Disclosure Regulations resulting from the Government’s commitment to deliver flexibilities in relation to money purchase benefits as announced in the 2014 Budget. Both will come into force on 6 April 2015.
Comment
It seems that trustees of schemes providing money purchase benefits will have only a few weeks to put in place what could be significant changes to the way in which they are required to communicate with members about to take such benefits. The Government needs to finalise these regulations as soon as possible – but we may have to await Royal Assent to the Pension Schemes Bill before this is possible.
Essential guide to governance standards and charge controls published
The complex changes to the law applicable to the charges and governance of many money purchase occupational pension schemes that take effect on 6 April 2015 have been summarised in a brief guide issued by the Pensions Regulator.
Focussing on the changes being introduced by the draft Occupational Pension Schemes (Charges and Governance) Regulations 2015 (see Pensions Bulletin 2015/06), the guide summarises the new governance standards and the related role of the chair of trustees. It goes on to consider the operation of the charges cap including use of an ”adjustment measure” that can be used before 6 October 2015 (and in exceptional cases from then) where the charge cap is unlikely to be met. It concludes by summarising the new requirements applicable to multi-employer schemes for unconnected employers (including master trusts).
Comment
This is an excellent introduction to a complex subject and should help affected trustees get to grips with their imminent responsibilities.
Pension risk – PRA to require less capital for banks?
In a consultation paper issued last month the Bank of England’s Prudential Regulation Authority (PRA) announced changes to the system for determining capital adequacy under “Pillar 2” for banks (and also building societies and PRA-designated investment firms). It sets out changes to the “internal capital adequacy assessment process” (ICAAP) by which the regulatory capital which must be held against various risks should be determined and the PRA’s methodology for regulating the output of this. One of these risks is pension obligation risk – the risk that defined benefit pension liabilities pose to the regulated firm.
The paper addresses a wide range of issues and includes passages on how pension risk should be dealt with in the ICAAP. Also, the PRA has published some hitherto unpublicised details of the methodology it applies when looking at the capital determined by the ICAAP. Most noteworthy are:
- As we saw in relation to insurers last year (see Pensions Bulletin 2014/50), when calculating pension liabilities the pensions accounting standard, IAS 19, basis may be used instead of the typically stronger scheme funding basis currently required
- The publication of “stressed scenarios” on a firm’s IAS 19 measure of pension liabilities which the PRA will use to assess the adequacy of the capital resulting from the firm’s own assessment of pension risk
- The need in the ICAAP to specify how any pension deficit would be dealt with in an extreme stressed scenario
Consultation closes on 17 April and the new requirements on pension risk will come into force, without any explicit transitional provisions, on 1 January 2016.
Comment
The transparency that this represents is welcome. Our first impressions are that, when all of this is taken together, lower levels of capital for pension risk may be required than under the old FSA regime.
EIOPA is quietly busy despite a budget cut back
Seemingly all is quiet on the European pensions front at the moment. The European Insurance and Occupational Pensions Authority (EIOPA) is considering the responses to its consultation on pension scheme solvency (see Pensions Bulletin 2014/42) and the IORP 2 Directive is awaiting consideration by the European Parliament (see Pensions Bulletin 2014/50). However, EIOPA has been quietly busy since the New Year.
It has published the results of a survey on the costs and charges applying to defined benefit and defined contribution (DC) pension schemes across 26 EU member states. The idea seems to have been to draw a map showing who pays the charges, how charges are disclosed, what legal requirements for disclosure there are and what caps on charges are imposed. EIOPA states that “Unfortunately, early on in the project the results of the mapping exercise showed a lack of detailed information and practical experience among some Member States as regards the detail of costs and charges at this moment in time”, and so the output of the survey is perhaps less useful than EIOPA had hoped. The paper still concludes with a threat of more regulation, considering that all costs and charges in the “value chain” should be disclosed and that national regulators should have effective means to assess whether members are getting value for money.
Comment
There is not a proposal for legislation and even if there was this seems to be an area where the UK, in terms of disclosure and capping is already streets ahead of much of the rest of Europe.
When the Portability Directive was agreed in 2013 (see Pensions Bulletin 2013/27) it did not include any requirements about transfers. Plugging this gap in EU pensions regulation would have required an agreement amongst member states that has thus far not been forthcoming. Therefore at the European Commission’s request EIOPA is consulting on 14 “good practices” which it hopes will work against the barriers to transferability within and between EU countries.
Comment
We haven’t set out the proposed good practices, although readers who click through should not find anything contentious. Those who are having difficulty sleeping may find the appendix containing a detailed history of the EU’s policy on pension transferability since 1989 especially helpful.
EIOPA has also published an interesting report on investment options for members of DC schemes – interesting because, if readers are after a summary of the ideas of behavioural economics which have informed auto-enrolment policy in the UK, there is a detailed exposition of the theory in the report.
There are no proposals for legislation in the report.
Shortly (we do not quite know when) EIOPA will be conducting a “quantitative impact study” of UK schemes. Readers may recall that one of these exercises was conducted in 2013 (see Pensions Bulletin 2013/16), with predictably terrifying results. EIOPA thinks that the time has come for a “QIS 2”. What may be different this time, we understand, is that unlike QIS 1 where the Pensions Regulator did all the work of data collection and analysis for UK schemes, for QIS 2 EIOPA wants greater direct involvement by UK schemes.
At the same time as QIS 2, EIOPA is proposing to conduct stress tests on pension schemes for the first time alongside QIS 2. Again, there is a possibility that EIOPA will require some work from schemes.
We are watching this with interest as it may involve schemes having to do something this year.
Finally, we note that EIOPA’s 2015 budget has been cut by 7.6% compared to 2014.
NEST restrictions removed – on 1 April 2017
Following debate in Parliament, the Order that removes certain restrictions applying to the National Employment Savings Trust (NEST) has now been made.
The National Employment Savings Trust (Amendment) Order 2015 (SI 2015/178):
- Removes the limit on contributions that can be paid to NEST in relation to each member (currently £4,600 pa)
- Allows NEST to receive bulk transfers without member consent, but only if the separate bulk transfer without consent conditions are satisfied (which require the trustees of the transferring scheme to obtain an actuarial certificate) and the employer concerned is making contributions to NEST; and
- Lifts the restrictions on NEST receiving and making transfers in respect of individuals
None of these changes apply until 1 April 2017.
Comment
Although these important regulations do not come into force for a couple of years, they will affect companies’ pension decisions long before that. Two of the major barriers to choosing NEST for your pension scheme – the contribution limit and transfer ban – will be lifted. It remains to be seen how many will move their pension scheme to NEST as a result.
Details of single tier state pension finalised
The regulations containing some of the detail of the single tier pension for those reaching State Pension Age after 5 April 2016 have now been made following debate in Parliament.
The State Pension Regulations 2015 (SI 2015/173) come into force on 6 April 2016. See Pensions Bulletin 2014/50 for our summary of their contents.
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.
