Pensions Bulletin 2016/09

George Osborne decides not to announce pension tax relief changes in next week’s Budget

It seems that contrary to what we (and everybody else) thought last week (see Pensions Bulletin 2016/08) there will not now be dramatic changes to the taxation of pensions in next week’s Budget.

No official statement has been made but it became clear last Friday evening (from the press being briefed by Treasury sources and MPs close to the Chancellor) that a decision has been taken that it is not the right time to make changes to pension tax relief. See, for example the BBC’s report.

Member-borne commission – an action required for many pension schemes coming shortly

The regulations that ban “new” member-borne commission payments in respect of occupational pension schemes providing money purchase benefits which are used for auto-enrolment have been laid before Parliament. This follows a short period of consultation on draft regulations (see Pensions Bulletin 2016/03).

The regulations are only slightly altered from those consulted on. As before, they ban member-borne commission payments other than those arising from agreements entered into before 6 April 2016, unless varied or renewed on or after this date. A member-borne commission payment is any charge on members that is used to pay an adviser to the employer or member, or to reimburse a service provider for such a payment.

The regulations are accompanied by non-statutory DWP guidance whose purpose is to help service providers and trustees of occupational pension schemes understand the regulations and in particular provide further clarity on areas some stakeholders were unclear about.

While most of the onus on policing the ban falls upon service providers, widely defined to cover anyone who provides administration services directly to the trustees, there are requirements as to the sharing of information between trustees and service providers. These entail trustees having to notify, in writing, their service provider whether the scheme is being used for auto-enrolment within three months of the later of 6 April 2016, the employer’s “staging date” for auto-enrolment, or the date the service provider is appointed as such.

The service provider is then required to confirm in writing to the trustees that there are no prohibited charges and it must do this within two months of receiving the notification from the trustees. Finally, trustees must notify the Pensions Regulator, via the scheme return in 2017, whether or not their service provider has provided the required confirmation.

The Occupational Pension Schemes (Charges and Governance) (Amendment) Regulations 2016 (SI 2016/304) come into force on 6 April 2016.

Freedom and choice – new regulations made

Following on from the consultation launched at the end of November (see Pensions Bulletin 2015/50), the Department for Work and Pensions has now published its response and laid two sets of regulations before Parliament.

The Pension Sharing (Miscellaneous Amendments) Regulations (SI 2016/289) and the Pension Protection Fund and Occupational and Personal Pension Schemes (Miscellaneous Amendments) Regulations 2016 (SI 2016/294) come into effect on 6 April 2016. As before, their main focus is to tidy up some issues in relation to the ‘freedom and choice’ agenda. The DWP has also set out its next steps in relation to the valuation of benefits containing guaranteed annuity rates.

The main changes made as a result of the consultation are as follows:

Second line of defence for occupational schemes

The consultation document proposed amendments to the disclosure regulations to place an obligation on trustees to provide a “retirement risk warning” to members 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, take one of a number of actions. The obligation to do this where the potential action is to purchase an annuity, take a lump sum or designate for the payment of drawdown pension is in the finalised legislation, but the compulsion to do so when the member is contemplating a transfer out of the scheme has been removed. It seems that this change has been made as a result of market developments, with more schemes offering uncrystallised funds pension lump sums (UFPLS) as a route for members to take flexible benefits out of occupational schemes.

While the DWP has maintained its preference for generic risk warnings over more personalised ones, the final regulations have been revised so that the generic warnings can be tailored to the options that are available to the member rather than covering all the options possible under the pension flexibilities. There is also a provision to exempt schemes that do provide more personalised risk warnings from having to provide a generic one.

The final regulations also remove the set timescale within which the trustees were to be required to provide these risk warnings (on the basis that the important feature of a “second line of defence” is not the timing but rather the fact that it cannot be ignored) and should now be provided when the scheme provides the member with the means to apply to access their benefits.

Alternative route into the Pension Protection Fund

The regulations now extend PPF coverage to include UK pension schemes sponsored by employers where the “centre of that employer’s main interests” is in an EU member state outside the UK. However, as a result of points raised in the consultation, the 28 day time limit within which the trustees of an eligible scheme who become aware that that the sponsoring employer is unlikely to continue as a going concern must notify the PPF of that fact, has been extended to a maximum of three months where the PPF considers it reasonable to do so.

Pensions and divorce

These regulations ensure that the independent advice requirements potentially apply to pension credit members if they transfer benefits (but not if a pension sharing order is implemented by compulsorily transferring the ex-spouse’s benefits outside the scheme).

However, the original proposal to require schemes to inform ex-spouses with an earmarking/attachment order within ten days of the member requesting to draw benefits is not included in the finalised regulations. That proposal has been delayed due to some of the complexities surrounding its implementation.

Call for evidence about the valuation of guaranteed annuity rates

The DWP had also called for evidence on the best way to value benefits which are accumulated on a money purchase or cash balance basis, but with a guaranteed annuity rate built in.

The responses to the consultation have made it clear that the current system for valuing such benefits, which often result in members receiving two valuations – the first taking into account the guarantee to determine whether their benefits are above the £30,000 threshold for independent financial advice and the second being a lower transfer value – can cause significant problems for both pension providers and members. The DWP has therefore decided that there is a strong case for simplification.

The DWP has considered the advantages and disadvantages of the various different alternative valuation methods proposed by respondents and proposes to legislate so that, for the purposes of determining whether or not independent advice must be taken, subject to some limited exceptions, providers should treat the value of safeguarded benefits, including those with a guarantee, as equal to the actual transfer payment in respect of those benefits to which the member would have a statutory right.

However, the DWP is also aware that it is crucial that members understand and appreciate the value of the benefit conferred by the guarantee before deciding to surrender it and proposes to consult on regulations requiring schemes to send members projections of the annual income they would potentially be entitled to if they exercised their guaranteed annuity rate and also requiring such schemes to send personalised risk warnings to members considering transferring or surrendering their guaranteed benefits. It intends to consult on draft regulations in summer 2016.

Independent review of retirement income reports

The review team originally commissioned by the former shadow pensions minister (see Pensions Bulletin 2014/49) in the wake of the ‘freedom and choice’ reforms and headed up by Professor David Blake of the Pensions Institute at City University’s Cass Business school has now delivered its report on the issues confronting retirement income from DC sources.

The report itself weighs in at 606 pages. The summary is 137 pages long and even the press release is 22 pages long. The authors make no apology for this as this enterprise is consciously modelled on the Pensions Commission, whose wide-ranging reports formed the basis of the policy of auto-enrolment which we now have. Indeed, the review team recommends that a permanent Pensions, Care and Savings Commission should be established to inform policy on a non-partisan basis.

We are not trying to capture the entirety of the report in this article but some of the more interesting recommendations include:

• Regulators define a set of criteria so that good retirement products for DC funds can be designated as having ‘safe harbour’ status. A financial adviser couldn’t be sued for recommending a safe harbour scheme to a saver

• Turning financial advisers into a recognised profession. This would include formalising and improving professional standards including training, a fiduciary standard, so that advisers would have to act solely in the interests of their saver clients and an appropriate charging model demonstrably delivering value for money with full transparency

• The Financial Conduct Authority should clarify the legal consequences (for everyone) when insistent clients act against advice

• The powers of the independent governance committees of workplace personal pension schemes should be beefed up so as to be on a par with those of occupational pension scheme trustees

• As one of a number of suggestions for combatting pension scams telemarketing (cold calling) should be made downright illegal

• There should be a single pensions regulator. Usually when this is suggested it is with the Pensions Regulator’s powers transferring to the FCA. The IRRI suggests that it should be the other way around

The review team is also concerned that with annuitisation becoming optional and largely being shunned, there is a clear risk that without further action the pension system begins to unravel.

Consumer Panel proposes mechanism to gather costs and charges of running a pension scheme

The Financial Services Consumer Panel, a statutory body charged with advising and challenging the financial regulator to protect consumer interests, continues to contribute to the debate about disclosure of investment costs and charges. It has published a discussion paper proposing a data standard for pension funds and their providers through which the costs and charges of running a pension scheme could be gathered.

In 2014 the Panel recommended that retail investors should be subject to a single charge in order to address the problem of cost opacity in the management of retail investment funds. This was following findings that:

• the full costs of investment charged to investors are simply not known – even by the asset management firms that deduct them from the fund

• costs deducted from the fund directly by the provider are often not properly measured or declared

• explicit costs charged to the customer through the annual management charge, the total expense ratio or the ongoing charge figure are a poor guide to the full costs – and yet they are the only measurements available to investors and their advisers

The single charge idea remains the Panel’s long term goal, but in the meantime it is exploring how full transparency of costs and charges could be achieved by reference to pension schemes.

It argues that the data would be relatively easy to collect and could be implemented through a voluntary code, compliance incentives such as kite marking, or by regulation. Whilst accepting that its proposed standard does not cover 100% of costs, the Panel says that it marks a significant advance on the current position.

Financial Assistance Scheme to close its doors to new claims

The Pension Protection Fund has announced that the Financial Assistance Scheme will close to notification of new schemes on 1 September 2016. Trustees, advisors, former trustees and/or former advisors of any pension scheme they believe may be a qualifying scheme not yet notified are encouraged to get in touch with the PPF as soon as possible.

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.