Pensions bulletin

Pensions Bulletin 2016/49

Pensions & benefits

At last – Government starts to act on pension scams

As promised in the Autumn Statement (see Pensions Bulletin 2016/47) HM Treasury and the DWP are jointly consulting on three measures to combat pension scams – banning cold calls; limiting the statutory right to a transfer; and making it harder to open fraudulent schemes.

A ban on cold calls

The proposed ban on all cold calls in relation to pension scams is to be achieved through primary legislation. The Information Commissioner’s Office will police it under existing legislation and will have the power to issue fines of up to £500,000 on firms located or operating in the UK.

The ban will be drawn widely to prevent it being circumvented by fraudsters adapting their business models to avoid it. A range of “conversations” will be banned such as offers of a “free pension review” or inducements to hold certain investments within a pensions tax wrapper including overseas investments. The ban will include conversations involving inducements to transfer funds directly from a pension scheme to a scam vehicle and to move funds to a bank account, and will also cover calls that result in “hand-offs” to other organisations involved in fraudulent behaviour.

The Government acknowledges that it does not have the power to take action against firms making calls from overseas if the company is not UK-registered, but hopes that a blanket ban will protect consumers indirectly by sending out a strong message that will discourage them from engaging with any cold callers.

Limiting the statutory right to a transfer

A great difficulty for legitimate pension providers is that, even where their due diligence on a transfer request reveals suspicions that the receiving scheme is fraudulent, the DWP’s own legislation requires them to pay out anyway because members have a statutory right to a transfer. Since the Hughes v Royal London case (see Pensions Bulletin 2016/07) it has been almost impossible for providers to block suspect transfers if the member insists on proceeding.

The Government proposes to address this by restricting the statutory right to a transfer so that a member only has one if the receiving scheme is:

A personal pension scheme operated by an FCA-authorised firm or entity
An occupational pension scheme – in which case a genuine employment link between the employer and scheme must be demonstrated, with evidence of regular earnings from that employment and confirmation that the employer has agreed to participate in the receiving scheme; or
An occupational pension scheme which is an authorised master trust

The Government also trails the idea that instead of restricting the statutory right to transfer, some sort of super-discharge might be made available to providers who are faced with customers “insistent” that a transfer takes place.

Make it harder to open fraudulent schemes

Apparently there are around 800,000 pension schemes registered with HMRC in the UK. It is very easy to set one up and one-person small self-administered pension schemes (SSASs) are a major vehicle for pension fraud. HMRC registration – a non-onerous process – provides a fraudster with a misleading “registered by HMRC” credential in marketing literature.

A lot of these schemes have a dormant company as its “employer”. To try to cut this type of fraud off at source the Government proposes to make it harder to set crooked SSASs up by legislating so that a new scheme can only be registered with HMRC if the employer is an active, not a dormant company according to its Companies House entry.

Consultation closes on 13 February 2017 and the next steps will be announced in Budget 2017.

Comment

We very much welcome this strong statement of intent from the Government that they are finally grasping this nettle with measures that might actually be effective if properly thought through and implemented. Occupational pension scheme trustees may be particularly hopeful that the proposed restriction on the statutory right to transfer will help them when faced with the awful dilemma of either paying out to an obviously dodgy scheme or else breaching the pension law about transfers.

The detail of the proposals is clearly a work in progress. One can easily see both loopholes – which no doubt the fraudsters are already analysing – and potential unintended consequences: for example as it stands most transfers to “QROPS” will become non-statutory.

Another concern is the time that will necessarily elapse before these measures are law – especially as primary legislation may well be needed. Until then, how many pension scheme members will lose everything?

Auto-enrolment drives scheme membership even higher

New figures published by the DWP show that the number of people saving into workplace pensions continues to rise as a direct result of the auto-enrolment policy first rolled out in 2012.

The main findings reported in “Workplace pension participation and saving trends: 2005 to 2015“ are that in 2015:

75% of employees eligible to participate in 2015 were in a workplace pension in 2015
79% of employees eligible to participate in 2012 have saved into a workplace pension in at least three of the four years between 2012 and 2015; and
The annual total amount saved by eligible savers stands at £81.8 billion in 2015

The report also analyses participation trends between the public and private sector, by industry, occupation, employer size, earnings, gender, working pattern (full- or part-time), region, age, economic status (employed or self-employed) and disability. On nearly all of these metrics within the private sector a significant increase in participation rates can be seen since 2012. However, in a worrying sign for the future, the amount saved per eligible saver in the private sector continues its sharp decline – almost certainly because many of the increased number of savers will be making contributions at the minimum level.

The DWP also states that it will announce the scope of the 2017 review of automatic enrolment before the end of 2016.

Comment

There is little doubt that the auto-enrolment policy has been a great success so far in terms of the level of participation and the persistency of those who have been enrolled. But there are two material issues that need to be addressed – the first is the amount of savings, which need to increase substantially and the second is the significant number of individuals who have been excluded, for whom it will not always be appropriate to rely solely on the state pension in old age.

Pensions Regulator publishes a quick guide to integrated risk management

The Pensions Regulator has published a new quick guide to integrated risk management aimed at trustees of smaller DB schemes.

The four page guide is designed to be used alongside the Regulator’s full guidance that was issued in December 2015 (see Pensions Bulletin 2015/52). The quick guide is accompanied by a five step “key considerations” checklist.

The Regulator says that a commitment to integrated risk management can result in the following benefits:

Better decision-making resulting from greater trustee and employer understanding of risks
Better working relationships between trustees and employers because of open and constructive dialogue
More effective risk assessment, contingency planning and monitoring arrangements resulting from an evidence-based focus on the most important risks; and
Greater efficiency due to more effective use of trustee, employer and adviser resources

In addition, the Regulator says that trustees may find it helpful to use the guide and key considerations as a starting point for board discussions or in meetings between trustees and employers.

Comment

It may not only be trustees of small DB schemes that will benefit from reading the guide and checklist. Others who might find the 46 page guidance issued last year a bit daunting might like to start with the quick guide.

Pensions Regulator ups the ante on record-keeping

A survey of more than 530 trust-based occupational schemes, published by the Pensions Regulator, has revealed little recent improvement in record-keeping. As a direct result, from 2017 the Regulator is to ask trustees of some schemes to report their “common data” and “conditional data” record-keeping scores in their scheme return.

The survey shows that:

30% of members are in schemes where conditional data (data used to calculate benefits) is not measured
Larger schemes are significantly more likely to have measured their data – 87% of large schemes had measured common data versus 18% of micro schemes
Administrators’ understanding of the terms “common data” and “conditional data” is not universal
Administrators and trustees perceive conditional data as secondary to common data – 39% of administrators felt the measurement of conditional data was not a priority for their scheme
Record-keeping is not always seen as a priority by trustees, and they do not engage with their administrators accordingly – 23% of administrators felt that trustees treated record-keeping and administration as a low to middling priority. This went up to 32% for micro schemes, while trustees of automatic enrolment schemes were perceived to be more engaged with record-keeping than non-auto-enrolment trustees

The Regulator has also published a quick guide to record-keeping and will be providing further educational products in 2017, including videos and bite-sized learning.

Comment

The Regulator has been seeking improvement in record-keeping for a number of years and is now clearly getting concerned with a recent stagnation. But whilst there is a clear logic for schemes to ensure that their records are complete and accurate, there is no explicit legislative requirement for them to carry out the sort of measurement that the Regulator is requesting.

The sun will soon set on section 615 schemes

Pension savings made to section 615 schemes on or after 6 April 2017 will lose their UK tax-free status when taken as pension or annuity and no new schemes can be set up after that date. The legislation to make this happen is in the draft Finance Bill and follows the announcement in the Autumn Statement (see Pensions Bulletin 2016/47). Pension or annuity taken in respect of benefits accrued up to 5 April 2017 will continue to be free of UK tax.

Section 615 schemes get their name from the tax relief granted under section 615(3) of the Income and Corporation Taxes Act 1988. They are not registered pension schemes, instead existing in their own right under a separate part of legislation. These schemes came into existence over 40 years ago in order to provide benefits for individuals working in former British colonies for UK companies or subsidiaries of UK companies.

The Government has previously restricted the tax benefits of section 615 schemes by removing the tax-free lump sum easement in respect of benefits accrued on or after 6 April 2011 that had previously existed.

Comment

In recent times there has been interest in using section 615 schemes more generally for internationally mobile employees, but since A-day they have increasingly looked anomalous from a tax point of view. It would seem the Government has now decided the time has come to take action.

Details published about changes to foreign pension taxation

As well as the changes made to section 615 schemes , the Government has published a large amount of new material covering the tax treatment of foreign pension schemes, as previously mentioned in the Autumn Statement (see Pensions Bulletin 2016/47).

The draft Finance Bill sets out the following changes with effect from 6 April 2017:

Extend from five to ten years the period in which UK tax charges can apply to payments out of funds in overseas pension schemes that contain pension funds or rights that have benefitted from UK tax relief – but only in respect of funds for which that tax relief has been enjoyed since April 2017
Ensure that funds in a registered pension scheme based outside the UK are subject to UK taxation consistent with the tax treatment of a UK-based registered pension scheme – a whole new section of the Finance Act 2004 is created for this purpose
Subject to UK tax all (rather than 90%) of the pension received by a UK resident from a foreign pension scheme
Tax lump sums paid to UK residents from a foreign pension scheme in the same manner as had they been received from a registered pension scheme; and
Give HMRC new powers to make regulations specifying how information and evidence should be provided and that a pension transferred from a relevant non-UK scheme out of funds that have benefitted from UK tax relief to another relevant non-UK scheme or a registered pension scheme will be treated as the original pension

A policy paper has been published giving further background to these measures. The paper also notes that the 70% rule will be removed from the conditions that a pension scheme has to meet to be an overseas pension scheme or a recognised overseas pension scheme. This rule requires 70% of funds that have received UK tax relief, either in connection with contributions or as a result of a tax-free transfer, to be designated to provide the individual with an income for life. Following the introduction of “Freedom and Choice” for UK pension schemes in 2015 it has seemed outdated.

Effect is to be given to this via regulations which have been exposed for consultation. Other changes within these regulations include:

Allowing such overseas schemes to pay benefits earlier than normal minimum pension age, but only where the payments would be authorised if made by a registered pension scheme; and
Requiring a provider of a non-occupational pension scheme to be regulated by a body in the country where the scheme is established if there is no body which regulates such schemes and the scheme is not established within the EEA

Draft versions of the main HMRC forms affected by these changes have also been published. Comment about them should be sent to HMRC by 1 February 2017.

HMRC has also published several pieces of guidance simultaneously with the above policy paper. These cover:

Comment

The Government is attempting to reduce the tax arbitrage between how overseas pension schemes and domestic pension schemes are treated under UK tax law. On the one hand this will permit QROPS to more closely mimic the “Freedom and Choice” provisions. On the other the period of time that UK tax charges can apply to overseas schemes is extended, and there is an increase of tax charged on foreign pensions paid to UK residents. The Government giveth and the Government taketh away.

Employer-provided pensions advice – income tax exemption clause issued

The promise from Budget 2016 to increase the existing income tax and national insurance relief for employer-arranged pension advice from £150 to £500 from April 2017 has now started to find expression at clause 6 of the draft Finance Bill 2017 (see Pensions Bulletin 2016/11).

This sets out a new income tax exemption to cover the first £500 worth of pensions advice provided to an employee (including former and prospective employees) in a tax year, whether the employer pays for or reimburses the employee for the cost of advice.

It will allow advice not only on pensions, but also on the general financial and tax issues relating to pensions.

The advice must be made available to employees generally or to employees generally at a particular location, but it is also possible to limit the advice to those who are nearing retirement or are in ill-health so long as one of the above availability conditions is met.

The current £150 exemption set out in regulations will no longer be required and will be repealed. Legislation for NIC purposes will be introduced following the passage of the Finance Bill 2017.

Further details are set out in an HMRC policy paper.

Comment

When initially proposed there was concern that if advice cost a penny more than £500 the exemption would be lost. Thankfully this has proved not to be the case.

Salary sacrifice – restriction on income tax relief clause issued

The announcement in the Autumn Statement that the income tax and national insurance contributions advantages of certain salary sacrifice schemes will start to be removed from April 2017 has now been followed up by clause 2 of and Schedule 2 to the draft Finance Bill 2017 (see Pensions Bulletin 2016/47).

The exceptions to the new treatment are slightly wider than had previously been announced. Under the pensions heading they now comprise the following:

Provision made by an employee's employer under a registered pension scheme or otherwise for a retirement or death benefit
Contributions to registered pension schemes in respect of an employee
Contributions under a qualifying overseas pension scheme in respect of an employee who is a relevant migrant member of the pension scheme
Provision of appropriate independent advice in respect of conversions and transfers of pension scheme benefits where their nature will change from being a safeguarded benefit into a flexible benefit; and
Employer-provided pensions advice (see article above)

The announced protections for arrangements in place before April 2017 are reflected in the Finance Bill.

Further details are set out in an HMRC policy paper.

Comment

The extension in scope makes sense. We are particularly pleased to see that the provision by an employer of any retirement or death benefit is now within the exemptions. This should mean that life assurance arranged outside a registered pension scheme, such as through an excepted life policy, can continue to be delivered through salary sacrifice in a tax effective manner.

PPF confirms changes to valuation assumptions

The Pension Protection Fund has confirmed that its proposed changes to the assumptions used in various PPF valuations will go ahead.

Those who responded to its consultation (see Pensions Bulletin 2016/38) were supportive of the changes and as a result no further adjustments have been made. However, the PPF will pick up concerns that were expressed in relation to the expense allowance for cash balance schemes at the next review.

The changes, which were necessary in order to bring the assumptions in line with current pricing in the bulk annuity market, apply to valuations with an effective date on or after 1 December 2016.

Accountants finalise assurance reporting on master trusts document

The Institute of Chartered Accountants in England and Wales has finalised its updated technical release on assurance reporting on master trusts.

It has made two minor changes following the consultation (see Pensions Bulletin 2016/38). It also acknowledges the concern expressed about the three month deadline for completion of reports in order to remain on the Pensions Regulator’s list of master trusts and asks schemes to “maintain a dialogue with the Regulator on this issue”.

Scottish Government’s new tax raising powers now in force

Aspects of the Scotland Act 2016 have now been brought into force by the UK Government including the power of the Scottish Government to set rates of income tax and the thresholds at which these are paid for the non-savings and non-dividend income of Scottish taxpayers.

To accompany this development, HMRC has published guidance that seeks to clarify the scope of Scottish income tax powers. It includes draft regulations that, amongst other things, make consequential changes to the operation of relief at source, the annual allowance charge and the liability of the scheme administrator of a registered pension scheme.

The Scottish Government is to announce its proposed rates and limits for the 2017/18 tax year in its draft budget on 15 December 2016.

MPs to probe self-employment and the gig economy

The latest investigation by the House of Commons’ Work and Pensions Committee is into whether the UK welfare system adequately supports the growing numbers of self-employed and gig economy workers, and how it might be adapted to suit their needs.

The call for written submissions includes two questions relating to pensions:

How can self-employed people best be encouraged and supported to save for retirement?
Should self-employed people be required to enrol in a pension?

Submissions must be made by 16 January 2017.

Comment

The self-employed are outside the Government’s auto-enrolment policy and as the workplace pension participation rates show, whilst the decline in participation amongst the employed has been halted and reversed as a direct result of auto-enrolment, the decline amongst the self-employed has continued.

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.