FCA to examine effective competition in non-workplace pensions
The Financial Conduct Authority is turning its attention to non-workplace pensions, initially via a discussion paper that seeks to better understand the market for such pensions with a view to assessing the potential presence, nature and extent of harm to consumers.
In recent years, the FCA, alongside the DWP and the Pensions Regulator, has taken a number of steps to address weaknesses in the DC workplace pensions market – most notably following the Office of Fair Trading’s study of this market in 2013. The FCA believes it is now right to look at the other side of the picture and assess whether competition is working in non-workplace pensions.
The particular areas of focus include those affecting the “demand side” such as:
- Product complexity – as product performance may not become apparent for many years
- The factors which may reduce consumer motivation and ability to invest time and effort in decisions related to their pensions
- Whether customers can identify and freely move to more competitive products; and
- Fund choice and the use of defaults – the FCA is concerned that informal defaults may be operating in the market for non-workplace pensions that are not subject to the same protection as defaults in workplace pensions
The FCA is also looking at whether providers are competing on charges and if there are barriers to consumers identifying, and choosing from, more competitive products.
Consultation closes on 27 April 2018, after which the FCA will issue a data collection request to providers which is likely to cover charges and whether and how value for money and fair outcomes are addressed by providers’ oversight arrangements. Towards the end of 2018 the FCA intends to publish a further paper providing feedback on both exercises and consultation proposals if the gathered evidence demonstrates harm to consumers.
Comment
This looks like the beginning of a major investigation into the personal pension market, whether individual, stakeholder or self-invested, with perhaps a focus on the latter, whose recent growth has been buoyed by the 2015 pension freedoms. In relation to SIPPs what is coming through in the discussion paper is a concern that a product designed for a particular demographic is now much more widely used, with the risk that it will not sufficiently serve consumer needs. It is too early to say what the outcome in terms of regulation may be, although action in relation to charges may be part of the mix.
Have you removed your Protected Rights rules yet?
The easement by which trustees can remove out of date provisions in respect of Protected Rights from their rules ends on 5 April 2018. Trustees of affected schemes who have not yet taken action should do so quickly.
Protected Rights were formed from the minimum contributions that money purchase schemes had to receive as part of the deal for contracting out from the State scheme. The fund arising from these contributions could then only be used in certain ways.
These Protected Rights provisions were abolished and removed from the statute book on 6 April 2012. However, because the Protected Rights requirements had to be written into scheme rules in order to meet the contracting-out conditions, removing them following abolition was likely to trigger the complicated and costly modification (Section 67) requirements and indeed may not have been possible under scheme rules. To avoid this, an easement was introduced from 6 April 2012 so that trustees of affected schemes could remove by resolution those parts of scheme rules directly relating to Protected Rights that were no longer required as a result of their abolition without triggering the Section 67 requirements. Any such amendments have to be made before 6 April 2018.
Comment
We hope that the vast majority of affected schemes dealt with this issue promptly, shortly after the easement was introduced. But any stragglers should deal with this now if they don’t want to be left with unnecessarily obsolete Protected Rights restrictions in their scheme rules.
Is it too late for schemes to offer to pay a member’s 2016/17 Annual Allowance charge?
Now that 31 January 2018 has passed, is it too late for a member to have a scheme pay some of his/her 2016/17 annual allowance charge in return for a benefit reduction? In short – no.
A member may for a while still have a statutory right to use Scheme Pays for some of the charge (see our Pensions tax checklist for “Mandatory Scheme Pays” election deadlines), and the trustee’s consequent tax payment to HMRC won’t count as late.
And if the member doesn’t have such a right? A scheme can still allow Scheme Pays on a voluntary basis. 31 January has passed so the tax payment will count as late and HMRC may well charge the individual interest or late payment charges, but the individual may appreciate the help on their cash flow (and the potential tax efficiency) rather than paying themselves.
Comment
Why this question now? The run up to 31 January 2018 really highlighted the complexity of the tapered annual allowance, new for 2016/17. It will be no surprise if some individuals are late, perhaps very late, in spotting an annual allowance charge – and then find the taper or timing means they don’t have a full Mandatory Scheme Pays right.
Will the UK have its first Collective Defined Contribution scheme?
This could be the case if Royal Mail and the Communication Workers Union succeed in their promised lobbying of the Government following the conclusion of a negotiation on pay and conditions last week, the details of which were announced to the London Stock Exchange on 1 February 2018.
However, although the primary legislation to enable CDCs to be established is contained within the Pension Schemes Act 2015, following the 2015 General Election, Ros Altmann, the then pensions minister, put the development of the necessary regulations on ice. And only recently, the current pensions minister (Guy Opperman) has been reported as indicating that he would not be turning to this area any time soon.
Comment
The likely next step in this will be the results of the inquiry being carried out by the Work and Pensions Committee (see Pensions Bulletin 2017/50). This has attracted a number of responses and it would seem that at some point in the near future, the Committee will publish a report setting out its findings.
The Regulator has its say on British Steel
As the restructuring of the British Steel Pension Scheme draws to a close the Pensions Regulator has published a report on its decision to approve the regulatory apportionment arrangement that was at the heart of the necessary changes to the scheme.
The report highlights how the restructuring represented a significantly better outcome for scheme members than had the sponsoring employer become insolvent. The Regulator also repeats its mantra that it will only agree to a regulatory apportionment arrangement if stringent criteria have been met.
There is some focus on the mitigation package provided from the company side – an upfront payment of £550m along with a 33% equity stake in the scheme sponsor. One of the reasons for the size of the cash payment was to recognise the security package that the trustee had negotiated in 2007 from which the company side wished to be released (along with its other obligations to the scheme). The Regulator makes the point that trustees generally need to be alert to opportunities for alternative, legally binding support for their scheme when efforts to secure cash to support the scheme’s funding have been exhausted.
The Regulator notes that the establishment of the new BSPS is not a foregone conclusion, with (unspecified) qualifying criteria needing to be met. Nevertheless, it appears highly likely that it will be given the go ahead next month, in which case those who have elected for it will be transferred on 28 March and the old scheme will enter PPF assessment the following day.
Comment
The report is a slight disappointment as it has little to say specific to the scheme, regulatory apportionment arrangements and setting up successor schemes that is not already known or could be readily inferred. For example, it should come as no surprise that the Regulator obtained actuarial and investment advice on the successor scheme.
The report does mention, in passing, concerns in relation to those who have chosen to transfer their benefits to other pension arrangements and it is likely that we will hear more about this in due course.
DWP updates guidance on safeguarded flexible pension benefits
The non-mandatory guidance on safeguarded flexible pension benefits issued by the DWP in November has been updated in order that it can cover what appears to be an unintended effect of regulations that come into force on 6 April 2018.
As one might think from reading the title, the original guidance (see Pensions Bulletin 2017/47) was concerned only with safeguarded-flexible benefits – those which 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.
But the updated version of the guidance now covers, in a new valuation chapter, the fact that from 6 April 2018, DB schemes that provide transfer values on a “higher than best estimate” basis will need to disregard any increase over the corresponding best estimate value for the purpose of determining whether members are required to seek financial advice.
The guidance goes on to suggest some best practice for impacted schemes, under the headings of “getting ready for the change” and “ongoing”. The DWP suggests that trustees who think they are potentially affected should get in touch with their scheme actuary. They also warn that certain transitional provisions may apply to members of affected schemes who have had a transfer quote on or after 1 October 2017.
Comment
As we commented when the regulations completed their passage through Parliament in November (see Pensions Bulletin 2017/51), this is a completely unnecessary and unwelcome addition to DB transfer processes. But given where we now are, it seems likely that it will endure.
Auto-enrolment staging comes to an end – and a reminder about contribution increases
1 February 2018 marked the last date on which employers have been gradually “staged” into their auto-enrolment duty since 1 October 2012, from the largest initially to the smallest. However, since last May, staging has only applied to those employers with PAYE schemes set up after 1 April 2012 but before 1 October 2017 regardless of size.
The next significant milestone in the auto-enrolment calendar will be 6 April 2018 when those within money purchase schemes could see their contributions and those paid by their employer increase under the phasing rules.
Comment
Although the staging process has now come to an end, for some while now, new employers have been subject to the duty to auto-enrol qualifying workers as soon as they are employed.
Insofar as contribution increases are concerned, in most cases employers should not need to consult with their employees, but it may depend on exactly how the phasing of minimum contributions is documented and so legal advice will usually be required before deciding not to consult.
Auto-enrolment earnings parameters – draft Order published
The draft Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2018, which will give effect to the 2018/19 earnings parameters agreed in December (see Pensions Bulletin 2017/53), has been published. The Order contains the annualised lower and upper limits of the qualifying earnings band (£6,032 and £46,350 respectively) and by reference to other pay reference periods. As the earnings trigger remains unchanged at £10,000 this is not mentioned.
NEST Order laid before Parliament
The Order that allows employers to contractually enrol workers into the National Employment Savings Trust after their staging date and which also covers a number of other matters (see Pensions Bulletin 2018/05) has now been laid before Parliament in draft form.
The draft National Employment Savings Trust (Amendment) Order 2018 should come into force on 1 April 2018.
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.
