DWP grants early sight of regulations delivering the new pension flexibilities
The Department for Work and Pensions (DWP) has published three sets of draft amending regulations relating to its part in delivering the new DC flexibilities.
- The Occupational Pension Schemes (Consequential and Miscellaneous Amendments) Regulations 2015 – empower the trustees of occupational pension schemes to deliver some or all of the new DC flexibilities within their scheme, but only in relation to money purchase benefits and subject to employer consent
- The Occupational Pension Schemes (Transfer Values) (Amendment) Regulations 2015 – make changes to the Transfer Regulations that are consequential to those being made to the primary legislation
- The Occupational and Personal Pension Schemes (Disclosure of Information) (Amendment) Regulations 2015 – are arguably the most significant as they contain important adjustments and additions to the disclosure requirements so that (amongst other things) those with an opportunity to transfer their flexible benefits are given information relating to this and all with flexible benefits are signposted to the pensions guidance service, given information about their flexible benefits (including its current value) and some further information including risk warnings
The regulations are subject to final legal checks and parliamentary approval in early March 2015, so they should not be treated as finalised.
Comment
This is an unusual move by the DWP as the regulations are not in final form. Regrettably, there was not time to formally consult on them, but for many months now, the DWP has been engaged with stakeholders behind the scenes in developing these regulations. The intention is that, with time fast running out, this early sight of these regulations will assist those who need to implement key changes to scheme processes in time for 6 April 2015.
Draft legislation issued delivering greater annuity payment flexibility following death along with tax breaks
HM Revenue & Customs has published draft legislation that amends the existing pension tax rules in the Finance Act 2004 around those who can receive payments from an annuity on the death of a member. The changes, which will be contained in this year’s pre-Election Finance Act, allow anyone including non-dependants to receive these payments. They also amend the Income Tax (Earnings and Pensions) Act 2003 to allow payments of these beneficiaries’ annuities (whether as a contingent annuity or an annuity purchased from a member’s uncrystallised funds) to be tax-free on the death of an individual before 75.
This development is further to the Chancellor’s announcement in the Autumn Statement that “beneficiaries of individuals who die under the age of 75 with a joint life or guaranteed term annuity will be able to receive any future payments from such policies tax free. The tax rules will also be changed to allow joint life annuities to be passed on to any beneficiary” (see Pensions Bulletin 2014/50).
The changes broadly mirror those made previously by the Taxation of Pensions Act 2014 in respect of drawdown funds (see Pensions Bulletin 2014/47). The consultation runs until 4 March 2015.
HMRC Newsletter focuses on PAYE for flexible pension payments
HM Revenue & Customs’ (HMRC) Pensions Schemes Newsletter 67, published last week, reiterates and provides further clarification on how Pay As You Earn (PAYE) taxation rules should operate on payments made under the pension flexibility rules, as previously set out in Newsletter 66 (see Pensions Bulletin 2015/02). Highlights include:
- Flexible payments requested before 6 April 2015 and paid after that date are considered as flexible payments made in the 2015/16 tax year without transitional arrangements
- Further examples are given on how PAYE rules apply in different situations and information that scheme administrators need to provide to HMRC and members; and
- When pension and lump sum benefits are tax free
The newsletter also provides sign-posting for members seeking further information on pension flexibility or tax calculations, and promises further guidance material for members and scheme administrators.
HMRC has also made a small corrective amendment to the QROPS article in Pensions Schemes Newsletter 66.
IBM remedies hearing – members 5, employer nil but will there be a replay?
In his judgment last year, Mr Justice Warren held that when IBM tried to close its defined benefit pension scheme in 2011 (along with making future pay rises non-pensionable and bringing in a more restrictive early retirement policy) it had breached its “implied duty of good faith” towards the scheme members. A further “remedies” hearing followed and Mr J Warren delivered his judgment last Friday – such that affected members are entitled to damages and reversals of scheme changes made in 2011.
One of the reasons for the original conclusion (see Pensions Bulletin 2014/15) was that IBM’s actions contradicted “reasonable expectations” which the employer had itself created by previous communications and that the business case for disappointing these expectations was insubstantial enough for it not to be “irrational and perverse” to have done so. The consultations themselves were also flawed for a number of other reasons.
This April 2014 ruling broke new ground in this area and pension commentators have been awaiting the outcome of the later hearing on the remedies available to the members. This lengthy and complicated ruling has now been published and it has a lot of very good news for the members including:
- Crucially, if a member so chooses, then the purported closure in 2011 is quite simply ineffective. The employer may close the scheme from a future date, but not before going through an entirely new process, including consultation. Benefit accrual, possibly net of the cost of any money purchase contributions, during the interregnum will be reinstated
- The 2011 changes involved “non-pensionability agreements” (NPAs). These cannot be enforced by IBM, and are therefore not valid (although salary increases awarded since 2009 will be treated as being 2/3rds pensionable under previous NPAs)
- Salary increases awarded under the NPAs are valid, with members being entitled to keep all of the salary increases they had been paid, and to continue to be paid salary incorporating those increases
- Members who did not agree to the NPAs are entitled to claim damages from IBM to reflect the (pensionable) salary they would have received had none of these changes been implemented
- Certain members are entitled to claim damages/compensation from IBM in respect of early retirement terms
It has been reported that IBM will seek leave to appeal and is expected that there will be a further hearing to decide this.
Comment
It must be remembered that there has not yet been any finding of recoverable loss and furthermore it is important not to generalise on the basis of what is clearly a very particular and complex set of circumstances and in any case all this might be overturned in the higher courts.
Nevertheless, employers who are contemplating or in the process of re-shaping pension benefits for the future (including, but not limited to closing to future accrual) should ensure that they do nothing now to create “reasonable expectations” that may limit room for manoeuvre in the future and check that nothing done or proposed now contradicts any reasonable expectations created in the past. Making a cogent, clear business case for pension changes is likely to be critical and communications should reflect this as well as being of good quality and compliant with legislation. Getting this wrong may be very painful.
Is it time for a new consensus on pensions?
The International Longevity Centre - UK (ILC-UK) calls on the next Government to set up a new independent “Pensions Commission” to look at the problem of retirement income adequacy in a holistic way and to bring back some certainty about the future direction of pensions policy in the UK built on consensus.
The ILC-UK’s report “Consensus revisited” draws on lessons learnt from the Turner Commission ten years ago, and recommends that the new Commission should:
- Have a core goal of ensuring adequate retirement incomes, by focussing on increasing saving levels, helping people work longer, understanding long-term care, and having regard to the impact of macroeconomic forces and other public policies
- Have repeated consultations with key stakeholders in each stage of the Commission, so that any new recommendations will already have stakeholder buy-in before the reporting stage
- Be independent from any political party but report to the Secretary of State for Work and Pensions, the Chancellor of the Exchequer and the Prime Minister in order to cut across any competing departmental priorities; and
- Be a one-off exercise to set the agenda for the next ten years
Comment
This report highlights many practitioners’ concerns that, after five years of policy upheavals, a new Government could once again make drastic changes to pensions legislation. An independent body free from a party political agenda could go a long way to solve this problem, and this report sets out many detailed and workable areas which such a body might give some stability to the pensions world. It will be interesting to see whether the next parliament will be ready to take on the challenge to hand over this power.
Can behavioural barriers for new pension freedoms be overcome?
The Association of British Insurers has set out what it sees as the behavioural barriers preventing pension savers from making use of the pension freedoms available from 6 April 2015, and provides recommendations on how the industry and regulators could help address the issue.
Its report, “Freedom and Choice in Pensions: A behavioural perspective” highlights the need to take into account the realities of the way people think and act when trying to engage with crucial decisions about retirement. These include:
- Perception of one’s own abilities in making financial decisions, risks of various financial products, and what others are doing
- Tendency to delay tasks that do not have instant rewards and disconnect with the future; and
- Disengagement when presented with a large amount of material, and inability to compare options that are not aligned with each other
The report argues that the new freedom and choices available from April are likely to exacerbate these behavioural barriers. It sets out recommendations that the Government, regulators, and the industry could do to help savers with decision processes, such as:
- Foster engagement with retirement planning at an earlier stage
- Maximise uptake of the Pension Wise guidance service
- Ensure content of Pension Wise guidance is behaviourally informed; and
- Facilitate a more user-friendly search process
Comment
This is a timely report which, if taken on board by pension providers and the Government in the near term, may go a long way in helping people close to retirement make better decisions. However, it would not be a surprise if these recommendations fall through the net.
Retirement 2050 –Identifying the challenges of a changing world
The Association of British Insurers has published a report calling for policymakers to look further ahead than the baby boomer generation and start thinking about how to help generations Y and Z to save and build a decent retirement.
Retirement 2050 - Identifying the challenges of a changing world looks beyond the current understandable focus on people at retirement age, arguing that generations Y and Z, ie those born after 1980, will not have the assets of their parents or grandparents and will be navigating a very different set of retirement challenges such that we should plan now for the best way to ensure the reforms also work for those saving now.
In particular, the report recommends that there should be exploration of:
- The pros and cons of allowing people to access their pension savings to fund a deposit for their first home, especially for generations Y and Z
- Restructuring tax relief so that people on low to middle incomes are more encouraged to save
- Taking the politics out of pensions, through an Independent Retirement Commission, providing analysis and shaping a national long-term savings strategy, so that the implications of an ageing society are assessed holistically
- Introducing auto-escalation, so that people’s pension contributions rise upon receiving a pay rise
- How best to reach the growing population of self-employed people
- The pros and cons of default retirement income products or advice to make sure people who don’t engage with their decisions still get a good outcome; and
- Giving people an overview of all their savings in one place on-line, including the state pension, so that they have a clear sense of what their preparation for retirement looks like
Comment
This is quite a shopping list, which if nothing else demonstrates that public pension policy operates in a continuum. Many of these are not new ideas, but none are being tackled right now. Perhaps some will be in the next Parliament?
Could “auto-protection” complement auto-enrolment?
The Centre for Policy Studies has called for the introduction of “auto-protection” under which those approaching the current “private retirement age” of 55 would have their DC pension pot automatically taken to a newly established not-for-profit national auction house for annuities, which would in effect make the current ability to exercise an open market option compulsory.
Michael Johnson, the author of Auto-protection at 55, argues that the Budget liberalisation from mandatory annuitisation, whilst welcome, raises legitimate concerns that some people may fail to purchase suitable retirement income products.
He also proposes to:
- Raise the private pension age from the current 55 to 65 by 2030-35
- Incentivise a five-year deferral of default pension by income tax exemption
- Integrate the guidance guarantee into the auto-protection process, to help savers select the most appropriate form of pension
- Enable the state to offer default private pensions; and
- Delay access to the 25% tax-free lump sum until the age of 60 or 65 – alternatively, it should be scrapped, but with accrued rights to it protected
Comment
Auto-protection is an interesting concept, but is unlikely to fly until and unless evidence starts to accumulate that individuals are taking poor decumulation decisions, with or without accessing Pension Wise.
HMRC publishes 2015/16 payroll guidance for employers
HM Revenue & Customs (HMRC) has updated a whole range of its guides ahead of the new tax year. Of particular interest to pension scheme administrators are:
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.
