Pan-European regulation for personal pension schemes takes the next step
EIOPA, the European pensions regulator, has now worked up draft advice to the European Commission on how to bring about a single market for personal pension schemes, with some potentially important implications for UK domestic provision. This is the latest in a series of developments in this area (see Pensions Bulletin 2015/31) and may in turn generate a proposal for EU legislation.
There are two linked key questions addressed by EIOPA – how best to empower a single market for personal pensions across the EU and whether and the extent to which regulation specific to domestic personal pension schemes should be standardised.
Following the earlier consultation, EIOPA intends to recommend that the single market is best empowered through a ‘’second regime” – such pan-European personal pension products being licensed to operate across the EU. The alternative of harmonising the many divergent national regulations is felt to be impossible, or at least sub-optimal. This is because there is such a diversity of providers in the EU that they may be subject to regulation as pension schemes, insurance companies, asset managers or banks.
But EIOPA is of the view that this second regime is only feasible if a degree of standardisation is accepted across all domestic markets and this is the essence of the current consultation. Following further research and discussion with a number of stakeholders, EIOPA intends to recommend that all personal pension schemes sold across the EU should be standardised in respect of key elements, with a defined set of flexible elements. The standardised elements would be information provision and investment options (including a default investment option). Flexible elements would include the regulation of guarantees, charge caps and investment switching.
Deadline for comments is 26 April 2016. If the final advice goes to the European Commission before summer then it is possible that there will be a proposal for legislation this year.
Comment
Once more the desire by EIOPA to promote the single market results in cross-border provision impacting the domestic market. However, it is not immediately obvious what the impact of an “IORPs” style directive for personal pension will be on UK personal pension providers and their customers. If this goes ahead, although it seems likely that there will be another layer of regulation imposed domestically, UK insurers might be well placed to comply with much of it already given developments in the domestic market. As such, the “second regime” could prove to be an opportunity to compete to sell their wares throughout Europe.
Pension sharing under the new State Pension
A useful information note has been published by the Department for Work and Pensions which explains the circumstances in which part of the new State Pension can be shared following divorce or the dissolution of a civil partnership.
Under the current State Pension the earnings-related component is shareable but the Basic State Pension is not. The intention is that none of the new State Pension should be shareable, but there are two important provisos to this:
- Pension sharing orders in relation to that part of the new State Pension derived from the earnings-related component of the current State Pension, resulting from divorce or dissolution proceedings that started before 6 April 2016, will be honoured; and
- Pension sharing orders resulting from divorce or dissolution proceedings that started after 5 April 2016 can only share the protected payment (ie any excess of a person’s new State Pension above the full rate)
The information note sets out more detail.
Currently SERPS/S2P is shareable through a mechanism under which the DWP provides to the Court the cash equivalent of the benefits and on receipt of any pension sharing order applies actuarial factors to turn the amount to be shared into a weekly award or reduction in SERPS/S2P. This will continue in relation to the first point above. But for protected payments the mechanism will be different. Although the DWP will continue to provide the Court with the cash equivalent of the benefit, the pension sharing order has to specify a percentage of the weekly protected payment and so the person subject to a debit has their protected payment reduced by an amount that will exactly equal the amount paid to the person benefitting from the credit (this is not necessarily the case under the current system).
Comment
The first proviso is intended so as not to disrupt proceedings that are underway at April 2016 or have been settled some time ago. The second is likely to be of limited applicability, other than in relation to those who have been contracted-in for a large part of their working life.
How safe are your DC assets?
The Security of DC Assets Working Party has launched a short guide for the Association of Member Nominated Trustees, to help trustees explore the levels of protection in place for DC assets.
The Working Party expects the security of DC assets to be an issue that grows in prominence for three reasons: increasing numbers of members of DC schemes, with a corresponding rise in DC assets; a significant growth in the number of master trust arrangements; and the fact that it is a requirement for trustees to understand and be able to communicate their conclusions around security of assets as part of their assessment against the Pensions Regulator’s Code of Practice 13.
The guide highlights the fact that there are popular misconceptions around the level of protection provided to DC scheme members by compensation schemes such as the Financial Services Compensation Scheme, indemnity insurance or similar arrangements and the questions set out in the guide aim to help trustees explore with their advisers what protections are in place for their own members in their specific investment circumstances, be they investing directly into funds or via an investment platform. The guide also highlights key areas to explore when seeking to change platform provider or fund managers.
Comment
This is a useful well written document and asking the suggested questions should help DC trustees understand the risks and be prepared to mitigate them where possible. Trustees may also want to think about how this is reflected in their risk register.
HMRC publishes Newsletter 75
HMRC’s latest pension schemes newsletter contains a lengthy explanation of the changes happening to align pension input periods in the transitional 2015/16 tax year as well as a short comment on the newly-published information requirements (see Pensions Bulletin 2016/04).
However HMRC has still not provided full details on the interim process (see Pensions Bulletin 2015/54) for registering for the 2016 Lifetime Allowance protections in the period 6 April 2016 to 31 July 2016. HMRC promises that “further details on the interim process including how to contact us will be provided in the next pension schemes newsletter”.
Amongst other matters the Newsletter covers, one welcome point is confirmation of the Autumn Statement announcement (see Pensions Bulletin 2015/54) that unused drawdown funds at death will not be subject to inheritance tax. It also usefully states that from 6 April 2016 defined benefits lump sum death benefits paid more than two years after the death of a member aged under 75 will no longer be treated as unauthorised payments when paid to an individual and will instead be taxable at the recipient’s marginal rate. Such payments need to be reported under RTI.
DB transfer quotations and payments increase
LCP is monitoring the pattern of transfer quotations and payments for the DB schemes it administers, and the practices adopted by trustees, to see how things are changing following the introduction of Freedom and Choice in April 2015.
Our findings include:
- A spike in the number of transfer quotation requests immediately after the 2014 Budget, followed by a more sustained increase during 2015
- A noticeable up-tick in take-up rates in the six months prior to April 2015 seems to have reversed – perhaps as a consequence of the new requirements to take financial advice for most transfers
- Transfer quotations that proceeded to payment were, on average, much larger than those that did not
- A significant increase in the average age of members both requesting quotations and taking transfers
- Currently, nearly 30% of schemes we administer are including estimated transfer value figures in retirement packs and around 15% are offering partial DB transfers
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.
