Following the BHS scandal it has become clear that the DWP is putting together a Green Paper on the future regulation of DB schemes, but until now what it might contain and when we might see it has been shrouded in mystery. Some of the fog started to lift last week thanks to evidence given to the Work and Pensions Select Committee by Lesley Titcomb, Chief Executive of the Pensions Regulator, Andrew Warwick-Thompson, Executive Director of Policy at the Pensions Regulator and the pensions minister Richard Harrington MP.
In the first part of the proceedings, Lesley Titcomb reiterated some of the changes the Regulator was looking for and on which she had previously written to the Committee – such as information gathering and clearance (see Pensions Bulletin 2016/27). She referred to the current section 72 information gathering powers as being quite a blunt tool, which nevertheless had been used fairly liberally – several hundred times over the past couple of years. There were promises to publish more, in the coming weeks, about what makes effective 21st century trustees (see Pensions Bulletin 2016/30), along with the possibility of publishing further general guidance on DB funding outcomes and recovery plans, so that “scheme trustees of any type can see where they fit into the overall spectrum and they can see whether what their employer is presenting them with is unusual”. The Regulator would also like to see consolidation in both the DC and DB market as it could bring benefits of scale, cost savings and drive up standards of trusteeship. Andrew Warwick-Thompson outlined some of the challenges involved in so doing. One is whether this will happen naturally through the market or will require some legislative intervention – something that is being discussed with the DWP.
Richard Harrington expanded on this in his evidence, suggesting that the key themes of the Green Paper would be scheme consolidation and broader powers for the Regulator (along the lines being suggested in the submission the Regulator made to the Committee back in July). In particular, obliging employers and schemes to provide information to the Regulator if it requires it and speeding up DB valuations are to be “very prominent in the Green Paper”. On scheme consolidation he said that “it is so obvious … that many pension schemes are subscale in a number of ways” and that the Government would have to nudge consolidation. Related to this, he also spoke about “a non-PPF PPF” where small subscale funds would be quite happy to put their members’ money and (unreduced) benefits into, “knowing that they are going to have the chance of getting better returns”.
Less emphasis was placed on the prospect of schemes being able to switch their inflation measure used for indexation purposes, with Richard Harrington saying that a DB scheme is “fundamentally not negotiable”. However, in principle he has no objection to giving trustees the ability to change the inflation measure, “so long as ... pensioners are protected for what was intended, which was to be protected against rises in prices”.
As to timing, when pressed by the Committee, Richard Harrington said that he hoped that the Green Paper would be issued before next April and that “all efforts are on it”.
Comment
From where we currently stand it seems that the themes set out by the Regulator in July are being developed, with a particular emphasis on consolidation. Disappointingly there seems, right now, to be little on acknowledging that for some distressed schemes, their promises are highly unlikely to be deliverable.
DWP consults on a new method for equalising pensions for the effect of GMPs
The DWP has issued a consultation paper covering three separate topics with a contracting-out theme. The first concerns changes to the salary-related contracting-out legislation to help improve scheme administration and provide clarity; the second deals with regulations which have been introduced in the past where the DWP committed to review the provisions, whilst the third seeks views on a new methodology for equalising pensions for the effect of inequalities caused by GMPs.
The third topic will be of great interest to pension schemes and their advisers. See our separate News Alert on this subject.
Turning to the first topic, the DWP has put forward draft regulations that will come into force on 6 April 2017. They are largely concerned with relatively minor technical matters, including the following:
- Extending the time limits and the circumstances in which CEPs are payable as a result of the discovery of scenarios for which the current provisions are too restrictive – HMRC is to be given discretion to extend the circumstances, notification and payment periods
- Strengthening the legislation that restricts amendments to Section 9(2B) rights
- Making changes in relation to when survivor GMPs are payable that are consequential to the survivor being entitled to the new bereavement support payment from the State that comes into being in April 2017; and
- Reducing the fixed rate of GMP revaluation to 4.0% (from the current level of 4.75%) for those who leave pensionable service before pensionable age on or after 6 April 2017 – the logic for this is set out in a separate report prepared by the Government Actuary’s Department
The second topic concerns three areas of contracting-out where the DWP has committed to review legislation as follows:
- Whether amendments to Section 9(2B) rights need actuarial certification – the DWP promises to look into this, but changes are unlikely before autumn 2017
- Facilitating bulk transfers without consent that involve contracted-out rights where the receiving scheme has never been contracted-out – again any changes are unlikely before autumn 2017; and
- The transitional provisions associated with the abolition of DC contracting-out in April 2012 – the DWP seemingly concludes that they are working fine
Consultation on all three topics closes on 15 January 2017.
Comment
The focus for readers of this consultation paper will inevitably be on GMP conversion. Until now it was not clear whether this was an acceptable means by which the GMP inequality issue could be addressed.
GMP conversion has the potential to deliver equality for members, simplification for trustees and lower ongoing costs for sponsors. As such, this development should be strongly welcomed.
HM Treasury examines how to address GMP inequalities in the public sector
At the same time as the DWP issued its consultation on addressing GMP inequalities in private sector schemes, across at HM Treasury a much broader consultation was launched on how best to retain a longstanding commitment for public service pensions to be fully indexed and not to discriminate between men and women.
For this purpose, the commitment has been by reference to what an individual would receive from a public service pension and, where contracted-out between 1978 and 1997, through the GMP element and the indexation to such provided through the earnings-related aspect of the State Pension.
The public service pension scheme for such individuals would include a GMP, exactly as in the private sector and the argument goes that, in the public sector, the only inequality that needs resolution on the GMP is that relating to differential pension increases. Under the old State Pension such equality was achieved because less than full indexation on the GMP in the public service pension scheme was picked up by the State Pension through the operation of the contracted-out deduction.
The introduction of the new State Pension in April 2016 broke this linkage through which the commitment could be maintained and on 1 March 2016 the Government announced a temporary fix (at an estimated cost of £500m). All public service pensioners reaching State Pension Age between 6 April 2016 and 5 December 2018 would have the GMPs earned in public service fully indexed by the public service pension scheme.
Continuation of this policy for those reaching State Pension Age after 5 December 2018 would be expensive, with this consultation paper indicating that so-called “full indexation” would increase liabilities for public service pension schemes by around £5bn. Arguably it is also unnecessary because for many who contracted-out, the new State Pension is more generous than the old. So in addition to the continuity option, the Treasury is looking at the following:
- Case-by-case – under which the total income received by the pensioner from public and state pension provision under the old and new state pension system is compared on an annual basis. Where the member has lost financially, they would be compensated up to the value of the loss of indexation only. Then to equalise the benefit, the method would be repeated for a theoretical member of the opposite sex, with the scheme paying the higher of the male and female benefit. This approach is estimated to cost around £1.5bn, but would be very administratively complex, continue for decades and require significant investment in administration systems for all public service pension schemes
- Conversion – in which the GMP is turned into a scheme benefit on a £1 for £1 basis. It has a similar cost to that under full indexation, is likely to involve some administrative complexity to complete the conversion but should be significantly simpler in the longer term for schemes
The intention is that serving and former public sector employees from the major workforces will be affected, but the paper also notes that:
- There may also be a number of wider public service and public sector organisations that are affected, either because their pensions are “official pensions” for the purpose of pension increases, or because, historically, their pension scheme has, through its own scheme rules, followed the treatment of the major public service pension schemes regarding the indexation of GMPs
- Some private sector occupational pension schemes may be affected – including those whose trust deeds and rules explicitly require them to follow the indexation treatment of the public service pension schemes
The Treasury is also interested to hear views on other potential solutions. Consultation closes on 20 February 2017.
Comment
This is an entirely different problem to that which private sector schemes are facing and so it is no surprise that the proposed solutions differ. But whether the public sector’s GMP inequality issue is limited to indexation is a moot point. Also, if it is permissible for sex equality in the public sector to be assessed by reference to what the Scheme and State provide, it is not clear why this argument cannot also be applied to the private sector.
Mega schemes the winners in levy reduction proposal
The DWP is proposing a reduction in the general levy, but only for schemes with 500,000 or more members.
The general levy funds the work of the Pensions Regulator, the Pensions Advisory Service and the Pensions Ombudsman and is expressed as a rate per member; such a rate (which varies between occupational pension schemes and personal pension schemes) declining with scheme size.
The DWP estimates that a levy surplus of approximately £13m will exist at the end of 2016/17, notwithstanding the fact that the levy rates were reduced by 13% for 2012/13 onwards.
Three options are put forward – leave the rates unchanged, reduce all the rates by 10%, or introduce a new band for schemes with 500,000 or more members which has a rate 25% lower than currently applicable to schemes of this size. Under the second and third proposal the levy surplus is expected to reduce to a negligible level by 2020.
The DWP intends to adopt the third proposal and has drafted regulations to that end, to have effect from the 2017/18 levy year. Responses to the consultation are requested by 18 January 2017.
Comment
On the face of it, to pass the entire surplus to a handful of mega schemes seems most unfair. However, the argument put forward by these schemes is that they have been overcharged for some time when one considers the numerous small pension pots they administer and the much lighter supervisory effort they need to attract vis-à-vis smaller schemes.
FCA proposes personalised “annuity comparator” to further nudge shopping around
Annuity providers will be required to inform their customers how much they could gain from shopping around and switching provider before they purchase an annuity under plans announced by the Financial Conduct Authority.
This follows on from the FCA’s Retirement Income Market Study published in March 2015 (see Pensions Bulletin 2015/15), one of whose recommendations was that an “annuity comparator” be established in order to encourage shopping around. The behavioural research the FCA sponsored as a consequence was reported on in July this year (see Pensions Bulletin 2016/29) and it concluded that a personalised form of information prompt delivered annually provoked the largest and most persistent increase in shopping around.
The FCA is now proposing that such a prompt is given before an annuity is purchased and is consulting on exactly when it should be provided, the scope of the prompt and its content, along with when firms should implement the changes.
The FCA intends that the prompt should show the difference between the provider’s own quote and the highest guaranteed quote available to the consumer on the open market (determined using comparison tools that include every provider on the market). It should be set out in a prescribed format (a template is included in the consultation pack), be issued as part of pre-sale disclosure, and be set out in the context of other important information, such as details of whether the annuity is a single or joint life product, whether the rate of income paid by the annuity is guaranteed and the total pot that will be used to buy the annuity.
Consultation closes on 24 February 2017. The FCA then intends to bring this new requirement into being from 1 September 2017.
Comment
This proposal has been long in the gestation and makes absolute sense in this era of freedom and choice, but it should be seen as part of a wider package in this area to empower annuity shoppers as by itself it does not address the enhanced annuity issue which will be highly relevant to some individuals.
Auto-enrolment minimum contributions must increase
This is the main message coming out from the PLSA’s retirement income adequacy report which examines the incomes different UK generations can expect in retirement.
Of the 25.5 million people in employment, the report finds that:
- 6 million people (largely the “baby boomers” in the age group 55 to 64) are still at high risk of falling short of a minimum income standard (of around £9,500 pa) in retirement; and
- 6 million people are still at risk of not meeting their target replacement rate (of 67% of median income of £27,450 – ie around £18,400 pa)
The PLSA states that minimum contributions under auto-enrolment need to increase to at least 12% of qualifying salary (from the 8% of qualifying earnings legislated for from April 2019), suggesting that the scheduled 2017 review of the regulations by the Secretary of State is an opportunity to start working towards this next phase of auto-enrolment.
The PLSA also repeats its message that an independent commission should be created in order to contribute to this work, with a particular remit to make recommendations around increasing minimum contribution levels to at least 12% of salary, with additional recommendations to improve the situation of older savers who will have less time to benefit from an increase in contribution rates.
Comment
It has been clear for quite some time that the minimum contributions formulated for the auto-enrolment project have become less than adequate. This is for a number of reasons including rising longevity and relatively poor market conditions and most significantly the fact that in setting the auto-enrolment replacement rate for a median earner at 45% the Pensions Commission anticipated that further voluntary savings would bridge the shortfall to 60-67%, which does not appear to have happened to date. The challenge for the DWP will be to deliver steps towards a significant increase in contributions whilst keeping everyone on board.
European Court setback for same sex partners’ pension rights
In August we reported the Opinion of the Advocate General in the Irish case of Parris v Trinity College Dublin in the European Court of Justice (see Pensions Bulletin 2016/32) as it may have implications for same sex partners’ pension rights in the UK.
Under the rules of the Trinity College scheme, entitlement to a survivor’s pension is dependent on a civil partnership or marriage being legally entered into before the member’s 60th birthday. Although Dr Parris entered into a civil partnership with his long-term same sex partner in the UK in April 2009, as Irish law did not recognise such unions at the time (and in any event Dr Parris was then over age 60) no survivor’s pension will be due if Dr Parris pre-deceases his husband. Dr Parris is suing on the grounds that he and his husband are being discriminated against on the grounds of sexual orientation, age or both.
The Advocate General opined in his favour but the ECJ has now decided that the Equal Treatment Directive must be interpreted as meaning that the age 60 rule does not constitute discrimination on grounds of either sexual orientation or age, whether directly or indirectly (with it following that there is no “combined” discrimination on these two grounds).
A crucial part of the ECJ’s reasoning is that a recital to the Directive “… expressly states that the directive is without prejudice to national laws on marital status and the benefits dependent thereon” and that “Member States are thus free to provide or not provide for marriage for persons of the same sex, or an alternative form of legal recognition of their relationship, and, if they do so provide, to lay down the date from which such a marriage or alternative form is to have effect”.
Comment
As well as being a disappointing outcome for Dr Parris this judgment is likely to influence the UK Walker case (see Pensions Bulletin 2015/43) which we understand is currently before the Supreme Court. This case also concerns retroactive entitlement to survivors’ pensions for same sex partners for periods before same sex unions were legally possible under national law. It seems to us that the Parris judgment makes it less likely that the Walker case will succeed.
DWP announces benefit up-ratings
The DWP has published the level of social security benefits that will apply next year. Those of direct relevance to pensions and pensioners are set out below.
Basic state pension
The 2017/18 basic state pension has been confirmed as £122.30 per week – a 2.5% rise on the current rate of £119.30 per week.
Increases to the basic state pension are currently protected by the Government’s triple lock guarantee (of the higher of the increase in average earnings, the increase in CPI-measured prices and 2.5%). The 2.5% increase has won out as the increase in average earnings (which apparently reflects the increase in the regular pay component of national average earnings over the 12 months to July 2016, but averaged over three months to this point) was only 2.2%. The CPI (measured over the 12 months to September 2016) was 1.0%.
Comment
Once again and thanks to the triple lock, state pensioners will experience a substantial real terms increase in their pension.
Single tier state pension
The 2017/18 level for the full rate of the new state pension will be £159.55 per week – up from £155.65 per week. Ordinarily, the transitional rate of new state pension will increase proportionately (so by 2.5056%), but for those who as at 6 April 2016 had accrued an amount in excess of the then full rate, the State Pension Revaluation for Transitional Pensions Order 2016 (SI 2016/1141) provides for this excess to increase by 1.0%, which is CPI as measured over the 12 months to September 2016.
Comment
The same triple lock applies to the full rate of the new state pension as it does to the basic state pension and so the increase has been driven this year by the 2.5% component.
European pensions directive almost over the finishing line
The “IORP II” directive has now been approved by the European Parliament (see Pensions Bulletin 2016/27). We are now down to the formalities before it becomes EU law. We understand that the next stage is for the directive to go to Coreper II. The final stage is publication in the Official Journal of the European Union and the directive becomes EU law 20 days after that.
We currently expect this to happen around the New Year. Member states (which still include the UK) then have two years to implement the directive in national law.
Comment
Our working assumption is that, despite Brexit, IORP II will be implemented in the UK from around the end of 2018. IORP II is a significant piece of pensions legislation, compliance with which will be a substantial exercise for schemes.
