BHS collapse triggers two inquiries by MPs
On 27 April 2016, in the light of the collapse of British Home Stores and the substantial deficit in its DB pension scheme, the House of Commons’ Work and Pensions Select Committee announced that it is to carry out an inquiry into pension regulation and the Pension Protection Fund.
The Committee is to consider:
-
The adequacy of DB pension scheme regulation and regulatory powers, in general and specifically in relation to the pension schemes of complex and multi-national companies
-
The use of these powers by the Pensions Regulator in recent cases, including BHS
-
The resourcing and prioritisation of the Regulator’s supervisory work
-
The implications of the regulatory approach for company behaviour, including whether it mitigates or incentivises moral hazard
-
The sustainability of the PPF; and
-
The fairness of the PPF levy system and its impact on businesses and scheme members
A number of witnesses have been invited to attend and proceedings are expected to start next week.
A separate Parliamentary inquiry into the sale and acquisition of BHS has been launched by the Business, Innovation and Skills Committee. This is to focus on the role of advisers in the sale and purchase of BHS and examine the legal obligations of company directors in this process. The witness list is to be decided in due course in consultation with the Work and Pensions Committee.
Three more investigations relating to BHS are also underway – by the Insolvency Service, the Pensions Regulator and the Serious Fraud Office – with calls being made for the Financial Reporting Council to also take action.
Comment
The events at BHS and these inquiries have attracted a great deal of media attention. In relation to the Work and Pensions Committee’s inquiry, whilst the specifics of BHS are likely to come under the spotlight, particularly the role played by key individuals, it will be important for the MPs to provide some separation between this and their assessment of whether, in general terms, the protective framework for DB schemes, in place for just over ten years, remains fit for purpose.
Survey shows lukewarm support for the secondary annuity market coupled with unrealistic expectations of how it will operate
A survey commissioned by the Institute and Faculty of Actuaries of over 2,000 annuitants has exposed some of the difficulties facing the launch of this market in April 2017.
Although 66% of respondents said that they were aware of the proposals for a secondary annuity market, only a minority thought that it was a good idea either generally or specifically for them. 18% said that they were likely to sell their annuity income in return for a cash lump sum.
In a further sign of the difficulties that will face this market:
-
The majority of those surveyed struggled to say whether or not they would buy another retirement product with their proceeds
-
There was an unrealistically high expectation of the likely proceeds when expressed as a percentage of expected future annuity payments, with 41% of respondents not being willing to accept less than 100%
-
The appetite for independent financial advice (which will be compulsory other than for those whose financial circumstances meet certain criteria) was mixed and the amount willing to be spent on it was unrealistically low; and
-
There was some reluctance to provide medical information to firms seeking to buy annuity income
The survey also revealed that a clear majority of those likely to sell their annuity income wish to organise the sale themselves.
Comment
The statistics contained within this snapshot are of particular relevance given that this Treasury policy has been launched with little prior evidence gathering and has clear risks of consumer detriment. As the blueprint progresses during 2016/17 it will be interesting to see whether any future consumer surveys show more realistic expectations of how the market is likely to operate and whether attitudes to potential participation change.
Legislation banning early exit charges and extending guidance and advice requirements enacted
The Bank of England and Financial Services Bill that was introduced to the House of Lords last October (see Pensions Bulletin 2015/45) was enacted on 4 May 2016. During its passage through Parliament, a number of extra clauses were added to the Bill and the provisions that will come into force include:
-
Secondary annuity market – extending 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. In addition, the FCA will be required to make rules requiring specified authorised persons to check that the individual has received “appropriate advice”, with the Treasury empowered to provide for an exemption in relation to individuals whose financial circumstances meet certain (not yet specified) criteria
-
Authorised independent advice – extending the definition of authorised independent adviser in relation to conversions and transfer of certain safeguarded benefits to include “appointed representatives” of authorised financial advisers
-
Early exit charges – a duty on the Financial Conduct Authority to limit early exit charges for both contract-based and trust-based pension savers seeking to access the new pension freedoms. The clause in respect of trust-based schemes was only proposed late in the Bill’s passage following an announcement by the Chancellor (see Pensions Bulletin 2016/02), but operates similarly to the corresponding clause in respect of contract-based annuities. The intention is that the cap is implemented by the end of March 2017. The FCA will be responsible for setting the level of the cap and will consult on this in due course
Comment
There are some interesting building blocks in this Act, but the nature of the detail to come remains unclear – such as which individuals will not need to obtain advice before offering up their annuity income to a third party.
Adjustments to the Financial Services Compensation Scheme alter some pension trustees’ eligibility to claim
Changes to the rules governing the operation of the Financial Services Compensation Scheme will impact the eligibility of certain DC and SSAS trustees to claim on it. This is one of three sets of changes proposed by the Financial Conduct Authority last November which have now been finalised and are in force from 29 April 2016.
Under the new rules:
-
Trustees of occupational pension schemes sponsored by large employers will be eligible to claim on the FSCS in respect of money purchase benefits; and
-
Trustees of small self-administered schemes providing defined benefits sponsored by large employers will no longer be able to claim on the FSCS
Until now, in respect of occupational pension schemes, eligibility was restricted to claims in respect of schemes (whatever the benefits provided) sponsored by small employers.
The rationale for the first change is that the size of the employer is not likely to be relevant in the case of money purchase benefits as the employer is not guaranteeing payment of the pension. It is expected to be of particular benefit to members of master trusts which have significantly increased in popularity as a result of auto-enrolment. The rationale for the second change is to provide consistency of treatment between all occupational pension schemes providing defined benefits that are sponsored by large employers.
These changes have come ahead of a review of the FSCS funding model and compensation limits planned for later in 2016.
Comment
The ability of trustees looking after DC benefits to claim in relation to the failings of an authorised firm are of interest as under the FSCS’s rules each non-pensioner member could potentially receive up to £50,000. The perils covered include receiving bad or misleading advice, negligently managing investments and committing fraud.
FRC finalises 2016/17 pension levies
The Financial Reporting Council has finalised its plan, budget and levy for 2016/17. There is no change in respect of those aspects previously reported (see Pensions Bulletin 2015/54). In particular, the pension levy has been set at £2.95 per 100 members, with only schemes with at least 1,000 members required to pay.
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.
