Budget Day today
The new Chancellor, Rishi Sunak MP, will start delivering his first Budget Statement to the House of Commons shortly after 12.30 pm today. We will bring you all the Budget news relevant to pension schemes in a Budget Special edition of the Pensions Bulletin tomorrow.
Industry group to publish climate guidance for trustees tomorrow
At the PLSA Investment Conference tomorrow we are expecting draft guidance to be published whose purpose is to help trustees evaluate the ways in which climate-related risks and opportunities may affect their schemes. This guidance, from the Pensions Climate Risk Industry Group, was promised by the Government in its Green Finance Strategy published in July 2019 (see Pensions Bulletin 2019/27).
We will bring you our summary and analysis of this guidance by way of a special News Alert by the end of the week.
DC pension costs exemption moves to statutory footing
Regulations have been made to bring the VAT exempt treatment of certain DC pension funds on to a statutory footing.
The Value Added Tax (Finance) Order 2020 (SI 2020/209) adds “qualifying pension fund” to the list of exempt supplies in Group 5 of Schedule 9 of the Value Added Tax Act 1994. A qualifying pension fund is a fund meeting the following conditions:
- It is solely funded, whether directly or indirectly, by the members
- The members bear the investment risk
- The fund contains the pooled contributions of more than one member
- The risk borne by the pension members is spread over a range of investments
- The fund is established in the United Kingdom or in an EU member state
This means that certain supplies to DC occupational pension schemes should be statutorily exempt from VAT from 1 April 2020.
Substantially the same regulations were made last year but then revoked (see Pensions Bulletin 2019/03 and Pension Bulletin 2019/24).
Comment
On the face of it this is good news for trustees of DC schemes – ostensibly some of their costs could be reduced by 20%. But it may not be so simple where the sponsor ultimately pays the bills and offsets the VAT against its input tax. Furthermore, there will be no choice about the VAT treatment from April. The law says that qualifying pension funds are an exempt vehicle and that’s the end of it, so it is unfortunate that the regulations have been made with such a short lead time and without transitional provisions.
FCA proposes climate-related disclosures for UK-listed companies
The Financial Conduct Authority has issued a consultation paper setting out a new climate-related disclosure rule for many UK-listed companies.
Under it, all commercial companies with a UK premium listing must either make climate related disclosures consistent with the approach set out by the Taskforce on Climate-related Financial Disclosures (TCFD) in its 2017 report (see LCP’s Briefing Note) and state that they have done so in their annual financial report, or explain in this report why not.
The FCA regards this as a first step and in due course will consider consulting on extending this rule to a wider scope of issuers. It may also strengthen what needs to be disclosed.
The FCA is also seeking feedback on clarifications to how existing requirements applicable to all listed companies already require climate and other sustainability-related disclosure. These clarifications are contained in draft FCA guidance.
Consultation closes on 5 June 2020 and the FCA intends to publish a policy statement along with the finalised rules and guidance later in 2020. The new rule is expected to take effect for accounting periods beginning on or after 1 January 2021.
Comment
In its Green Finance Strategy launched in July 2019, the Government has set 2022 as the year by which such disclosures would be made by all listed issuers and large asset owners. The proposed timing of the rule to take effect will mean that annual reports published from early 2022 for all companies within scope will have to include relevant disclosures, just in time to comply with this requirement.
FCA responds on permitted links rules relaxation consultation
On 4 March the Financial Conduct Authority published finalised amendments to its “permitted links” rules following a consultation that took place along with that on patient capital (see Pensions Bulletin 2018/51), the outcome of which we reported on last week (see Pensions Bulletin 2020/09).
The FCA’s permitted links rules specify the types of investments insurance companies can make when the investment risks of a contract, such as a unit-linked product, lie with an individual customer. As such they are of relevance to the make-up of fund choices that insurers can offer to those who invest via DC pension schemes that are regulated by the FCA.
The consultation was concerned with removing unnecessary barriers in these rules relating to long-term capital investment in illiquid assets, whilst continuing to ensure that an appropriate degree of protection to policyholders is delivered.
The FCA is going ahead with its proposals in most areas. However, it has decided to remove permitted land and property from its proposed overall limit of 50% on the proportion of funds that can be invested in illiquid assets. Limits relating to investment in land and property will be unchanged from the current rules, and the overall limit on other categories will be set at 35%. Use of these extended permissions is conditional on the insurer:
- Ensuring, on a continuing basis, that the investments are suitable and appropriate for a policyholder’s circumstances, and that the timing of benefits due to a policyholder under the contract are not negatively affected by liquidity issues
- Setting out clearly and prominently to a policyholder the additional risks and consequences involved
These extended permissions came into force on 4 March 2020. Insurers can continue to use the existing permitted links rules if they wish.
IFS looks at how people have adjusted to the major pension reforms of the 2010s
On 5 March the Institute for Fiscal Studies published two new publications looking at how people have adjusted to the major pension reforms of the 2010s (an increase in male and female state pension ages, the introduction of the new state pension, and the roll out of automatic enrolment). One report looks at auto-enrolment whilst the other examines how retirement expectations, attitudes and saving behaviour have changed over the period 2006 to 2017.
Auto-enrolment
The first report shows how auto-enrolment has boosted workplace pension participation through two key mechanisms – by increasing the number of employers that offer pensions, and by defaulting employees into them.
The report also finds that auto-enrolment has substantially reduced the gaps in pension participation between different types of employees. Participation of eligible 22- to 25-year-olds in a workplace pension has increased from 20% to 88%, while participation of eligible 51- to 55-year-olds has increased from 55% to 93%.
Interestingly, pension participation amongst the least financially secure 3% of the eligible workforce has risen from 22% to 90%, begging the question as to whether those in financial difficulty should remain enrolled in a pension scheme when they could potentially be better off, at least temporarily, with a higher income today.
Retirement expectations, attitudes and savings behaviour
The second report reveals a sizeable increase in the proportion of private sector employees expecting to get any income from a private pension in retirement, from 63% in 2013 to 78% in 2017.
It also shows that whilst confidence in retirement incomes has increased, levels of understanding of pensions and confidence in the adequacy of retirement incomes remain low, with both around the 50% mark. Using the increase in State Pension Age since 1995 as a comparison, the authors suggest that any changes to policy are likely to take a long time to bed in and expert guidance is likely to be important.
The report also examines how saving outside of pensions has become more common since 2012 and concludes that there is no clear evidence that the working-age population is much more (or less) future-oriented than it was in the mid- to late-2000s. In contrast, by far the biggest change in attitudes in recent years is with respect to expected ages of retirement: the average age at which men and women expect to retire has increased by more than two years in a decade but expected retirement length is broadly unchanged.
Comment
Both reports should assist policymakers in activities that are currently planned, such as the DWP’s auto-enrolment review due this year and MaPs’ plans to improve pensions understanding, especially when choices need to be exercised.
Pension Schemes Bill – Committee stage concludes
The final day of the House of Lords’ Committee stage on the Pension Schemes Bill was on 4 March when a number of unrelated amendments were discussed. However, no amendments were carried other than those already announced by the Government. The Bill now moves to Report stage in the House where it is possible that further Government amendments could be tabled.
Separately, the Government has published illustrative regulations on the details of the operation of the authorisation and supervision regime for collective money purchase schemes. This is in response to criticism from a number of quarters of the extensive “Henry VIII” powers being taken by the Government in this part of the Bill. In many places in these regulations the topics and their treatment are expected to be similar to those in the regulations now governing DC master trusts. However, there are some topics specific to collective money purchase schemes, such as how actuarial valuations are undertaken and how the surpluses and deficits arising find their way into benefit adjustments.
The latest version of the Bill can be found here, including the new clause 124 on climate change risk proposed by the Government (see Pensions Bulletin 2020/06).
Comment
It is good to see these early draft regulations as they help to fill in important detail of the proposed regime for these completely novel benefits. It is also most welcome to see on the face of these regulations that the Government intends to formally consult on a later version of them at the appropriate time.
