Slim pension pickings in the Autumn Statement
There were no big pension surprises in the Autumn Statement. It was widely anticipated that the Government would not use the opportunity to respond to the consultation on pension tax relief and the Treasury has now confirmed that the response will come in Spring in the 2016 Budget.
There were nevertheless some announcements of interest to the pensions community, as follows.
Basic state pension
The 2016/17 basic state pension has been confirmed as £119.30 per week – a 2.9% rise on the current rate of £115.95 per week.
Increases to the basic state pension are currently protected by the Government’s triple lock guarantee (of the higher of the increase in average earnings, the increase in CPI-measured prices and 2.5%). The 2.9% increase reflects the increase in the regular pay component of national average earnings over the 12 months to July 2015, but averaged over three months to this point. By contrast, the CPI (measured over the 12 months to September 2015) fell by 0.1%.
Comment
Ever since the earnings link was restored, it has failed to apply until now as either inflation or the 2.5% underpin have been higher. Now, with CPI inflation virtually zero, state pensioners will experience a substantial real terms increase in their pension.
Single tier state pension
The Government has set the starting level for the full rate of the new state pension at £155.65 per week. Those reaching State Pension Age from 6 April 2016 will be eligible.
Comment
This starting level is as expected and suggests that the Government intends to use the same earnings measure to increase it in future years as it applied to the basic state pension this year. It is not yet clear whether those who will receive the single tier state pension will benefit from the triple lock.
Auto-enrolment – phasing of money purchase contributions
The minimum contribution rate to money purchase schemes used for auto-enrolment had been due to increase significantly on 1 October 2017 and 1 October 2018. Both increases will now be put back to 6 April 2018 and 6 April 2019 respectively to simplify scheme administration for the smallest of employers by aligning the increases with the start of tax years.
Comment
Aligning contribution rates with tax years may also ease the implementation of a pension ISA style form of taxation for DC schemes should the Chancellor be minded to go down this route next April.
Dependants’ scheme pensions
Legislation will be introduced in the 2016 Finance Bill to simplify the test that takes place when a dependant’s scheme pension is payable.
Comment
The current test in law (applying to those who retired since 2006 and who die on or after age 75 so not yet impacting many) applies penalty taxes if the dependant’s scheme pension is large compared to the member’s pension at death. The test was intended to discourage individuals with large pensions using reshaping to avoid the Lifetime Allowance charge. But it is very flawed and potentially hits the wrong targets, as has been acknowledged as far back as Labour’s 2007 Budget. It is good to hear that the Government is now minded to address the issue.
Bridging pensions
Following the introduction of the single tier state pension, the Finance Bill 2016 will include legislation to enable the pension tax rules on bridging pensions to be aligned with Department for Work and Pensions legislation.
Comment
Tax law in effect limits the size of the bridging pension (designed to pay out between when an individual retires and (broadly) when they reach State Pension Age) by reference to the basic state pension. We assume that in future the limit will be by reference to the much higher single tier state pension, but we wait to see details.
Salary sacrifice
The Government remains concerned about the growth of salary sacrifice arrangements and is considering what action, if any, is necessary. The Government will gather further evidence, including from employers, on salary sacrifice arrangements to inform its approach.
Comment
The mood music has been quite consistently ominous for salary sacrifice for some time now. We would not be surprised if some sort of clampdown does emerge in the future, but the challenge is how to frame an appropriate measure.
Secondary market for annuities
The Government will set out further details on this measure, including the framework for the consumer protection package, in its consultation response this December (see Pensions Bulletin 2015/30).
Comment
The response had been expected soon. It may now be as early as next week.
Inheritance tax and undrawn pension funds in drawdown pensions
The Government will legislate in the 2016 Finance Bill to ensure a charge to inheritance tax will not arise when a pension scheme member designates funds for drawdown but does not draw all of the funds before death. This will be backdated to apply to deaths on or after 6 April 2011.
Comment
This is a technical point that has arisen as a consequence of the Government’s freedom and choice legislation. Hopefully the issue will shortly be resolved.
Disguised remuneration
The Government intends to take action against those who have used or continue to use disguised remuneration schemes and who have not yet paid their fair share of tax. The Government will “also consider legislating in a future Finance Bill to close down any further new schemes intended to avoid tax on earned income, where necessary, with effect from 25 November 2015”.
Comment
This is a curiously vague announcement. We wonder whether it means that any attack on unfunded employer-financed retirement benefit schemes announced in future will apply retroactively.
Pooling Local Government Pension Scheme Fund assets
The Government is to publish guidance for pooling Local Government Pension Scheme Fund assets into up to six British Wealth Funds, containing at least £25 billion of Scheme assets each. It is also now inviting administering authorities to come forward with their proposals for new pooled structures in line with the guidance.
Uprating of Pension Credit
The Government has confirmed that the single rate of the Standard Minimum Guarantee will rise in line with earnings by £4.40 to £155.60 per week, and the couple rate will rise by £6.70 to £237.55 per week.
The Savings Credit threshold will rise to £133.82 for a single pensioner and to £212.97 for a couple, which will reduce the single rate of the Savings Credit maximum by £1.75 to £13.07 and the couple rate by £2.68 to £14.75 per week.
Freedom and choice – DWP plays catch up with its regulations
We said last week that it seems that the Department for Work and Pensions legislation machine is cranking up after a quiet few months and now we have a second consultation paper, draft regulations and call for evidence.
In this there are some substantive changes and a lot of tidying up, nearly all of which is related to the freedom and choice agenda. We highlight the more significant below.
Second line of defence for occupational schemes
Since April the Financial Conduct Authority has required the providers of contract-based pension schemes to give personalised risk warnings to scheme members accessing their pensions, the so-called “second line of defence” (see Pensions Bulletin 2015/10). The DWP has now decided to put risk warnings for members of occupational pension schemes on a statutory footing through generic risk warnings, covering a number of scenarios.
Amendments will accordingly be made to the disclosure regulations so that trustees will be obliged to provide members with additional information in writing at a point after receipt of the retirement “wake up” pack and where they become aware that the member is considering, or has decided to, do any of the following with their flexible benefits:
- Transfer out of the scheme
- Purchase an annuity
- Take a lump sum; or
- Designate for the payment of drawdown pension
This additional information will be in the form of a “retirement risk warning”, to be given as soon as reasonably practicable, or in any event within seven days of becoming aware (although only one risk warning needs to be given in any 12 month period).
The draft regulations do not actually specify the content of the risk warning, but the consultation document states that it should include “those attributes, characteristics, external factors or other variables that increase the risk associated with how the members could access their pension savings”. These are already set out in the Pensions Regulator’s “essential guide” to communicating with members about the pension flexibilities published earlier this year (see Pensions Bulletin 2015/11).
The draft regulations also require a statement to be given with the risk warning that sets out the options available to the member under the scheme and asks the member to consider whether they have read the warnings and note the importance of doing so; and consider whether or not they have accessed pensions guidance or independent advice and note the importance of doing so.
Comment
We seriously doubt the necessity of putting what are already best practice guidelines set out by the Pensions Regulator onto a statutory footing. Another statutory disclosure requirement is not going to prevent sub-optimal decision making by members.
Alternative route into the Pension Protection Fund
It became apparent from the Olympic Airlines insolvency that there is a gap in PPF coverage for UK pension schemes sponsored by some overseas employers that become insolvent. Last year (see Pensions Bulletin 2014/27) the DWP legislated narrowly to get the Olympic members into the PPF, but we have been awaiting a wider fix for some time. We may now have it.
In the consultation paper the DWP proposes that the existing mechanism for an alternative route into the PPF be widened to cover, in particular, an employer whose “centre of main interests” is in an EU member state outside the UK. In this case and where insolvency proceedings have been opened against the employer in its home country and it does not have an “establishment” within the meaning of EU insolvency law in the UK, an application may be made to the PPF Board to get the scheme into the PPF.
Comment
We welcome that the DWP has finally acted to give members of schemes directly sponsored by EU employers comfort that they will be eligible for PPF compensation if the employer fails.
Pensions and divorce
A number of changes are proposed in this area, consequential to the “freedom and choice” legislation set out in the Pension Schemes Act 2015 and the Taxation of Pensions Act 2014. They include the following:
- The pension credit regulations and the independent advice regulations are to be amended so that an ex-spouse with a pension credit following a pension sharing order is subject to the same requirements as any other member to obtain independent financial advice before transferring or converting “safeguarded rights” (ie benefits which are neither money purchase nor cash balance) into benefits which may be drawn flexibly
- Where a member has an earmarking/attachment order in relation to his benefits, schemes will be required to notify the ex-spouse within ten days of receiving a request from the member to draw benefits. This applies to drawing benefits in any permitted form and the ex-spouse must be told in which form the benefits are to be drawn
Call for evidence about the valuation of guaranteed annuity rates
“Flexible benefits” as defined in DWP legislation include designs where the benefits accumulate on a money purchase or cash balance basis, but have a guaranteed annuity rate built in. There have been some difficulties around how to value this type of benefit for the purpose of determining whether or not the £30,000 threshold for obtaining independent financial advice before transfer or conversion is reached.
The DWP is requesting evidence as to the best way to value these benefits for the purpose of the test. It is also suggesting that should any changes be made, members should remain fully aware of the value of the benefits that they may be surrendering.
Comment
All in all, a considerable package, which proves that the freedom and choice legislation was so far encompassing that Government could not and did not have everything in place in plenty of time for schemes and providers to be able to fully deliver it in April 2015.
Regulator consults on refreshed DC Code
The Pensions Regulator has launched a consultation on its long-awaited revised Code of Practice for occupational defined contribution (DC) trust-based schemes, stating that the shorter and simpler Code will better support schemes “offering money purchase benefits as they adapt to major reforms introduced earlier this year”.
The draft Code is split into six broad areas – the trustee board; scheme management skills; administration; investment governance; value for members; and communicating and reporting.
The length of the current Code had been a cause for concern. This is acknowledged in the accompanying consultation document which also states that the new Code is intended to be clear and unambiguous and, as far as possible, contain all the standards of conduct and practice that the Regulator expects of trustees of such schemes.
The new Code reflects the latest legislative position, on which there has been significant change since the current Code was introduced just two years ago (see Pensions Bulletin 2013/49). Much of the regulatory update reflects the charge cap and governance regulations (see Pensions Bulletin 2015/14), but the draft Code also has references to the new “freedom and choice” tax flexibilities, albeit limited as the Regulator has chosen not to include a dedicated section on decumulation, including flexible access to benefits.
Usefully, the draft Code contains many references to “the law requires”, kept distinct from the “we expect” language used to signal the Regulator’s expectations. On the latter, the draft Code no longer refers to the infamous 31 “quality features” that are in the current Code. But in the accompanying consultation document the Regulator states that schemes which are already performing well against the quality features should be in an excellent position to introduce the new chair’s statement required by legislation which “should be viewed as a starting point for improving the quality of schemes”. There is also a hint that the quality features will reappear in the “how to” guidance that will accompany the new Code and will itself be consulted on in spring 2016.
Consultation on the Code is open until 29 January 2016. The new Code will not take effect until next summer and until then trustees should continue to comply with the requirements of the existing Code. However, in the light of the new legal requirement to produce the chair’s statement, the Regulator no longer expects trustee boards to produce voluntary governance statements demonstrating how their scheme has performed against the DC quality features set out in the current Code.
Comment
The draft Code is a significant improvement on that issued in 2013 with a much more comprehensive feel to it – once settled it should earn its keep on a DC scheme trustee’s bookshelf. We are also pleased that the Regulator has taken on board feedback that the current Code is too long and complex (see Pensions Bulletin 2015/27).
Is competition in asset management working effectively for investors?
This is the subject of a “market study” launched by the Financial Conduct Authority via 47 pages of terms of reference. The study into the operation of the asset management market is conducted under the FCA’s competition law powers and has the potential to result in sweeping legal and regulatory changes. While the terms of reference are not out for formal consultation, the FCA states that it welcomes any comments on the issues raised by it by 18 December.
The initiative covers both the retail and wholesale asset management industry. Of the £6.6 trillion under management in the UK, going on half is managed on behalf of pension funds. The outcome could therefore be of major importance to pension scheme trustees.
The FCA asks three big questions:
- How do asset managers compete to deliver value
- Are asset managers willing and able to control costs and quality along the investment chain
- How do investment consultants affect competition for institutional asset management
The FCA is also interested in how these topics may feed into barriers to innovation and technological advances.
The FCA states that if competition is not working well then it may intervene, through some mix of rule-making, introducing firm-specific remedies or enforcement action, publishing general guidance or proposing enhanced industry self-regulation. It also refers to the nuclear option of a “market investigation reference” to the Competition and Markets Authority.
The FCA aims to publish an interim report in summer 2016, setting out its analysis and preliminary conclusions, followed by a final report in early 2017.
Comment
As befitting an investigation into such a large and complex industry it will take a long time to complete. The eventual outcome may result in dramatic changes to the asset management landscape.
Time is running out to review employer surplus refund provisions
Occupational pension schemes could lose the ability to pay refunds of surplus to sponsoring employers if, before 6 April 2016, their trustees have not passed a resolution confirming that such payments are allowed (see Pensions Bulletin 2015/38).
Although the overall deadline is 5 April 2016, members must be given three months’ notice of the intention to pass this resolution. Any schemes that have the power to make such payments and wish to retain it will therefore need to notify scheme members no later than 4 January 2016 (so in practice by the end of this year). Those who think they may be affected may therefore want to urgently check with their legal advisers whether a resolution is needed.
Comment
Whilst it is the trustees who make the resolution, the sponsoring employers have most to lose. Affected employers and trustees may therefore want to work together to ensure that they have completed any necessary tasks to allow future refunds of surplus.
Statutory revaluation and indexation confirmed
The Order has now been made setting the statutory minimum revaluation of deferred pensions other than GMPs for those reaching normal pension age in 2016. The same Order also sets, indirectly, the statutory minimum increases for pensions in payment in 2016.
The revaluation percentages within the Occupational Pensions (Revaluation) Order 2015 (SI 2015/1916) reflect the overall rise in the Consumer Prices Index (CPI) from September 2010 to September 2015 (see also the explanatory memorandum) and movements in the Retail Prices Index (RPI) prior to this.
The one year Order for revaluations subject to both the 5% cap and the 2.5% cap is 0.0% by virtue of the zero floor applying when inflation is negative (the CPI fell by 0.1% in the twelve months to September 2015).
These one year Orders also form the basis for so-called Limited Price Indexation (LPI) for pensions in payment and so the 5% LPI increase and the 2.5% LPI increase will also both be 0.0%.
DB transfer quotations increase
LCP is monitoring the pattern of transfer quotations and payments for the DB schemes it administers, to see how things might be changing following the introduction of Freedom and Choice.
For the six months to 30 September 2015, compared with the same period last year:
- The number of quotations increased from 13 to 21 per 1,000 deferred members
- The average transfer value quoted increased from £180,000 to £255,000; and
- The average age of members requesting quotations increased from 50 to 52
It is too early to say how take-up rates are changing because of the time lag between quotation and payment, particularly because the advice requirements introduced in April 2015 may have caused delays. However, there is recent anecdotal evidence that more transfers are going ahead, some of them very large.
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.
