PPF service-related compensation cap to go ahead
After much delay, Richard Harrington MP has announced that the service-related cap to PPF compensation, legislated for by the Pensions Act 2014, is to go ahead with an equivalent to be introduced into the Financial Assistance Scheme.
The cap limits the initial amount of the PPF pension for those who are below normal pension age when the scheme is assessed for PPF entry. Currently it is set as a fixed amount which is increased each year – so for compensation commencing at age 65 between 1 April 2016 and 31 March 2017 it is £37,420 pa (before the application of a 10% reduction) – with actuarially equivalent caps, determined by the PPF Board, applying where compensation commences at other ages.
Section 50 of and Schedule 20 to the Pensions Act 2014 provide for the cap for members with more than 20 years’ service to increase, by 3% for every full year of pensionable service above 20 years the member has in the scheme, to a maximum of twice the standard compensation cap. The Act provides that whilst all those affected will have their PPF compensation recalculated at the original point of assessment as if the service-related cap had always been in existence, they will not receive any back payments.
Ahead of bringing the new provisions into force, the DWP has now launched a consultation on draft regulations needed to ensure the service-related cap in the PPF will operate as intended in all circumstances.
In particular, the DWP is seeking views on two issues contained within the draft regulations:
- The modification of the compensation cap where a member has a pension entitlement from more than one source, or has a single entitlement which is payable at two or more different ages; and
- Whether the amount of money purchase rights the PPF can discharge should be increased in line with changes to the tax rules (ie from the current £2,000 cap to £10,000)
The consultation closes on 9 November 2016, with the intention that the service-related cap will be in place from 6 April 2017.
The Government also intends to introduce an equivalent cap for the Financial Assistance Scheme. So that the PPF (as FAS scheme manager) has sufficient time to plan for these changes, the Government intends that the FAS changes will apply from April 2018. Those already being paid assistance will get the uplift applied to their cap amount from this date, although, as in the PPF, this increase will not be backdated.
Comment
Those affected will be pleased that, at long last, this policy announced and put through by Steve Webb when he was the Pensions Minister is to go ahead. But given how little is actually required in secondary legislation to make the whole package work, it is far from clear why there has been such a delay in getting to this point.
Separately and in due course, the PPF will need to make adjustments to its valuation guidance to reflect this improvement to PPF compensation.
PPF proposes weakening of valuation assumptions
The Pension Protection Fund is proposing a weakening of the assumptions used in various PPF valuations in order to bring them in line with current pricing in the bulk annuity market. This follows initial discussions with market participants in January and February 2016, and a follow up in July 2016 with the four currently winning the largest volumes of business.
The most significant changes are:
- To weaken the mortality assumptions – by removing the 90% scaling factor that is applied to the mortality base rates and to adopt more up-to-date base tables and projections for mortality improvement. The PPF is also proposing to increase the long term rate of mortality improvement for females
- To make two changes to the discount rates so that they can be based on indices with durations that better match the liability durations for an average scheme
The new assumptions will cover valuations carried out under sections 143 (PPF entry) and 179 (PPF levy) of the Pensions Act 2004, and certain other valuations for PPF purposes. As before, they err on the side of understating the liabilities in order to reduce the risk of taking schemes into the PPF that could have bought out better benefits in the market.
The PPF estimates that, based on section 143 calculations as at 31 May 2016 for an average scheme, the approximate impact is a 5% reduction for pensioner liabilities and a 3% reduction for non-pensioner liabilities. There would also be an improvement in the PPF 7800 index – which tracks the aggregate section 179 funding position of schemes eligible for PPF protection – with the combined deficits of those pension schemes in deficit reducing by nearly £60 billion as at 31 August 2016.
The consultation closes on 31 October 2016. The PPF Board intends to introduce these changes for valuations with an effective date on or after 1 December 2016.
Comment
Our view on the changes is broadly positive; a more precise method for calculating discount rates and a slight reduction in the strength of the basis should reduce the risk of pension schemes falling into the PPF when they could instead secure higher benefits in the insurance market.
The reduction in the strength of the basis also corresponds with our experience of recent pensioner buy-in pricing, which has been very attractive relative to gilt yields (although we have not seen the same impact for deferreds). However, the PPF basis remains only a very broad approximation of buy-out pricing.
Accountants consult on changes to assurance reporting on master trusts
Following the publication of the new DC Code and DC guides earlier this year (see Pensions Bulletin 2016/30) and in light of new legislation addressing minimum quality standards, the Institute of Chartered Accountants in England and Wales is now consulting on a new version of its technical release on assurance reporting on master trusts.
The update, produced jointly with the Pensions Regulator, also takes into account experiences from applying the current framework of good practice standards of governance by trustees of occupational DC master trusts and the application of control objectives since the publication of the original document in May 2014 (see Pensions Bulletin 2014/19).
The consultation closes on 10 October 2016.
Comment
Originally produced to assist in what for now remains a voluntary framework (but now a necessary piece of the toolkit for a master trust to go on and to remain on the Regulator’s approved list), in not too long from now it could form part of a more compulsory regime depending on what the Pensions Bill has in store for DC master trusts.
MPs launch corporate governance inquiry
The Business, Innovation and Skills Committee has launched an inquiry on corporate governance, focussing on executive pay, directors’ duties, and the composition of boardrooms, including worker representation and gender balance in executive positions.
The inquiry follows on from the corporate governance failings highlighted by the Committee’s recent inquiries into BHS (see Pensions Bulletin 2016/30) and Sports Direct and in the wake of commitments from the Prime Minister to overhaul corporate governance.
A number of questions under the directors’ duties section appear to be influenced by the Committee’s part in the BHS inquiry including the following:
- How are the interests of shareholders, current and former employees best balanced
- Should there be greater alignment between the rules governing public and private companies? What would be the consequences of this
- Should additional duties be placed on companies to promote greater transparency, eg around the roles of advisors. If so, what should be published and why? What would the impact of this be on business behaviour and costs to business
- Should Government regulate or rely on guidance and professional bodies to ensure that directors fulfil their duties effectively
The consultation closes on 26 October 2016.
Comment
Arguably, this latest inquiry is more related to the comings and goings at BHS than that of the Work and Pensions Committee (see Pensions Bulletin 2016/32). Although the latter is asking some searching questions about the future of DB schemes, corporate governance failings were at the heart of what went wrong at one of the fixtures of the British High Street.
Treasury proposes single definition of financial advice
Following on from the Budget (see Pensions Bulletin 2016/11), HM Treasury is now consulting on aligning the definition of regulated financial advice with EU law.
Currently, there is a definition of “advising on investments” within Article 53 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 and a definition of “investment advice” within the Markets in Financial Instruments Directive. The former is wider and hazier in scope than the latter.
The Treasury proposes to make the former consistent with the latter which should have the effect of making it much clearer as to when the boundary between guidance and advice has been reached and importantly, make only advice which makes a personal recommendation subject to regulation.
Comment
The intention behind this change is to facilitate the growth of guidance services. To date, potential providers have been reluctant to offer too much by way of guidance for fear of being regarded as giving advice. Hopefully this will change, but we need to await the results of the related FCA project on what providers of guidance services need to do in order to treat customers fairly.
NEST says that pension savers with small pots want freedom too
NEST has published key findings from research into savers’ attitudes towards retirement income options which reveals significant support for the development of new retirement products that combine flexibility, security, and rainy day cash, even for those with smaller pots.
However, it also shows that savers worry about doing the right thing and don’t feel confident about taking on the responsibility of making complex decisions throughout their retirement.
Related to this, the DWP is currently consulting on whether NEST should evolve to respond to the changing pensions landscape (see Pensions Bulletin 2016/28) and has recently announced an extension to the deadline – to 5 October 2016.
Comment
The results are not a surprise and shine a light once more on the dilemmas that the new DC freedoms have generated. NEST’s proposed offering of a lifetime income strategy has been around for some time now, but it seems to be awaiting the green light from the DWP.
Lifetime ISA – updated notes show progress being made
HM Treasury has updated its technical note and policy paper on the Lifetime ISA, both of which were originally published on the day of the Budget (see Pensions Bulletin 2016/11).
The new documents published alongside the originals show how the design has progressed since the March announcement. In particular:
- It will not be possible to pay more than £4,000 in each tax year – it was previously thought that it might be possible to pay more but not attract the Government bonus on the excess
- As a result, there is no longer a need for providers to administer the Government bonus separately from the contribution
- The Government bonus will be based on the contributions paid in, not on any subsequent interest or investment growth – the Government notes this means the bonus will not be affected by any investment losses incurred after the contribution is made but before the bonus is claimed
- From 2018/19 the Government bonus will be claimed and paid on a monthly basis – rather than waiting until after the end of the tax year
- There is a completely new section on transfers
- There is much greater detail on the withdrawals process in relation to home purchase
- The 5% penalty for withdrawals other than in approved circumstances is now subsumed within a 25% Government charge applied to such withdrawals – which neatly mirrors the 25% Government bonus on net contributions made (but of course is significantly greater in £ terms); and
- The charge will be collected and paid to HMRC by the Lifetime ISA manager
We also now know that:
- The FCA is to publish a consultation this autumn on the regulatory framework for the Lifetime ISA
- The Government is continuing to consider whether there should be the flexibility to borrow funds from the Lifetime ISA without incurring a charge if the borrowed funds are fully repaid, and whether there should be other specific life events where individuals can have access to their Lifetime ISA without a Government charge. However, it has decided that these will not be a feature of the product when it becomes available in April 2017
Comment
The Lifetime ISA was announced at this year’s Budget with little detail, so inevitably it gave rise to a number of questions as to exactly how the product was to operate. We now know some of the answers, but it will be a race to the finish to get all the necessary regulation in place ahead of the 6 April 2017 go live date. Some potential providers have already publicly stated they will not have a product ready by then, so the initial market could potentially be skewed towards just a few providers.
