Pensions Bulletin 2017/51

DWP consults on master trust regulations

The DWP has launched a major consultation on regulations that fill in the necessary detail of the new authorisation and supervisory regime for master trust schemes set out in the Pension Schemes Act 2017.

The Act defines a master trust scheme, broadly, as an occupational pension scheme which provides money purchase benefits and is used or intended to be used by two or more employers, but not only by employers who are connected to each other.

The consultation document states that the aims of the new regime are that:

• Members have equivalent protections to those in other types of pension schemes
• The risks specific to master trust scheme structures, including the size and scope of schemes, lack of employer engagement, diverse business models, and other factors that influence their financial resilience and viability, are proportionately and proactively regulated; and
• There is an appropriate balance between preventing risks occurring and giving the Pensions Regulator powers to intervene when necessary

The draft regulations themselves cover a number of areas and the policy underpinning the new regime has been broken down into four broad areas – scope and application, authorisation process, authorisation criteria and controls and monitoring. Some highlights from these are set out below:

• There are some exemptions to ensure that certain schemes offering a mixture of DB and DC benefits don’t find that the DC component is drawn into the new regime – including, in particular DB schemes offering money purchase as AVCs for their active DB members. However, there is no exemption for (non-statutory) industry-wide or not-for-profit schemes such as some schemes set up for academic or religious organisations
• There will be flat authorisation fees – of up to £24,000 for new master trust schemes and up to £67,000 for existing master trusts
• The fit and proper persons test will be assessed in relation to integrity, conduct and competency

Consultation closes on 12 January 2018. The Government will respond in due course. Over the coming months the Pensions Regulator will consult on a Code of Practice and publish operational guidance. The new regime remains on course to come into force from October 2018.

Comment

There is a certain mechanical aspect to these regulations as they set out all the minutiae necessary to give the new regime legal form. What is not clear at this stage is whether the regulations weave well with the Act into an appropriately balanced regulatory regime. However, the DWP has consulted widely before bringing forward these proposals and the Pensions Regulator appears to be happy with where things have now reached. But the scale of the challenge for the Regulator should not be underestimated. For the first time in its existence it will take on formal powers of authorisation and supervision.

What will be of immediate interest to some operating mixed benefit schemes is whether they will be able to take advantage of the proposed exemptions. Industry-wide schemes, in particular, that grew from DB only provision, will be concerned that as things now stand and despite their lobbying, the DC side of their offering will be treated as a master trust, albeit with some easements in relation to the scheme funder role.

MiFID II implementation draws near

The second instalment in the EU’s Markets in Financial Instruments Directive (MiFID) will come into force on 3 January 2018, ahead of which trustees of occupational pension schemes may be required to take certain actions.

In November 2007, the original Markets in Financial Instruments Directive (MiFID I) came into force with the aim of increasing the level of transparency and harmonisation across the EU’s financial markets. In particular, it was designed to encourage competition between Europe’s trading venues for financial instruments and to ensure appropriate levels of protection for investors and consumers of investment services across the EU.

In recent years the EU reviewed the MiFID framework and decided to make changes to reflect first, issues identified in the Global Financial Crisis and second, the pace of technological change (such as the growth of algorithmic trading). The result is MiFID II – the key changes of which are to do with covering a broader range of investment securities, providing greater trading transparency and enhancing investor protection.

MiFID II applies to firms that provide investment services to third parties and/or perform investment activities on a professional basis. In order to comply with MiFID II, these firms may need to provide, or obtain, further information from their clients, including occupational pension schemes. In particular, trustees of such schemes may be required to:

• Review and consent to any updated documentation provided by their investment managers; and
• Register for a Legal Entity Identifier (LEI) – most likely with the London Stock Exchange

An LEI is a unique identifier for a given legal entity that is a party to a financial transaction. Under MiFID II, investment managers are required to report on all relevant trades to their domestic national competent authority (for example, the FCA for UK firms). In order to do that, they will need to submit certain transaction reports, which include their clients’ LEIs. Without their clients’ LEI, an investment manager may not be able to continue to trade on its clients’ behalf.

Comment

Not all schemes will need to have an LEI and some may have one already. With appropriate support, the actions required by trustees should be straightforward, but for those who have yet to hear about MiFID II from their investment consultants, time is running out.

Advice regulations issued – but with a sting in the tail for DB schemes

The second set of regulations relating to “safeguarded-flexible benefits” that was settled last July (see Pensions Bulletin 2017/29) has now completed its passage through Parliament and comes into force on 6 April 2018. Safeguarded-flexible benefits are benefits that are DC in nature but offer some form of guarantee in relation to the pension income that will be available to the member such as a guaranteed annuity rate.

The main purpose of The Pension Schemes Act 2015 (Transitional Provisions and Appropriate Independent Advice) (Amendment No. 2) Regulations 2017 (SI 2017/1272) is to provide some clarity as to how providers of such benefits should value them for the purpose of testing whether the £30,000 threshold has been reached beyond which independent advice needs to be obtained when transferring out. However, they contain a completely unexpected result for some DB schemes.

A small change in the drafting of the regulations that were consulted on means that those DB schemes that provide more generous transfer values than the minimum required by the Transfer Values Regulations (whether intentionally or otherwise) will be forced to introduce a minimum basis, purely for determining whether or not the £30,000 threshold has been met.

Comment

This is a completely unnecessary and unwelcome addition to DB transfer processes. Before next April all DB schemes will need to find out whether they are affected and if so, put in place appropriate procedures to deal with it, adjusting member communications as necessary. Trustees will need to take advice from their scheme actuary and potentially debate and decide what constitutes such a minimum basis, and then keep it under review along with the existing basis that is used to calculate the actual transfer value.

Finance Bill introduced to Parliament

The Finance Bill following the Autumn Budget has now been published and, in keeping with the Budget, contains little by way of proposals impacting pensions. The Bill is also significantly shorter than recent Finance Bills.

The one measure directly impacting pensions is in Schedule 3 and it widens the circumstances in which HMRC may refuse to register a pension scheme, or alternatively decide to re-register a scheme. This was issued for consultation in September (see Pensions Bulletin 2017/39) and it seems that there is little change from those proposals.

Strangely, there is silence on the Budget announcement that tax relief for employer premiums paid into life assurance products or certain overseas pension schemes will, from April 2019, be modernised to also cover policies where an employee nominates an individual or registered charity to be their beneficiary.

The increase in the lifetime allowance to £1.03m is also absent, but this is because it will be dealt with via a statutory instrument.

Comment

So, for once, we have a Finance Bill that is largely silent on pensions tax matters. Although there are always things to be done to ensure that the pensions tax regime works as intended, perhaps we should be grateful that, in these times of great economic uncertainty, the Government has, for the 2018/19 tax year at least, left pensions tax policy undisturbed.

Relief at source tax reclaim submissions to be speeded up

HMRC has issued for consultation draft regulations applicable to those schemes that reclaim tax relief using the relief at source method, such as group personal pensions.

Administrators of such schemes will in future have to submit the annual return of individual information within three months of the end of the tax year as opposed to the current six months.

The due date of the annual claim is also being brought forward to 5 July to maintain a common filing date with the annual return of individual information.

The draft regulations also reduce the period in which an interim claim can be made from six to three months and introduce a new 30-day timescale for the reporting and repayment of excess relief in an interim claim, along with an interest charge if the reporting and/or repayment is made after the 30-day period.

Consultation closes on 31 December and the intention is that these new requirements will have effect from 6 April 2018 and, in relation to interim claims, for tax months ending on or after 5 April 2018.

Comment

The change to the annual return due date has been necessitated by the introduction of the Scottish rate of income tax. This submission (which contains details relating to the members’ residency status) needs to be speeded up so that HMRC can bring forward when it advises administrators of the correct rate of tax relief to apply to members’ contributions.

The interim claim changes by contrast are purely to encourage administrators to make claims without delay.

More news on HMRC’s pensions online service

HMRC’s Pension Schemes Newsletter 93 contains the usual selection of articles, including on the Finance Bill and on relief at source (including the draft regulations covered above). However, what may be of most interest to many schemes are the articles on the need for housekeeping ahead of HMRC’s move to a new pensions online service in April 2018.

HMRC has covered the service in a number of newsletters, aiming to get Scheme Administrators to carry out the important task of tidying up records ahead of the move. This Newsletter reports that HMRC has been writing to Scheme Administrators who have not logged on since April 2015 reminding them to go online and update their details; and goes on to say that a further reminder will soon be sent to those who have yet to log on and update their details.

The Newsletter also contains articles on pension payments to trustees in bankruptcy or third parties and the lifetime allowance service; and a report that a flaw in the HMRC annual allowance modeller, that individuals may be using the complete their 2016/17 tax returns, has been corrected.

Comment

What HMRC’s letter writing campaign has produced is recipients who have forgotten their password or want to register a new contact as Scheme Administrator. HMRC has received a number of such requests and promises to respond.

The letters we have seen from HMRC have set tight deadlines by which HMRC wants action to be concluded and have mentioned sanctions for failure to comply. Neither the deadline nor the sanction has been covered in newsletters. We can only hope that they are warnings of potential ultimate sanctions if, by April 2018, records are inadequate for transfer. What is clear is that HMRC believes that there is a lot of work involved and it needs all schemes to take the issue seriously and carry out their tidy up as soon as possible.

21st Century trusteeship – trustee business plans suggested

The Pensions Regulator’s promise to provide clearer guidance to trustees on how to raise the standard of governance in their schemes (see Pensions Bulletin 2017/39) took a further step recently with the publication of a section entitled “clear purpose and strategy”.

The Regulator suggests that setting a clear purpose and strategy is essential to managing a pension scheme effectively and having in place a business plan will enable trustees to plan ahead and improve their ability to comply with legal requirements.

To assist, the Regulator has published an example business plan and an annual planner template.

The Regulator goes on to suggest that the business plan needs to contain:

• Clear, long-term goals for the scheme and interim objectives around key areas of focus including governance, investments (and funding for DB schemes), administration and communications
• How the trustees propose to meet these objectives and goals; and
• How the trustees will measure and monitor progress towards them

The Regulator suggests that by failing to plan and prepare properly, trustees could miss important legal duties, which may lead to a fine from the Regulator for non-compliance. Moreover, if there are no long-term goals or interim objectives, the trustees are failing to govern the scheme effectively.

Comment

We are not aware of any requirement, either under trust law, or statute, for trustees to operate a formal business plan. However, we consider it important for all trustees to develop and regularly review an activities-based plan that clearly documents the tasks expected to be completed during the year, who is responsible for overseeing completion and the target date for doing so. We also encourage trustees to formulate clear objectives for their schemes and ideally integrate this with their risk management framework. For those wishing to refresh their approach, the Regulator’s material provides a useful starter for ten.

This year’s Purple Book shows notable rise in schemes closing to future accruals but funding positions look better

The Pension Protection Fund has published this year’s edition of its’ “state of the nation” Purple Book review of where the 5,600 or so DB pension schemes eligible to enter the PPF in the UK are at in terms of their demographics, funding and investments.

This time last year (see Pensions Bulletin 2016/50) the Purple Book revealed largely stable trends.

This year’s review shows that:

• Schemes closed to future accrual notably rose again from 35% to 39%, this shows the trend of the last couple of years is beginning to accelerate. The percentage of schemes that are open to new members has fallen slightly from 13% to 12% as has the proportion of members who are active
• Scheme funding has risen to its highest level in three years resulting in the aggregate deficit, measured on the PPF valuation basis, falling from £221.7bn last year to £161.8bn while the aggregate funding ratio rose from 85.8% to 90.5% in the year to the end of March 2017. The PPF notes that market movements made a small negative contribution to funding but more up-to-date valuations and the shrinking universe also contributed to the improvement
• The average recovery plan for Tranche 10 schemes is 7.5 years, the lowest recorded since records began in 2005/06 and a year shorter than that of Tranche 7 (comparable given the three year valuation cycle)
• The proportion of assets invested in equities fell from 30.3% to 29.0% while the proportion in bonds rose from 51.3% to 55.7%. The share of other investments fell again – from 18.4% to 15.3%
• The proportion of UK-quoted equities in total equity holdings fell again from 22.4% to 20.5%, while the overseas-quoted share increased from 68.6% to 69.0%
• Within bonds, the corporate fixed interest securities’ proportion decreased from 33.7% to 31.4%. Meanwhile, the proportion of government fixed interest securities rose from 21.9% to 24.1%. The balance of holdings in index-linked securities also rose fractionally to 44.5% from 44.4%

Comment

It is good to see that despite a challenging environment there has been progress on deficit and risk reduction. But the PPF remains exposed to a veritable wall of claims that could crystallise should insolvency rates take a turn for the worse.

Will UK pensioner poverty rise further?

This is the underlying concern expressed in the UK section of the OECD’s Pensions at a Glance 2017 report published this week.

Showing charts that illustrate that old-age poverty is currently high in the UK, the authors worry that low employment market participation by older adults, especially amongst those who are lower-educated, exacerbated by widespread disability (driven in part by high obesity levels), will not enable sufficient retirement savings to be made by disadvantaged groups. They also worry that planned increases in minimum contributions to private pensions could result in more lower earners opting out and that the freedom and choice reforms could increase poverty risks in retirement.

Looking more widely, Pensions at a Glance 2017 says that further reforms are needed across OECD countries to mitigate the impact of population ageing, increased inequality among the elderly and the changing nature of work.

Comment

This report provides an interesting counterpoint to the observation made by many that, in the UK, today’s pensioners are in fact doing better than those in work. This may be so, but policymakers and employers will need to react to the findings in this report to ensure that tomorrow’s pensioners are not disadvantaged.

ACA Pension Trends – final edition published

The Association of Consulting Actuaries’ final report on its survey of employers in smaller schemes focusses on auto-enrolment issues whilst making available all of the survey’s findings, including those previously released in September and October (see Pensions Bulletin 2017/39 and Pensions Bulletin 2017/44 respectively).

The latest results published show that:

• 57% of employers think the self-employed should be brought into auto-enrolment
• 46% oppose reducing the lower trigger point for auto-enrolment (currently £10,000 pa earnings), whilst 44% support a lowering; and
• 44% oppose increases in minimum auto-enrolment contributions post-April 2019, when contributions will be a minimum of 8% of qualifying earnings, whilst 41% support a gradual increase

The ACA, in introducing the survey results, says that the Government needs to develop a coherent “next steps” strategy on auto-enrolment, that is ready to address the anticipated potential danger of rising opt-outs as employers – particularly small and micro-employers – and their employees react to the increase in minimum contributions in 2018 and 2019. The Association goes on to say that a gradual increase in minimum contributions to eventually around 16% of earnings should be a target.

Comment

The ACA’s findings on auto-enrolment demonstrate the difficulty of delivering reform in this area. But public policy does need to take a further step if retirement savings through auto-enrolment are to be meaningful.

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.