Auto-enrolment changes pensions landscape – but for better or worse?
Auto-enrolment has caused a surge in active membership of occupational pension schemes but at the price of greatly reduced contribution rates according to the 2014 Occupational Pension Schemes Survey published by the Office for National Statistics.
The survey, which collects 2014 data from the majority of occupational pension schemes but not group personal pensions, shows that active membership of private sector DC schemes has jumped to 3.2 million (from just 1.2 million in 2013). Such a huge increase is impressive, but it has been accompanied by a drop in the average total (employer plus employee) contribution rate to such schemes – to just 4.7% of pensionable earnings (from 9.1% in 2013).
By contrast, the average total contribution rate to private sector DB schemes is nearly five times as much, at 20.9% of pensionable earnings.
Despite the surge in membership, the number of public sector active members of occupational pension schemes (5.4 million) remains higher than the private sector equivalent (4.9 million) – at least for now.
Comment
It is of course unfair to compare the contribution rates in the early stages of auto-enrolment as the full level of minimum DC contributions will only be implemented from October 2018. But the diversity in cost between the average DB and DC schemes is there for all to see – and will be felt when the next generation come to retire.
TUC report flags concern over increasing detachment of executives from corporate pension provision
In this year’s TUC report on directors’ pensions in the UK’s FTSE 100 companies, the report’s authors note that whilst executives continue to receive significant pensions-related rewards, this is increasingly in the form of cash top-ups, thanks in part to the impact of substantial cuts in the annual allowance and lifetime allowance over recent years. Whilst its annual survey of the disclosures in company reports reveals a number with substantial accrued pensions, the report notes that this is likely to decline as the last of the generation of executives who built up entitlements over long service go into retirement.
This links into what the authors state as the clear theme of the report – an increased detachment of executives from the pension provision available to the rest of the workforce, which the authors believe will limit the impetus for improvements to the quality of workplace pension schemes as a declining number of those around boardroom tables will have interests in them.
Comment
That executives are moving to cash top-ups is a finding that chimes with LCP’s Executive Pensions Survey released in July. Cash in lieu of pension has become king for the FTSE 100 executive. The end of the road for executive pensions, now becoming a certainty thanks to next year’s tapered annual allowance, could indeed have an adverse impact on the quality of workplace pension schemes.
HMRC Newsletter 72 – some new details on 2016 Lifetime Allowance protections and more
HMRC’s latest newsletter contains a few more snippets about the forthcoming fixed protection 2016 (FP16) and individual protection 2016 (IP16) associated with the Lifetime Allowance reducing from 6 April 2016, but HMRC acknowledges that it has not yet been able to provide as much detail as it would have liked. There is a promise of more information in October. In the meantime:
- HMRC reconfirms that the legislation to frame the protections will be the Finance Act 2016 (so we assume we will see draft legislation in November alongside the Autumn Statement and Royal Assent around July 2016 with the law taking retrospective effect). Individuals will not be able to register for the new protections until sometime after 6 April 2016. However, individuals intending to use FP16 will need to make decisions before that date since ”benefit accrual” after 5 April 2016 will invalidate/disqualify an individual from registering for FP16.
- HMRC states that the application process for FP16 and IP16 will be online only. A reference number will be provided to the member immediately on application; there will not be a paper certificate. There is no indication at this time whether the online process will do any sense-checking of the application (eg checking if the individual already holds other forms of pension tax protection).
Comment
6 April 2016 is thus a key date for decisions/actions for individuals, even if not for registration. The inability to register for FP16 before 6 April 2016 is likely to mean that affected individuals will not engage with the process until after that date. But, by then, they could already have lost FP16 if they are still accruing benefits.
The timing of the legislation creates challenges for communication for employers, as well as for trustees and administrators processing retirement cases in April to July 2016. But those challenges may be longer term if HMRC decides (as seems likely from past Newsletters (see Pensions Bulletin 2015/32) to set no long-stop deadlines on these registrations. Taking one example, the simple message to a new recruit after 5 April 2016 “if you have (already) registered for FP16 you might not want to join our scheme” will need to become long-term “if you are considering registering for FP16 and have not yet disqualified yourself then you might not want to join our scheme”.
The newsletter also covers several other topics including:
- A reminder that scheme administrators operating relief at source should submit the 2014/15 annual return of individual information by 5 October 2015. Failure to submit by this date will result in the suspension of any future interim payments. The 2014/15 return is particularly crucial because of the introduction of the Scottish Rate of Income Tax so HMRC says it will give scheme administrators three opportunities to submit this information successfully.
- An explanation of HMRC’s plans for relief at source to work alongside the Scottish Rate of Income Tax.
- Some RTI changes for benefits drawn using Freedom and Choice flexibilities.
Finally, there is another explicit statement that an overseas scheme’s presence on HMRC’s published list of Recognised Overseas Pension Schemes (ROPS) notifications does not guarantee that it is in fact a ROPS. So a scheme’s appearance on the list does not by itself satisfy the due diligence requirements of a UK scheme proposing to make a transfer to the overseas scheme. HMRC’s message on this latest newsletter reiterates what it said in last month’s newsletter (see Pensions Bulletin 2015/36).
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.
