Pensions Bulletin 2015/06

DWP’s finalised charge cap plans to “save average earner” £100,000 over working life

Substantial cost savings for pension savers are forecast by the Department for Work and Pensions (DWP) as it completes the delivery of its policy of capping charges at 0.75% for default funds in most money purchase auto-enrolment schemes. According to the DWP, a saving of as much as £100,000 over an average earner’s working life is possible.

To achieve this, on Wednesday pensions minister Steve Webb announced he was laying draft regulations, which will take effect from 6 April 2015, “to ensure value for money” in money purchase benefits provided through occupational pension schemes. Alongside this, the DWP has also published its response to the October consultation (see Pensions Bulletin 2014/44).

There have been relatively minor changes to the regulations since the consultation in October and we direct the reader to Pensions Bulletin 2014/44 for a detailed analysis of the policy intentions. Here we highlight the most significant changes made to the final regulations.

Charges

• Changes have been made to the definition of a “default arrangement”. For example, the Government has made amendments so that defined benefit schemes offering money purchase AVCs are not caught within this definition. Furthermore, where a member’s AVCs are invested in a scheme which is not used for any jobholder of their employer, this scheme will also not count as a “default arrangement”, however where AVCs are invested in the same arrangement that is also used as a qualifying scheme for other workers then the charge cap will apply to such AVCs
• A new “prospective” method will be permitted to verify charge cap compliance. Under this method it is assumed that a member does not make any contributions or withdrawals and the value of the member’s funds does not change. Instead the effect of the scheme’s charges is projected over the forthcoming year and the average of certain reference point values taken. The charges deducted over the year are then divided by the average fund value and that percentage has to be lower than the charge cap to be compliant
• To avoid self-selection risk and the need for individual underwriting, costs that are solely associated with providing death benefits will be excluded from the charge cap
• The ban on active member discounts (AMDs) will no longer be limited to those charging structures subject to the default fund charge cap

Governance

• The requirement that trustees must appoint a chairperson is modified so that it does not apply where a scheme already has a chair in place or, for example the chair is appointed by the employer
• There is also a new easement so that where the first annual governance statement covering the period from 6 April 2015 to the end of the next scheme year is three months or less then that statement can be rolled into the following year’s statement (which would therefore cover more than 12 months)

Comment

We said in October that the DWP was proposing a lot within an ambitious timetable. The amendments made to the final regulations seem sensible. Trustees, managers and advisers of affected money purchase schemes now need to take action to ensure compliance by April.

FCA finalises governance rules for workplace personal pension governance

Hand in glove with the DWP’s announcement covering governance in occupational schemes, the Financial Conduct Authority (FCA) has finalised its own rules requiring providers of workplace personal pension schemes to set up and maintain independent governance committees (ICGs). The final rules are virtually identical to those published for consultation last August (see Pensions Bulletin 2014/32) and are intended to be aligned with the DWP’s regulations “to ensure similar expectations for contract-based workplace pension schemes and occupational schemes”.

The FCA is still to publish its corresponding part about charges in workplace personal pension schemes to tie in with that part of DWP’s announcement. The FCA’s consultation about this was covered in Pensions Bulletin 2014/46.

DC snapshot confirms active membership now outstrips DB

The Pensions Regulator’s latest annual report on the DC landscape has confirmed what the National Association of Pension Funds (NAPF) found in its latest annual survey (see Pensions Bulletin 2014/51) being that auto-enrolment has now pushed active DC membership numbers past those of DB schemes.

DC trust: a presentation of scheme return data is a snapshot of the current landscape of occupational trust-based DC pension provision in the UK, based on data from 40,000 private sector schemes. It analyses the information that these schemes are required to provide to the Regulator.

This year’s key findings include:

• The total number of DC memberships of occupational schemes with 12 or more members increased by 80% last year to over 4.5 million
• Active membership increased by 140% (from 1.3 million to over 3 million)
• There are 300 DC trust schemes being used for automatic enrolment. Of the 70 master trusts, 20 are used for automatic enrolment and collectively hold more than 2 million members
• Reported assets in non-micro (12 or more members) DC schemes increased by 11% (from £26 billion to £29 billion)
• DC schemes received net transfers of £398 million (transfers in £591 million, transfers out £193 million). 60% (£365 million) of transfers in were to schemes with 5,000 or more members
• Micro schemes (schemes with 2 to 11 members) membership numbers continued to reduce (by around 3% – schemes dropped from 35,600 to 34,400 and membership dropped from 102,000 to 99,000)

The data itself comes from information supplied via the scheme registration and scheme return processes and was extracted as at 31 December 2014.

PPF publishes guidance on certifying guarantor strength

The Pension Protection Fund (PPF) has sent trustees a briefing note on guarantor strength with respect to contingent assets, which re-iterates the issues trustees need to address before certifying an amount that they consider the guarantor can pay if the guarantee is called upon. The note contains examples of cases where the PPF rejected trustees’ certifications in the previous levy year.

The note also points out that for the current levy year (2015/16) the PPF plans to test a “substantial number” of guarantees, with reviews generally done by an external financial advisor before the PPF takes a decision. Significantly, the PPF points out that although it has the power to grant partial recognition, it will only do so in exceptional circumstances. In the great majority of cases, even where the guarantor is considered to be good for a lower sum, the asset will be disregarded entirely.

Specific factors the PPF has pointed out in this note include:

• Consideration of whether the guarantor can continue as a going concern after the insolvency of the employer, and if not, whether the guarantor can meet its own section 75 debt and liabilities to other creditors
• Any cash balances or undrawn finance facilities that the guarantor may currently have may no longer be available if the employer becomes insolvent
• Trustees need to consider assets of the guarantor after inter-company debts are reconciled, as often inter-company debts held by the guarantor may not be collectable once a group company becomes insolvent. Care needs to be taken when considering consolidated accounts
• Once one group company becomes insolvent, other group companies may become less valuable or cannot be disposed of to meet the guarantee as the market perception of the group changes. There is also a chance that there is cross-default across the group
• The value of an asset may be affected by whether a market exists for it and the speed and circumstance in which it is sold. A full breakdown and stress testing of the asset on the sale basis is expected

Comment

As the certification deadline approaches in less than two months, this publication serves as a timely reminder that there is a lot of work for trustees to go through before they can provide the required certification. It is no longer enough for trustees to consider the guarantee is good just because the guarantor is large; trustees must certify no more than an amount they think the guarantor can provide, and make comprehensive records that back up their decision.

Giving advice on safeguarded benefits – FCA Order laid

“Appropriate independent advice” in relation to certain transactions involving turning “safeguarded benefits” (broadly defined benefits) into flexible benefits (broadly money purchase benefits), is to be regulated by the Financial Conduct Authority (FCA).

This is the effect of a draft Order following which the FCA will provide guidance to advisers about their obligations and will update its rules.

Under measures contained within the Pension Schemes Bill, advice will be required, from 6 April 2015, where the transaction is any of conversion, transfer or payment of an uncrystallised funds pension lump sum. However, the Government has announced that such advice will not be required where the cash equivalent transfer value of the proposed transaction does not reach a £30,000 threshold.

Pension Tracing Service expanded

The Department for Work and Pensions has announced that it is expanding the Newcastle-based Pension Tracing Service in anticipation of an upsurge in public queries following the introduction of the Government’s retirement reforms in April.

The Pension Tracing Service exists to help people find their lost pension pots, eg from past employments. The anticipation is that the new retirement freedoms will encourage more people to actively try and track down old pension entitlements – with estimates suggesting there could be as many as 50 million lost or dormant pots by 2050.

Annual Allowance Order finalised

The latest Annual Allowance Order, laid before Parliament just before Christmas (see Pensions Bulletin 2014/52), came into force on 28 January.

However, the provisions of The Finance Act 2004 (Registered Pension Schemes and Annual Allowance Charge) (Amendment) Order 2015 (SI 2015/80), actually have effect from a whole range of dates including from the same day, six months thereafter and retrospectively for pension input periods ending in tax year 2011/12 onwards.

PPF levy ceiling rises slightly

The ceiling that the estimated overall pension protection levy cannot rise above has been increased by 0.6%. This is the substance of an Order made by the Department for Work and Pensions.

The Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling) Order 2015 (SI 201/66) provides that the ceiling for the 2015/16 pension protection levy will be £947,610,293. The increase follows that of the general level of earnings – and is by reference to the year ending July 2014.

PMI says no to merger with NAPF

The proposed merger of the Pensions Management Institute (PMI) with the National Association of Pensions Funds (NAPF) which was announced by both bodies on 10 October 2014 (see Pensions Bulletin 2014/42) has been called off by the PMI.

This is despite “extremely positive” discussions and no issues of concern being raised on either side. In the end the PMI Board and Council decided to “pursue other strategic priorities”.

Comment

Quite why the PMI has decided not to proceed has not been made public, but this is most definitely the right decision. Both organisations have significant strengths, but to weld a professional body together with a lobbying organisation was surely always a step too far.

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.