- FRC finalises SMPI update
- Retirement Living Standards – PLSA updates its recommended targets for retirement planners
- HMRC further clarifies LTA abolition provisions
- DC small pots – Delivery Group launched by DWP
- Work and Pensions Committee hearing on fiduciary duty and climate
FRC finalises SMPI update
The Financial Reporting Council is going ahead with the increases it proposed in November 2023 (see Pensions Bulletin 2023/44) to the accumulation rate assumptions that it requires to be used in statutory money purchase illustrations (SMPIs). This means that the accumulation rate assumption increases by 1% for volatility groups 1-3, so the 1%, 3% and 5% rates respectively become 2%, 4% and 6%. But volatility group 4 remains unchanged with a 7% accumulation rate assumption. The FRC’s changes, as initially proposed and set out in version 5.1, will come into effect for “calculations performed on or after” 6 April 2024.
The FRC’s phrase “calculations performed on or after” 6 April 2024 requires some careful consideration at this revision since the 6 April date is close to many scheme year ends, such as 31 March and 5 April on which the illustration dates for a number of SMPIs operate.
The FRC has said, in its response to the consultation, that it is “aware of providers that have interpreted the ‘date calculation is performed’ to be the same as the ‘illustration date’”, going on to say that it is “comfortable that this approach is consistent with the intention of AS TM1 v5.0”.
Under this interpretation SMPIs produced with 31 March 2024 and 5 April 2024 illustration dates will need to continue to use version 5.0 with its lower accumulation rates and the volatility calculation will have to be by reference to the 5 years ending on 30 September 2022.
But the FRC also says in its response to the consultation that “it is possible to take a different interpretation whereby the ‘date calculation is performed’ is different to the ‘illustration date’”.
So under this, if ’calculations performed’ is interpreted as being when the calculations are actually done, given the time that may elapse from a scheme year end before this happens, the same SMPIs produced with 31 March 2024 and 5 April 2024 illustration dates could be using version 5.1 with its higher accumulation rates and the volatility calculation will be by reference to the 5 years ending on 30 September 2023, which could result in funds being placed in different volatility bands to the position a year earlier.
Comment
We understand that the FRC does not want, without further consultation (because of the impact on IT systems), to require all SMPI providers to align on a single approach, expecting how a particular provider has previously interpreted “calculations performed” for the purpose of determining the volatility of an investment in version 5.0 to also be used to determine when version 5.1 is to apply.
But this does mean that for 31 March 2024 and 5 April 2024 illustration dates very different illustrations could be delivered depending on how providers are interpreting ‘calculations performed’, with those new to volatility calculations (because they issued the 2023 SMPI before 1 October 2023) being able to issue their 2024 SMPI under either version 5.0 or version 5.1. We understand that the FRC is comfortable with either interpretation being used as long as the rationale for doing so is sensible and documented.
Retirement Living Standards – PLSA updates its recommended targets for retirement planners
The latest edition of PLSA’s Retirement Living Standards unsurprisingly finds that the cost of living in retirement has gone up since the last update a year ago (see Pensions Bulletin 2023/02) reflecting the particular rise in the price of food and energy for households, but also an increase in the desire for people to spend more time out and about with friends and family following the prolonged period of restrictions during the Covid pandemic.
The PLSA now says that the annual cost of typical retirement lifestyles is as follows:
- Minimum (“covers all your needs, with some left over for fun”) - £14,400 for a single person (£22,400 for a couple); these figures have increased from £12,800 and £19,900 respectively)
- Moderate (“more financial security and flexibility”) - £31,300 for a single person (£43,100 for a couple); these figures have increased from £23,300 and £34,000 respectively)
- Comfortable (“more financial freedom and some luxuries”) - £43,100 for a single person (£59,000 for a couple); these figures have increased from £37,300 and £54,500 respectively)
The figures are for outside London. Higher amounts are required if living in London, as set out in the full report,
The full report on the latest research once again provides more detail behind the headline numbers designed to help people come up with a realistic picture of what life in retirement could be like based on their financial circumstances.
The Pensions Policy Institute has separately published a technical report for the PLSA which found that large portions of the population are still not on track to hit minimum standards for quality of life in retirement, and that if anything the situation for those expecting to achieve the minimum or moderate targets may even have worsened.
Comment
Importantly, the PLSA makes it clear that the standards are intended to provide a rule of thumb guide based on common costs for many people in retirement. As such they should be the first step on the journey: ie to be used as a starting point to develop a personal target. When doing this it is important to check what is and isn’t included in the standards in order to maximise the effectiveness of any subsequent planning.
HMRC further clarifies LTA abolition provisions
HMRC has published its second lifetime allowance guidance newsletter, focussing on the necessary legislation to abolish the lifetime allowance from 6 April 2024 and clarifying existing provisions in response to queries received from the industry. This guidance builds on the commentary in the first newsletter published shortly before Christmas (see Pensions Bulletin 2024/01) and its Pension Schemes Newsletter 155, published in January (see Pensions Bulletin 2024/04).
The newsletter starts by setting out a series of frequently asked questions – grouped under five headings: lump sums and lump sum benefits, reporting requirements, overseas transfer allowance, protection and enhancement factors and transitional arrangements. The answers given include confirmation that further legislative changes will be made to resolve a number of unintended consequences in the draft Finance Bill, such as ensuring the new “pensions commencement excess lump sum (PCELS)” will be an authorised payment.
The newsletter then goes on to look at a few areas in more detail.
A significant section is devoted to transitional tax-free amount certificates, which allow individuals to provide evidence of the actual amount of lump sums taken before 6 April 2024, so these are used in the lump sum allowance calculations. Included is further guidance on how and when individuals apply for such a certificate, including confirmation that there is no opportunity to revert to the standard calculation once a transitional tax-free certificate has been granted and that while HMRC expects individuals to apply to the scheme from which the first lump sum is being paid post April 2024, it is possible for the application to be made to an alternative scheme instead.
There is a separate section in relation to the new PCELS payment for taxed cash out, which is only available when all of an individual’s lump sum allowance or lump sum and death benefit allowance has been used. HMRC notes that legislation will be amended ahead of 6 April to remove the ‘permitted maximum’ for this lump sum, which in some circumstances would have been far more restrictive than what is available under the current regime. It also confirms that a PCELS will remain payable only where an individual becomes entitled to it in connection with becoming entitled to a relevant pension. HMRC promises to provide further guidance and worked examples on the PCELS as soon as possible.
The newsletter concludes by noting industry Working Group meetings past and to come and also giving details of some of the topics that are likely to be addressed in future pension scheme newsletters, the next of which is due to be published next week.
Comment
This is another useful newsletter from HMRC, which is clearly looking to respond with alacrity to challenges made around how the new regime will actually operate in practice, especially where the legislation is inadequate or unclear. However, it is worrying that such uncertainties remain around many fundamental elements of the new regime with less than eight weeks to go before it comes into effect.
DC small pots – Delivery Group launched by DWP
The DWP has announced that it has launched the Small Pots Delivery Group which will provide recommendations on how best to implement the DWP’s intended multiple default consolidator approach to the DC small pots issue. The Group’s setting up was announced in the DWP’s November 2023 response to an earlier consultation (see Pensions Bulletin 2023/47).
The Delivery Group will be chaired by the DWP and has representation from several pension organisations as well as broader representative bodies (such as Which? and the Chartered Institute of Payroll Professionals). Under the Delivery Group will be the Pension Provider Expert Panel and the Technical/Administration Expert Panel. In November the DWP said that it would be aiming to provide an interim update by spring/summer 2024 with proposals following in late 2024 for ministerial consideration and decisions.
Comment
LCP will be participating in some aspects of this initiative. If you would like us to feed your views into the process please contact us.
Work and Pensions Committee hearing on fiduciary duty and climate
The Parliamentary Work and Pensions Committee is gathering evidence on the operation of the law on fiduciary duty for pension schemes with particular reference to climate change. To the best of our knowledge, this is not explicitly related to the Financial Markets Law Committee’s recent paper on this topic (see Pensions Bulletin 2024/05).
LCP has made a submission to the Committee which we hope will assist in the formulation of policy in this area.
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.
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