Government puts defined ambition, collective benefits and pot follows member on hold
In a written statement made to the House of Commons on 15 October, the pensions minister Ros Altmann cited the need to focus on the single tier state pension, auto-enrolment and the freedom and choice agenda as justification for her Department not proceeding at the current time with three other significant reforms – defined ambition, collective benefits and the automated transfer regime for small money purchase benefits known as “pot follows member”.
The basic architecture of defined ambition and collective benefits is set out in the Pension Schemes Act 2015, whilst that for pot follows member is contained within the Pensions Act 2014.
Much work needs to be done at a detailed technical level before the previous Government’s risk sharing agenda can be finalised, particularly in relation to collective benefits. It is not clear whether any progress had been made following Royal Assent earlier this year. By contrast, a significant amount of work had been undertaken in bringing into being measures to tackle the increased proliferation of small money purchase pots through an automated transfer regime, with a first phase expected to launch in October 2016. Draft regulations were expected around now, but these will clearly now not emerge.
Comment
The announcement is not a huge surprise, but what everyone will be asking is whether this is a genuine holding measure, or whether in effect it signals the abandonment of policies that were close to the heart of Ros Altmann’s predecessor. Right now it seems that policy work on defined ambition and collective benefits could be reactivated at some future point, but that the money purchase pot may well not be following the member.
“Freedom to choose” is not sufficient
People must in fact have the freedom to make “well-informed” choices, is the overarching message delivered by the House of Commons Work and Pensions Committee in its report, published on 19 October, on its inquiry into the guidance and advice on offer in the light of the “freedom and choice” changes introduced in April (see Pensions Bulletin 2015/32).
The Committee considered a host of oral and written evidence and produced a report detailing areas in which it considers shortcomings in the provision of guidance and advice could be detrimental to the success of the new freedoms, along with recommendations on how to set about making improvements.
The Committee strongly urges the Government to clarify the distinction between guidance and advice, to reduce the use of jargon and complex pricing structures for those trying to withdraw funds and also to clearly define “safeguarded benefits”. The Committee also reiterates concerns around the increased potential created for scamming and, while recognising measures already put in place to mitigate this, advocates more powerful anti-scam publicity and stricter reporting requirements for pension providers.
The Committee also expressed dissatisfaction with the information made available on the use of both the new pension freedoms and the Pension Wise guidance service. It urges that a research program tracking consumer outcomes is set up as a matter of priority and findings made freely available. However, the Committee also believes that take-up of Pension Wise has been lower than anticipated, so has also made recommendations on how to potentially increase this in the meantime. In particular it urges that the Pension Wise website (which it describes as “not fit for purpose” and “static”) is upgraded to enable more interaction and provide a more holistic, personalised service including an indicative income calculator and, in time, a pensions dashboard so that people can see all their pensions savings in one place.
The report concludes with the Committee’s “promise” to keep a watching brief on pension freedom over the course of the Parliament and monitor developments both on the issues around advice and guidance as discussed above and also other areas of concern such as charges, access and transfer times as deemed necessary.
Comment
Scattered throughout the report are references to evidence given by various prominent figures in the pensions industry and it is interesting to see that many of those were keen to see the Government accept some responsibility for confusing communications. Singled out for special mention were implying that pension pots could be used “like bank accounts” (while neglecting the very different tax liabilities involved) and introducing complex jargon such as the notorious “uncrystallised funds pension lump sums”.
Pensioners have never had it so good
So said Paul Johnson, the director of the Institute for Fiscal Studies, at the inaugural annual lecture of the Pensions Management Institute on 20 October.
According to IFS research, pensioners now have higher incomes on average than the rest of the population, once housing costs and family composition are taken into account. Pensioners’ incomes have continued to rise post-recession as the incomes of working age households have fallen.
Modelling by IFS researchers suggests that pensioners’ incomes will continue to rise for at least the next decade. However, it is unlikely that later generations will do as well for a variety of reasons, including less generous state and occupational pensions.
Mr Johnson outlined some policy priorities for making state and private pensions more stable and sustainable. These included:
- Ending the triple lock on the state pension given that at some point it will prove to be “prohibitively expensive” – he also said that it adds a “bizarre degree of randomness” into the future level of state pensions which will depend not on overall increases in prices or earnings but on the timing of those rises
- Continuing increases in state pension age
- Finding some way to share and socialise risk in private sector pension saving; and
- Bringing stability and rationality to the taxation of private pensions which has suffered from far too frequent changes, with little rationale, making long-term planning impossible
In relation to the now closed consultation on pension taxation he said that providing people with tax relief for pension saving when contributions are made, and charging tax (including national insurance) on withdrawal, is the efficient, neutral basis for personal taxation.
DWP consults on further adjustments to allow for the ending of contracting out
The Department for Work and Pensions has launched a short consultation around a draft Order that for the most part comprises minor and technical changes to other secondary legislation to take account of the abolition of contracting out in April 2016.
The draft Pensions Act 2014 (Abolition of Contracting-out for Salary Related Pension Schemes) (Consequential Amendments) Order 2016 ranges across numerous DWP regulations amending definitions and changing tenses so that they continue to work post-abolition, but of particular significance are the following:
- Disclosure of information – the requirement for schemes to inform members, where appropriate, “which relevant employment is, and which is not, contracted-out employment” is to be revoked from 6 April 2017 because the DWP is of the view that schemes will, under the current “material change to basic scheme information” requirements, have by then notified members of the abolition of contracting out
- Transfers between formerly contracted-out schemes – existing regulations will continue to allow transfers of GMPs and Section 9(2B) rights from former salary related contracted-out schemes to schemes that were never contracted-out, provided that the member accepts that the benefits provided by the receiving scheme may be in a different form and amount to those which would have been payable by the transferring scheme; and that the receiving scheme is not compelled to provide a survivor benefit following the transfer
- Auto-enrolment – formerly contracted-out schemes will need to retain their contracting out certificate for six years after abolition as part of evidencing that they met the relevant quality standard in relation to auto-enrolment before 6 April 2016
Despite the length of the proposed Order there remain some topics that have yet to be addressed. These include how best to preserve the Reference Scheme Test (RST) for RST underpin schemes and how best to adjust the DWP’s trivial commutation rules to be consistent with HMRC’s rules. The DWP promises to communicate the outcome of the first issue when it publishes the response to the consultation on the 2016 Order and to address the second through a separate consultation in due course. It is silent on guidance for ending contracting out which has previously been promised for early 2016. There is also no news on DWP’s promise to consult on new proposals to apply restrictions on post-April 2016 amendments to Section 9(2B) rights following its decision earlier this year (see Pensions Bulletin 2015/32) to withdraw its previous proposals.
Consultation on the draft Order closes on 16 November.
Comment
Contracting out has been one of the building blocks on which DWP law has been built since 1978, so it is no surprise that much of the law needs tweaking so that it continues to operate effectively in the years following abolition to protect contracted-out rights that have been built up. The proposals seem sensible, but no doubt other issues will arise in the run up to April 2016 and beyond.
Pension Wise to be extended again
The Bank of England and Financial Services Bill which has been introduced into the House of Lords by the Government, is intended amongst other things to strengthen the governance and accountability of the Bank of England and extend the principle of personal responsibility to all sectors of the financial services industry.
Of particular interest to the pensions community is the measure included in the Bill to extend the scope of the Government’s pension guidance service “Pension Wise” to enable it to offer guidance to annuitants considering transferring the right to payments under their annuity to a third party. The Bill also gives the Treasury the power to specify what annuities come within the scope of this provision, and what interest an individual must have in an annuity to be entitled to the guidance.
Comment
The opportunity to reflect on safeguards and processes such as this to frame an effective secondary annuity market is precisely why the announcement in the Summer Budget that the launch of this market would be delayed by a year (see Pensions Bulletin 2015/30) was welcomed.
NAPF changes its name
The National Association of Pension Funds (NAPF) has now been rebranded the Pensions and Lifetime Savings Association (PLSA).
The change is intended to reflect the fact that as people are now working later in life, funding retirement in different ways and the lines are blurring between work and retirement, between pensions and other forms of saving and between scheme and saver responsibility, there is a need for an organisation to look beyond pensions.
And finally…
Whilst many in the UK are booking up to rediscover the charm of a particularly wayward wookie, the Department for Work and Pensions is introducing us to Workie whose aim is to change the country’s perception of pensions in the workplace. This equally furry creature will be encouraging everyone, including those working for small and micro-employers, to know that they may be entitled to be enrolled into a workplace pension scheme. However, we suspect that the force will not be with it.
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.
