Pensions Bulletin 2019/15

IFS calls the Annual Allowance taper “most perverse”

On 4 April 2019 the Institute for Fiscal Studies issued a report in which it highlights the reduction in the pension contribution annual allowance for high income individuals as “arguably the most perverse case” of a tax threshold in the UK tax system. The authors go on to say that “it is hard to see much logic to the tapering of the annual allowance. It is not clear why someone getting total remuneration of £150,000 (including pension contributions) should be able to save £40,000 of it in a pension without incurring penal tax rates, while someone earning £210,000 should only be able to save £10,000”, also arguing that the taper has damaging effects on work incentives.

The IFS accepts that the extreme cases illustrated within the report concern unusually high income individuals. Within the private sector these penal tax charges can be, and often are, avoided by keeping pension contributions below the annual allowance and instead receiving higher salaries.

But the IFS also notes that some public sector schemes, such as for some doctors and civil servants, do not allow such flexibility. Typically, the only way in these cases for affected individuals to avoid an unwelcome tax charge is to opt out of their pension scheme thus losing the whole of their employer’s contribution (including other features such as payments to their family if they die), or to reduce their working hours so that their salary falls beneath the threshold.

This analysis is part of a wider argument made by the IFS that the haphazard way in which some tax thresholds are (or are not) increased with inflation over time is not transparent and can have damaging effects on work incentives by encouraging individuals to keep their income below arbitrary thresholds.

The IFS concludes that, in particular, both the withdrawal of the personal allowance and the withdrawal of child benefit create income bands with very high effective marginal rates of income tax: an effective 60% income tax rate on incomes between £100,000 and £123,700 in the case of the personal allowance, and in the case of child benefit an effective marginal income tax rate between £50,000 and £60,000 that is higher for those who have more children (it is currently 51% for those with one child and 65% for those with three children).

The IFS report finishes by acknowledging that few may be sympathetic to the plight of high earners paying excess tax but argues that nobody’s interests are served by encouraging these individuals to work less in order to keep their income below an arbitrary threshold. And as these thresholds are frozen while incomes rise, these “pernicious incentives” become relevant to an ever wider group of people.

Comment

This is a useful paper that shines a spotlight on some of the murkier areas of the tax system. It is also timely given the recent press reports about doctors quitting the NHS because of pension tax charges.

FCA proposes beefing up IGC oversight duties on ESG policies and other matters

On 15 April 2019 the Financial Conduct Authority launched a wide-ranging consultation proposing changes to the duties of Independent Governance Committees (IGCs) and Governance Advisory Arrangements (GAAs) regarding Environmental, Social and Governance (ESG) issues and drawdown investment pathways as well as some other matters.

IGCs and (for smaller firms) GAAs currently provide independent oversight of the value for money of workplace personal pensions provided by firms such as life insurers and some self-invested personal pension (SIPP) operators. IGCs and GAAs currently oversee workplace personal pensions in accumulation, ie before pension savings are accessed. They act on behalf of consumers who are likely to be disengaged or less engaged with their pension savings (Future references to IGCs in this article mean both IGCs and GAAs unless otherwise stated).

New duty to report on ESG issues

The FCA is proposing a new duty for IGCs to report on their firm’s policies on ESG issues, consumer concerns and stewardship, for the products that IGCs oversee. The FCA states that its proposals are to help protect consumers from investments that may be unsuitable because of ESG risks including climate change, make sure that consumer concerns are considered, and encourage good stewardship of investments.

New ESG guidance for pension providers

The FCA is also proposing related guidance for providers of pension products and investment-based life insurance products. This guidance will set out how these firms should consider factors such as ESG risks and opportunities that can have an impact on financial returns, and on non-financial consumer concerns, when making investment decisions on behalf of consumers.

Consultation on all these aspects was promised in the FCA’s discussion paper on climate change and green finance last October (see Pensions Bulletin 2018/41).

IGCs to assess value for money in drawdown investment pathways

Additionally, the FCA is proposing to extend the duties of IGCs to include independent oversight of the value for money of their firm’s investment pathway solutions. This follows the consultation in January 2019, when the FCA proposed changes to its rules and guidance to require drawdown providers to offer investment pathways to non-advised consumers entering drawdown (see Pensions Bulletin 2019/04) and in which the FCA stated that it intended to extend the remit of IGCs to investment pathways.

Assessing the value for money of pathway solutions means assessing the costs and charges of pathway solutions relative to their quality, and the appropriateness of a pathway solution for consumers invested in it. Importantly, IGCs will have to assess the value for money of pathway solutions before they are offered to consumers. As with workplace personal pensions, IGCs will have the power to raise any concerns directly with the Boards of firms, which firms must respond to.

Prominent publication of IGC annual reports

There is also a proposal that IGC annual reports should be made “appropriately prominent” on their firm’s website, with prior year reports for comparison.

This consultation closes on 15 July 2019 and, for the proposed extension of IGC remit set out in this consultation paper, the FCA plans to publish its policy statement and final rules in the fourth quarter of 2019.

Comment

Yet more evidence that 2019 will be the year that ESG issues really break into the pensions sphere (to the extent they haven’t yet done so).

Despite being arguably overshadowed by the ESG aspects of the consultation, the extension of IGC’s oversight to cover drawdown investment pathways could have the greater impact on improving outcomes for pension savers, so this is to be welcomed.

We also applaud the proposal that IGC annual reports should be easier to find on websites – this will make comparisons between different providers easier and thus improve transparency and ultimately competition.

MAPS launched but route yet to be decided

The newly named Money and Pensions Service (MAPS - see Pensions Bulletin 2019/09) was officially launched on 8 April 2019. Unsurprisingly, the first year of operation will be one of transition, bringing together seven brands, six websites, two telephone contact centres, many debt advice brands, and five statutory functions set out in legislation. So a lot to coalesce into a coherent whole.

While MAPS has clear key performance indicators for this first year based on target numbers of guidance and advice to be provided in each of its service areas (see its business plan), it is also holding “listening events” throughout the UK between now and June to help develop its national strategy and three-year corporate plan.

In terms of pensions, it is proposed that the number of working age adults who understand enough to make informed decisions about their retirement should be increased by two million by March 2023 (this is the end of the Service’s business plan period and most targets have this date). It is recognised that current challenges around pensions, later life and retirement include:

• At the planning stage: a shift of risk towards individual employees; lack of engagement, changing concept of retirement; people living longer; the pension gap between genders; and vulnerability to scams
• Once in retirement: many older people being digitally excluded; not claiming benefits they are entitled to; needs difficult to predict; outstanding debts; vulnerability to abuse and scams; and cognitive ageing exacerbating many problems

MAPS expects to launch a national strategy and three-year corporate plan by November as well as a new customer website going live around the same time.

Comment

The Money and Pensions Service will have a challenging year of transition as it gathers all the services it now has responsibility into one brand. It acknowledges that there are pros and cons of keeping specialist brands versus one overarching brand – we wish them well in achieving this balance.

ONS confirms three-quarters of employees are now in workplace pension schemes

The unsurprising headline to the Office for National Statistics’ latest statistical bulletin published on 12 April 2019 states that 76% of UK employees were members of a workplace pension scheme in 2018, an increase of 3% from 2017, and a whopping increase of 29% from 2012 when automatic enrolment was introduced. Among other interesting figures are:

• In 2018 the proportion of employees with DC workplace pensions (34%) almost equalled that with defined benefit pensions (36%)
• In 2018, employees aged outside automatic enrolment age eligibility (less than 22 years or over State Pension age) had low proportions of workplace pension participation (35% or less), whereas approximately 80% of employees within the age boundary criteria were members of their workplace pension scheme
• The proportion of pension scheme membership increases as earnings increase. In 2018, 38% of those earning between £100 and £200 a week in the private sector were members of workplace pension schemes; the proportion rises to 89% for those earning at least £600 a week. This trend is also seen in the public sector, albeit much less significant: the proportions are 83% and 94% respectively
• The proportion of DC scheme members contributing between 2% and 3% of their earnings rose to 38% in 2018, up from 6% in 2017, while the share contributing less than 2% fell
• The vast majority (85%) of DB pension scheme members received employer contributions equivalent to 12% or more of their earnings in 2018, while just 8% of defined contribution members received employer contributions of this size