One step at a time for CDCs – starting with those that look like the Royal Mail proposal
Schemes like the proposed Royal Mail Collective Defined Contribution (CDC) scheme will be the only CDC schemes legislated for initially according to the eagerly awaited consultation issued by the DWP on 6 November. But there are some surprises in the proposed scheme design.
CDCs come in various shapes and sizes. As a reminder, the main premise of a CDC scheme is that the employer and employee pay in a set amount of contributions and the employee is informed of the target level of benefit these contributions will purchase. If investment returns and other scheme experiences are favourable, the level of pension (or associated increase) will be higher than that projected. If experience is unfavourable, pension increases can be reduced and in extremis benefits could be cut. Importantly, the employer is not forced to pay additional contributions to ensure that the benefits remain on target.
The Pension Schemes Act 2015 provided a legislative framework for CDC schemes, but the DWP has decided to rip this up and start again by implementing CDCs as a subsection within the existing DC legislation. As a result it is proposed CDCs will be subject to many of the requirements that apply to “money purchase” schemes, including the 0.75% charge cap and disclosure requirements about benefits payable under the scheme. Being classified as DC also means that CDCs will not be covered by the Pension Protection Fund.
Initially, the new CDC legislation (which will include both primary and secondary legislation) will be limited in scope to schemes that:
- Are occupational trust-based pension schemes registered with HMRC with their main place of administration in the UK
- Are sponsored by a single employer, or an associated group of employers – so CDC master trusts will not be possible
- Are not simply accrual-only vehicles like standard DC schemes, but have an element of smoothed investment returns and pooled longevity risk – this means the scheme would have to be of a sufficient size to be able to pool longevity risk
- Do not have “buffer funds” to support a more guaranteed level of benefits like CDCs in several other countries – the intention is instead that benefits are valued annually on a “best estimate” basis (by a scheme actuary) and that members accept benefits can go down as well as up
- Apply benefit adjustments as a result of good or bad experience equally to active, deferred and pensioner members
- Include a winding up trigger where it appears the scheme is no longer sustainable; and
- Are authorised by the Pensions Regulator under a new scheme authorisation process, that has many features in common with that of DC master trusts
The DWP is investigating further what minimum quality requirements are appropriate for a CDC scheme to be classed as an auto-enrolment scheme and how transfers to and from a CDC would work. We are also promised more details of the Royal Mail scheme during the consultation period.
Consultation closes on 16 January 2019.
Comment
The consultation confirms much of what the Parliamentary Under-Secretary of State for Pensions and Financial Inclusion Guy Opperman has been saying over the last few months. In particular, the need for a new Act to incorporate CDCs when Parliamentary time is so Brexit-focussed means that we are unlikely to see legislation in the near future.
Shunning buffer funds in favour of a best-estimate target benefit system is brave. Experience from other countries’ pooled risk funds suggests any form of unexpected large benefit cut is difficult for members to accept, and particularly in the first few years supporters of CDC schemes can ill-afford members to be complaining about reduced benefit expectations. But there is an argument for avoiding the investment restrictions that near “guaranteeing” a benefit places on those running the scheme. We look forward to the more detailed provisions of the Royal Mail scheme shortly.
Cold-calling regulations laid
Regulations have been laid before Parliament in draft form bringing in the pensions cold-calling ban. This follows the publication of HM Treasury’s response to its consultation, with the Budget papers last week (see Pensions Bulletin 2018/43).
The Privacy and Electronic Communications (Amendment) (No. 2) Regulations 2018 have no date for their coming into force, but the accompanying explanatory memorandum says that this is expected to be early in the New Year, subject to the Parliamentary timetable.
From this date, other than in very limited situations “unsolicited calls to an individual for the purpose of direct marketing in relation to occupational pension schemes or personal pension schemes” will be illegal and could attract fines of up to £500,000 for organisations that continue to do this.
The Information Commissioner’s Office will issue guidance for the industry on adhering to the cold-calling ban when it comes into force. It is also producing a new statutory direct marketing code under the Data Protection Act 2018 which will be consulted on in 2019.
Comment
The Government is clearly hoping that by outlawing pensions cold-calling it will have a major impact on the business operations of the scammers. But the ban will not address “factory gating” by lead generation firms, nor cold-calling from overseas. And we are still waiting for action on the 2016 Autumn Statement’s promise to limit the statutory right to transfer so that trustees can be assured that pension savings are transferred to safe destinations.
PPF outlines initial implementation of European Court’s “50% minimum” ruling
The Pension Protection Fund has outlined how it initially intends to uplift compensation where individuals are currently getting less than 50% of the value of their original scheme pensions. As a result of the recent European Court of Justice ruling in the Hampshire case (see Pensions Bulletin 2018/36), some individuals whose PPF compensation is restricted by the compensation cap and/or who had more generous revaluation/indexation rates in their original scheme than they will enjoy in the PPF may see their PPF compensation increased on a one-off basis.
To check whether a member requires uplifting (and how much extra they will get) the PPF will compare:
1) 50% of the actuarial value of the member’s scheme pension at the sponsoring company’s insolvency date; with
2) the value of PPF compensation at the same date
Actuarial value is calculated using factors on a PPF entry (also known as a section 143 valuation) basis. Where 1) is greater than 2), the percentage by which it is greater will correspond to the uplift in PPF compensation. Arrears will be payable with interest, over a period which may be affected by time limits under the Limitation Act (the PPF has confirmed it will consider time as frozen on the judgment date for now so people aren’t prejudiced by not making a legal claim for arrears now). As noted in Pensions Bulletin 2018/41 the PPF is in the process of writing to members to get the additional information needed to perform these calculations.
This is very much an interim measure as the PPF is expecting the DWP to bring forward legislation and before this there could be further court rulings in this area. Given the time that both could take, the PPF wants to take action now to improve affected individual’s PPF compensation. Capped pensioners are being looked at first as the group likely to require the greatest increases.
A similar process is taking place in respect of FAS assistance.
Comment
Those affected will be pleased the PPF is addressing the underpayments now rather than holding off on this work whilst they seek greater clarification from the Courts and a final legislative solution from the Government. Early action could also benefit the PPF – it will be keen for any solution to require minimal changes to its existing administration system, and its current proposal certainly does that. But whilst the current solution is pragmatic and administratively simple, will it sufficiently deliver the protection the CJEU intends?
Equality achieved in State Pension Age
6 November 2018 marks the point at which the transition of the female State Pension Age from 60 to 65 is complete – a process that started on 6 May 2010, but which was originally legislated for by John Major’s Government via the Pensions Act 1995. Women born between 6 November 1953 and 5 December 1953 will have reached State Pension Age on Tuesday this week.
This controversial reform now continues, but on a unisex basis, as the State Pension Age for both men and women rises in stages, first from 65 to 66 (by 6 September 2020), and then from 66 to 67 (between 2026 and 2028), and then from 67 to 68 (between 2044 and 2046, but likely to be brought forward by a future Government following the 2017 Cridland report (see Pensions Bulletin 2017/14).
Comment
Equalisation makes absolute sense, but the delivery of it over an extended timescale during which the women most affected were not made aware of the impact it would have on them, has been a sorry tale. And although we now have equality at a higher State Pension Age for women, we are far from equality when it comes to retirement incomes – whether from the State or from private pensions.
HMRC publishes Newsletter 104
HMRC’s Pension Schemes Newsletter 104 covers the usual range of largely administrative topics, amongst which you might like to note some new features of the Manage and Register Pension Schemes service and some common problems being encountered by HMRC with the information that is being received with submissions reporting the overseas transfer charge.
Also to note is the long overdue resolution of the P6 coding notices that were being incorrectly issued to beneficiaries in receipt of death benefits that are entirely non-taxable. This error was first acknowledged by HMRC in May 2016 (see Pensions Bulletin 2016/20) and the interim guidance issued through newsletters since then has been that such benefits should not be reported to HMRC (see most recently Pensions Bulletin 2018/38). HMRC has now confirmed that the error in the Real Time Information (RTI) system which generates these notices has been rectified and asks that the reporting of such payments is now resumed. A link to further guidance is also included.
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.
