Pensions Bulletin 2015/11

“Essential guide” to communicating with members about pension flexibilities published

A draft essential guide, whose purpose is to help trustees, administrators and advisers of occupational pension schemes that provide flexible benefits implement the new disclosure requirements and provide a “second line of defence” shortly before the member decides how to take his or her flexible benefits has been published by the Pensions Regulator.

As such the guide provides:

• Information on key changes to the disclosure regulations in connection with retirement communications; and
• Good practice suggestions for communicating with members about their retirement choices

The changes to the disclosure regulations set out in the guide reflect those in the Occupational and Personal Pension Schemes (Disclosure of Information) (Amendment) Regulations 2015 as presented in draft form (see Pensions Bulletin 2015/09) and which have now been laid before Parliament (see article below).

But it will be the good practice suggestions that will be of the greatest interest. On these, the Regulator:

• Encourages trustees to provide generic risk warnings in respect of the four main retirement options available to members (annuity, flexi-access drawdown, cash in stages and cash in one go) – whether or not they are offered in the scheme
• Encourages trustees to provide these generic risk warnings at the point a member is required to make a final decision to take their retirement benefits in a particular form or to take a transfer to another scheme or provider in order to take their retirement benefits; and
• Recommends that, at the same time as sending the generic risk warnings, trustees ask members to sign a statement to confirm whether they have received Pension Wise guidance or regulated advice, and to confirm that they have read the generic risk warnings

It is suggested that the above is delivered at Step 5 in a 7-step “retirement good practice process”.

The guide goes on to set out some example wording for the generic risk warnings which could be provided to members at the point of decumulation/transfer in relation to retirement, suggesting that these should be adapted as seen fit, to align with existing retirement documentation and the specific circumstances of the scheme. Trustees are asked to be careful to avoid giving advice to members when providing these warnings, with the guide saying that if members ask further questions about their retirement options for trustees to be prepared to direct them toward Pension Wise and/or an FCA-regulated financial adviser. To avoid the risk of giving advice, it is recommended that trustees do not provide specific risk warnings based on a member’s individual circumstances.

The guide concludes with some example declarations that schemes may wish to include in their retirement documentation for members to complete.

The Regulator’s final guide will be published after the amended regulations come into force.

Comment

This is a very clear guide which (other than its extreme lateness) will be welcomed by trustees struggling to cope with the regulatory deluge. And after worries that the Government might impose a similar “second line of defence” as required in the contract space, it is good to see that no question, answer and risk warning exchanges will be required.

DWP regulations delivering the new pension flexibilities made

The three sets of amending regulations relating to that part of the delivery of the new DC flexibilities being undertaken by the Department for Work and Pensions (DWP) published in draft form last month (see Pensions Bulletin 2015/09) have now been laid before Parliament and, with one exception, come into force on 6 April 2015.

• The Occupational Pension Schemes (Consequential and Miscellaneous Amendments) Regulations 2015 (SI 2015/493) – empower the trustees of occupational pension schemes to deliver some or all of the new DC flexibilities within their scheme, but only in relation to money purchase benefits and subject to employer consent. The regulations are near enough identical to the DWP draft
• The Occupational and Personal Pension Schemes (Transfer Values) (Amendment and Revocation) Regulations 2015 (SI 2015/498) – make changes to the Transfer Regulations that are consequential to those being made to the primary legislation. There are some changes from the DWP draft and they now revoke (from 1 April 2017) the regulations that prevent NEST members from having a right to transfer their benefits
• The Occupational and Personal Pension Schemes (Disclosure of Information) (Amendment) Regulations 2015 (SI 2015/482) – contain important adjustments and additions to the disclosure requirements so that (amongst other things) those with an opportunity to transfer their flexible benefits are given information relating to this and all with flexible benefits are signposted to Pension Wise, given information about their flexible benefits (including its current value) and some further information including warnings (not the generic risk warnings discussed in the article above). The regulations appear to be, to all intents and purposes, the same as the DWP draft

In a ministerial statement on Monday, pensions minister Steve Webb advised that the fourth set of regulations, the Pensions Schemes Act (Transitional Provisions and Appropriate Independent Advice) Regulations 2015 (see Pensions Bulletin 2015/10 for an overview of its content), will be made in due course once the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2015 has been laid (this is the Order that makes advising on pension transfers and conversions a regulated activity subject to supervision by the Financial Conduct Authority).

Comment

And so, all the pieces of the jigsaw are coming together, but it is a real race to the finishing line.

Employers can now override scheme rules to recoup their 2016 increase in NICs

Long awaited regulations, laid before Parliament last week, set out the detail as to how employers can use the overriding powers provided by the Pensions Act 2014 to unilaterally amend the future accrual of scheme benefits and the level of employee contributions. This is to enable employers to recoup their increased costs due to the loss of the employer rebate on national insurance contributions (NICs) following the abolition of contracting-out next April.

The Occupational Pension Schemes (Power to Amend Schemes to Reflect Abolition of Contracting-out) Regulations 2015 (SI 2015/118) come into force on 6 April 2015, but the effect of the overriding powers can only take place from 6 April 2016.

Many of the provisions set out in the draft regulations published by the Department for Work and Pensions (DWP) in May last year (see Pensions Bulletin 2014/19) are essentially the same, although there are some important changes:

• After the actuarial certificate is given, employers must consult with trustees regarding the date on which amendments will take place (which must not be before 6 April 2016). The draft regulations had no requirement for the employers to consult with the trustees at all
• Employers can apply one single test to include groups of members earning differing levels of benefits within the same scheme. The DWP’s original proposal was for these groups to be tested separately as if they were separate schemes
• Employers must appoint the actuary providing the certificate. The draft regulations made no such specification, although it was implied by actuarial professional guidance

The DWP has also published its consultation response which includes some noteworthy points:

• Employers must consult with members and their representatives on the proposed scheme rule changes (as the separate 2006 Consultation by Employers Regulations apply). In particular, although the regulations no longer require separate calculations for different groups of members, the DWP expects that any differences are clearly explained to members during the member consultation process
• The regulations do not provide for employers to unilaterally change their contributions as this would interfere with the scheme’s funding arrangements. But once the amendment power has been used, the trustees are then under a duty to consider revising the Schedule of Contributions to reflect any change in contributions
• In order to avoid “double dipping” by the employer, when agreeing any amendments under normal powers, trustees should seek written confirmation from the employer that the statutory override power will not be used subsequently

Comment

Now that these regulations are finalised employers can get down to working out the best way forward. The good news is that most of the amendments made to the draft regulations seek to simplify the application of the regulations for everyone involved.

MPs say the introduction of the new pension flexibilities strengthens the case for a single pensions regulator

The House of Commons Work and Pensions Select Committee has again called for the establishment of a new single pensions regulator given the potential increased risk to pension savers from fraud and mis-selling following the introduction of the new pension flexibilities from April 2015.

The Committee’s report on its inquiry into the progress of the implementation of auto-enrolment and the other Government pension reforms suggests that the Financial Conduct Authority is not sufficiently focused on pensions to inspire confidence in its willingness to be proactive in protecting pension savers. Consequently, the Committee argues that now is the time to switch to a single pensions regulator and claims that the Government is coming round to this view.

The report also recommends establishing a new independent pension commission to take the same evidence-based and inclusive approach to assessing the impacts of the recent pension reforms as the Turner Commission did back in 2005/06, which led to the auto-enrolment policy, and to recommend further improvements where necessary.

One issue, in particular, which the Committee would want the new commission to explore is the minimum age at which individuals can take advantage of the new pension flexibilities. This is currently set at age 55, in line with current tax rules, with the Government intending to increase it to 57 in 2028, when those becoming entitled to a State Pension need to be aged 67. The Committee believes that this minimum age should be changed to five years before State Pension Age.

The report makes a number of further recommendations, including:

• Monitoring of the number of individuals leaving auto-enrolment schemes after the initial opt-out period – as early opt-out figures alone cannot be used as a meaningful measure of success in the longer term
• Early confirmation by the new Government of plans for automatic transfers and quick action to develop workable IT solutions with the pensions industry
• Action to address the lack of transparency in charges, transaction costs, and high charges and poor governance in legacy schemes
• Assessment by the proposed independent commission of the impact of the new pension flexibilities on the range, suitability and accessibility of retirement products and advice on necessary interventions if the market is found not to be operating in savers’ best interests
• Introduction of a “pensions dashboard” to enable individuals to access consolidated information about all their pension saving in one place, ideally including both private and state pension entitlement, with its use by providers being made mandatory

Comment

Despite this Government’s record of significant regulatory change, the MPs report signals that there is much unfinished business. Whether the next Government warms to the idea of a single pensions regulator and independent commission remains to be seen.

FCA extends scope of the pension transfer rules to tie in with the new DC flexibilities

The scope of the pension transfer rules, applicable to those regulated to provide advice, is to be significantly extended, according to proposals published by the Financial Conduct Authority (FCA). These tie in with a proposed amendment to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 that will make advising on the conversion or transfer of safeguarded pension benefits into flexible benefits a regulated activity (and also the payment of uncrystallised funds pension lump sums in respect of safeguarded benefits).

The FCA also proposes to require that all this newly regulated advice must be provided or checked by a “Pension Transfer Specialist” who must undertake a transfer value analysis, even if the transaction is taking place close to retirement.

One exception is proposed – where the advice is on conversions or transfers in respect of pension policies with a guaranteed annuity rate (GAR). Whilst accepting that the benefits within such policies are “safeguarded benefits”, the FCA concludes that whilst a Pension Transfer Specialist may be better placed to model the value of the GAR, the FCA must also take into account the additional cost that a more in-depth analysis may require. Moreover, requiring such a specialist for transactions involving GARs may add to any transitional capacity issues in the industry for the provision of advice in respect of safeguarded benefits.

The FCA is also of the view that all firms that currently have permission for advising on pension transfers and pension opt-outs should be competent to advise on conversions and transfers of safeguarded benefits to flexible benefits. The FCA has accordingly sought additional legislation to enable the automatic grandfathering of firms with the existing permission. HM Treasury intends to bring forward this additional legislation as a consequence to the proposed amendment to the Regulated Activities Order.

Although the legislation is expected to be in force by 6 April 2015, the FCA’s amended rules will not be in place until June 2015. The FCA says that, during this period, advisory firms may wish to take into account its proposed revised rules.

Separately, HM Treasury has laid an Order whose purpose is to make clear that those providing the Pension Wise guidance service are not, in so doing, carrying out a regulated advisory activity. The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (Pensions Guidance Exclusions) Order 2015 (SI 2015/489) comes into force on 26 March 2015.

Amendments have also been made to the Social Security (Contributions) Regulations 2001 to provide that an employer will not be liable to pay national insurance contributions in respect of payments for, or reimbursements of, the cost of advice about the conversion or transfers which they are required to provide under section 49 of the Pension Schemes Act 2015. The Social Security (Contributions) (Amendment) Regulations 2015 (SI 2015/543) come into force on 6 April 2015.

Comment

Currently, the FCA regulates only those transfers from DB schemes that go to personal or stakeholder pension schemes, so these proposals, although largely consequential to the Government’s pension reforms, constitute a significant increase in scope. What does seem odd is the extension of transfer value analysis to all this newly regulated activity – a case of one size does not necessarily fit all?

DWP regulations made confirming further changes to auto-enrolment legislation

Regulations have now been laid before Parliament which introduce an alternative quality requirement for defined benefit (DB) schemes, simplify the information requirements on employers and create exceptions to the employer duty to auto-enrol their employees in certain circumstances. This follows consultation on draft regulations in December. The Department for Work and Pensions (DWP) has also published its response to the consultation which shows that respondents were very supportive of its proposals.

The Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2015 (SI 2015/501) come into force on 1 April 2015 and are broadly the same as those proposed in December (see Pensions Bulletin 2014/50 for a detailed write up) with two significant developments in relation to the alternative quality requirement for defined benefit schemes:

• There is now a fifth means of satisfying this test – a scheme that pensions earnings above the Basic State Pension or the Lower Earnings Limit will pass if the cost of accrual is not less than 13% of such earnings (with a 1% reduction if dependant pension benefits are not provided)
• The DWP has legislated to cover the situation of schemes that class as DB but whose structure more closely resembles that of a defined contribution (DC) scheme – they can now pass by meeting the money purchase quality requirements along with certain other conditions. This will be revoked once the Shared Risk Rules are developed which will allow these type of schemes to meet the existing quality test for DC schemes

In relation to the simplification of the information requirements, the significant reduction in disclosure requirements is to go ahead but with some adjustments, such as retaining the existing requirement to quote the current level of the lower earnings threshold when communicating with those who have not been auto-enrolled.

All the proposed exceptions to the employer duties are also to go ahead with some clarifications and consequential adjustments having been made.

Comment

As we said back in December, these adjustments to the auto-enrolment legislation are good news; now made even better through consultation and active dialogue with stakeholders.

Regulator decides not to provide a list of auto-enrolment vehicles available to any employer

In the light of a number of challenges raised by respondents to a consultation last November, the Pensions Regulator has decided not, for the time being, to produce and publish a list of auto-enrolment vehicles available to any employer. The list’s purpose was to assist small and micro employers whose staging dates are fast approaching.

The Regulator had hoped to assess schemes by reference to four objective criteria (see Pensions Bulletin 2014/49), but its consultation response reveals that there were a number of significant challenges relating to setting objective entry and exit criteria that could be applied fairly and evenly to schemes. Several respondents pointed out the difficulty in articulating criteria for universal acceptance of all employers, regardless of size. There were concerns that some suitable schemes, operating reasonable terms and conditions, could end up being excluded.

Without commonly agreed criteria, the Regulator concluded that it was difficult to manage a list in an objective and transparent way, including providing appropriate levels of scrutiny, managing entry and exit from the list, without it applying “substantial upfront and ongoing assessment” of schemes intending to enter and remain on the list.

Comment

This is disappointing. The idea did seem to be a good one and was supported by 32 of the 43 respondents. Although publishing lists is fraught with danger there is a clear concern that without it small and micro employers will not be able to identify which schemes are available and default into NEST which may not always be the best course. It is not immediately obvious why this list should be so problematic when for many years now the Pensions Regulator has maintained a register of stakeholder pension schemes.

Government completes its banking reforms as pension regulations are finalised

The final piece of the Government’s reforms to the UK banking sector came into force on 5 March 2015 following Regulations being debated in Parliament (see Pensions Bulletin 2015/05).

The Financial Services and Markets Act 2000 (Banking Reform) (Pensions) Regulations 2015 (SI 2015/547) set out the detail of how pension liabilities must be treated when banks are required to “ring-fence” their retail and investment banking businesses.

Further ring-fencing rules, which do not require legislation, are being put in place by the Prudential Regulation Authority.

2015/16 auto-enrolment earnings parameters finalised

The Order setting the 2015/16 earnings parameters for auto-enrolment purposes has now been made. This follows an announcement by the Department for Work and Pensions in December (see Pensions Bulletin 2014/52) and the draft regulations being debated in Parliament.

The Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2015 (SI 2015/468) sets the lower and upper limits of the qualifying earnings band at £5,824 pa and £42,385 pa respectively and freezes the earnings trigger at £10,000 pa.

Academic research suggests age at death for retirees will converge in the 90s

Academic research suggests age at death will increasingly cluster in the 90s and the life expectancy of men and women will converge.

A study by academics from Cass Business School in partnership with the International Longevity Centre UK (ILC UK) found that life expectancy beyond age 100 is increasing relatively slowly such that the typical age at death of retirees is now expected to tend towards some point in the 90s. The age at death of men and women is also now expected to converge, as fundamental changes to male lifestyles will see their life expectancy catch up with that of women.

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.