Millions stand to lose from the new state pension
So reported the press on 15 January. This is the complete opposite to a press release put out by the Department for Work and Pensions the previous day, which focused on the positive short term effects of the reform.
“New State Pension: impact on an individual’s pension entitlement – longer term effects” goes beyond the narrow 15 year horizon on which a report published last year was based (see Pensions Bulletin 2015/52). By continuing the projection to 2060 this latest report demonstrates that in the long term there will be more losers than winners compared to had the current system continued.
The report shows that the vast majority of those reaching State Pension Age in 2016 will be neither better nor worse off, with a significant minority of around 20% being better off. But by 2040 over 50% of those reaching State Pension Age at this point will be worse off and by 2060 it will rise to about 75%. In other words the majority of those now in their early 40s will be losers, with the proportion rising for those currently in their 30s and 20s. For those who are losers, the average loss is about 10% of their state pension income.
As before, the figures are based on the assumption that the triple lock will endure – a factor that is stated to lead to higher outcomes, but the continuation of this policy is far from certain, it not having even been announced yet that it will apply to the new state pension for this Parliament. No figures are provided for the eventuality of the uprating being limited just to earnings, rather than the better of this, prices and 2.5%. If the triple lock is dispensed with, the number of losers and the extent of their loss will surely only grow.
Comment
There is little doubt that on day one there will be few losers from the new state pension – this follows as a direct result of the formulae that are being used. And there will be some clear winners, such as the self-employed and women. But over time the losers will start to dominate, so it is a shame that the DWP has chosen to be less than candid on this aspect, even when challenged by MPs earlier this week.
Draft regulations set the starting rate of the new state pension
Draft regulations have been laid before Parliament setting the starting rate of the new state pension as £155.65 pw. This is, of course the rate announced by the Chancellor of the Exchequer in his Autumn Statement (see Pensions Bulletin 2015/50).
Comment
Although the draft regulations simply state the now settled figure, the explanatory memorandum provides some interesting detail. In particular, it makes clear that from the 2040s onwards the new state pension will cost less than had the current system continued. It also says that the new state pension will increase by at least earnings growth. It is silent on whether or not the triple lock will apply, contrary to the assumptions applied in DWP reports.
Are older people getting more than their fair share?
This is the question posed by the Work and Pensions Committee in launching a new enquiry on 13 January 2016.
The MPs ask whether the current generation of people in or approaching retirement will, over the course of their lifetimes, have enjoyed and accumulated much more housing and financial wealth, public service usage, and welfare and pension entitlements than more recent generations can hope to receive.
If this contention is established (on which there is already a significant body of academic work in support), it would seem that the MPs will wish to examine options for reform including such matters as the continuation of the triple lock on state pensions and other benefits that are focused on older citizens.
Comment
Fairness between generations is likely to be a subject that will occupy much thought by academics, think tanks and politicians over the coming years. It used to be a given that poverty and age went hand in hand, but this is no longer the case, as recently illustrated by the Institute for Fiscal Studies (see Pensions Bulletin 2015/45). At least, for now.
Pensions Ombudsman rules that employer has a duty of care to inform pension scheme members about tax
In 2010 the earliest age that a member could take benefits from a pension scheme without suffering tax penalties went up from 50 to 55. However, members who already had the right to take their benefits from age 50 were allowed to keep it. Such rights are called “protected pension ages” and they are subject to some conditions – one of which is that a member may not retire on their protected pension age and then be re-employed by the same employer within six months (or within one month where re-employed in materially the same role).
Failure to meet these conditions will result in the benefits being regarded as unauthorised payments for tax purposes, with consequently punitive tax charges.
Three South Wales’ police officers with protected pension ages left employment and took retirement benefits aged less than 55 in 2010 and 2011 and were then re-employed within a month. They then complained (see the top three Determinations listed – apart from the member particulars they are identical) to the Pensions Ombudsman that the employer, now the South Wales Police Commissioner, and the Police Pension Scheme administrator, Capita, should have warned them of the tax consequences.
The Pensions Ombudsman upheld the complaints, in identical terms. He did so on the basis that, while the Commissioner was under no legal obligation to provide advice to individual officers and employees, it was reasonable to expect the Commissioner to have provided the salient information (which had been supplied to it in a Home Office circular in 2006) about the implications of re-employment. Also, as a reasonable employer, the Commissioner had a duty of care to inform the officers of the tax implications and as a consequence of this failure he should reasonably meet the tax liabilities incurred.
Accordingly the Ombudsman directed that within 28 days of receiving written proof from the officers of the amount of their tax liabilities arising as a direct consequence of their loss of protected pension age, the Commissioner shall pay them the amount due to HMRC in respect of the loss of protected pension age only.
In fact, the Commissioner had already agreed to indemnify the officers against the tax consequences directly arising from the failure to inform and it seems that the purpose of the complaint was to obtain an Ombudsman’s direction, which is legally binding. The Determination also defines the scope of the indemnity so that it does not go beyond holding the officers harmless for tax liabilities directly resulting from the failure to provide information.
Comment
The first thing to note here is that the Determinations of the Pensions Ombudsman are not binding legal precedents in the same way as court decisions, although they do give an indication of which way the Ombudsman is likely to jump in similar cases. A second thing to note is that this decision seems to go against the thrust of the 2014 decision by the Deputy Pensions Ombudsman on Mr Ramsey’s complaint where it was decided that a pension scheme trustee had no legal obligation to inform a person about their tax liabilities (in this case an annual allowance charge).
We can see how it seems reasonable to impose a duty of care on an employer in relation to retiring employees who it plans to re-employ if there is a blindingly obvious tax trap as in this case. But we worry a lot about how far this could stretch, given the ridiculous complexity of the pension tax system. Is the Ramsey decision now out of date and can we expect the relatively new Ombudsman to start holding employers and trustees liable for annual allowance or lifetime allowance charges incurred because a scheme member made a choice, which in hindsight may not have been fully informed?
And could this “duty of care” extend beyond tax matters? Will members have a lifeline in the Ombudsman if they make a choice to exercise (or not exercise) the new pension flexibilities and the choice turns out to be sub-optimal but they can claim that they would have chosen differently if in possession of more information?
These uncertainties will make for unnerving reading for employers and trustees and are not likely to be quickly resolved given that everyone here was agreed that the Commissioner must pick up the tab.
Early exit charges to be capped
George Osborne has announced that excessive charges for accessing a pension pot early are to be brought to an end. The mechanism chosen is to place a duty on the Financial Conduct Authority to cap such exit charges for pension savers.
The new duty, to be introduced through legislation, will form part of the as yet unpublished response to the Government’s pension transfers and exit charges consultation (see Pensions Bulletin 2015/34).
The FCA will be responsible for setting the level of the cap and will consult on this in due course.
Comment
The Treasury announcement is silent on whether there will be a similar cap on trust-based schemes, but this has now been confirmed in a tweet from the Pensions Minister.
PASA launches phase 1 of its GMP reconciliation and rectification guidance
The Pensions Administration Standards Association has issued three guidance notes and a process map (for PASA members) whose purpose is to provide assistance to pension schemes as they work to meet the deadline for the cessation of contracting out in April 2016 and the need to reconcile contracted-out benefits. This follows PASA’s previous “call to action” last June (see Pensions Bulletin 2015/26) which amongst other things set out ten reasons why schemes should reconcile their membership and GMP data with HMRC.
The guidance notes look primarily at the reconciliation phase, with further guidance promised next month on rectification (ie changing member records in the light of the reconciliation results).
Guidance Note 1 is in essence an overview of the reconciliation process. Guidance Note 2 discusses the issues that administrators will face when seeking to reach agreement with HMRC as to precisely which scheme members have a current entitlement to a contracted-out benefit. Guidance Note 3 looks at the important role of tolerances in reconciliation and rectification exercises.
Comment
In recent years GMP reconciliation and rectification services have become a specialist offering by a number of pension consultants and it is clear from the material published by PASA why this should be so. There is no one size fits all solution, the approach taken is highly dependent on the needs of a particular scheme and the budget available and the crucial liaison with a resource-strapped HMRC benefits hugely from expert knowledge.
Within the next few years, all currently contracted-out schemes should have completed a reconciliation and rectification process for their GMPs. This will be essential for a number of reasons – not least of which is the looming prospect of having to then undertake a GMP inequalities exercise.
The good, the bad and the healthy
The Pensions Institute has published an interesting report that examines the significant increase in recent years of the use of medical underwriting in the defined benefit de-risking market.
It finds that from a standing start in 2013, around 60 transactions worth over £1billion have been transacted that have involved medical underwriting, and they accounted for over 15% of de-risking transactions in the first half of 2015.
The report’s authors find that there is theoretical support for the use of medical underwriting in reducing the prices required by insurers and the potential reductions can be significant. But a concern remains that should a pension scheme obtain medical data and/or a quote from a medical underwriter, but then fail to transact, it could face the risk that traditional insurers concerned about selection may lock these pension schemes out of the traditional bulk annuity market at reasonable pricing (at least for a number of years).
Sustained growth is expected in the bulk annuity market in the foreseeable future, with a particular focus on smaller schemes and top-slicing transactions (where a relatively small number of high liability individuals within a scheme have their benefits insured on a medically underwritten basis). The authors expect that there will also be further convergence between traditional and medically underwritten bulk annuities, following on from the merger of two insurers from the two streams.
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.
