Welcome to Pension Matters, produced by Torquil Clark.
Every month I will update you on the latest legislation and news surrounding corporate and personal pension planning. To find out more about the topics covered in this edition, please call 01902 576707.
Ian Hill, Pensions Technical Manager
Employers unaware of auto-enrolment duties
According to Pensions Regulator, many employers still know nothing about the introduction of auto-enrolment from next year.
The study reveals that as few as two in five employers are aware and only 1% knew that the age from which auto-enrolment applied was age 22. Three-quarters of employers have still not had any discussions about the prospective requirements. The findings are consistent with provider research, with Standard Life finding that most large employers are still not properly prepared to meet the regulatory requirements of auto-enrolment.
The Pensions Regulator (TPR) has spelled out just what happens to employers of any size which fail to comply.
TPR will issue at least two letters, one at 12 months and one at three months before their staging dates, to every employer informing them of their duties. The letters also contain details on where to find more information and support, so claiming ignorance will not be an option.
Employers will have a duty to keep records of their pension schemes and employee take-up rates, and TPR may request to see these at any time to check for suspiciously high opt-out rates. The regulator will also rely on whistleblowers to inform them of employers that induce their staff to opt-out.
If an employer is found to have failed to comply with regulations, TPR will send them a formal compliance notice as the first step to enforcement. This will set out again what the employer must do.
If the employer, within a set amount of time, does nothing to comply, TPR has the power, enshrined in the Pensions Act 2008, to impose fines on the company until it does comply.
In the first instance of TPR discovering non-compliance, it can hand out a set fine of £400. After that, it can impose daily fines, dependant on the size of the employer, until it complies.
So, for employers with between one and four employees, that fine could be £50 per day. For those with between 50 and 249 employees, the fine could be £2,500 a day, and for employers with more than 250 staff members, the penalty could hit £5,000 a day.
Abolition of contracting-out
HMRC's has produced a bulletin aimed at assisting scheme administrators to prepare for the abolition of DC contracting-out on 6 April 2012.
The bulletin confirms that:
- HMRC will run a one-off "closure" scan of its records early in 2013 to identify and terminate open periods of scheme membership for appropriate personal pension (APP) and contracted-out money-purchase (COMP) schemes.
- Contracted-out certificates held in respect of the DC section of mixed benefit schemes will also be cancelled on 6 April 2012. This will not affect salary-related sections that hold a contracting out certificate.
- HMRC's scheme cessation unit is currently agreeing membership and financial data with scheme administrators in advance of the abolition
Accounting standards for pensions
The National Association of Pension Funds (NAPF) has published a report informing the accounting standards currently used to calculate companies' pensions assets and liabilities are undermining pensions provision in the UK.
The report recommended:
- Pension liabilities should be valued as the discounted present value of future net asset/liability cash flows, thereby allowing for the asset/liability interaction that occurs over the life of a pension scheme.
- Pension disclosures should include the actual cash contributions that a corporate sponsor is committed to as a result of negotiation with scheme trustees and/or the Pensions Regulator.
- The recognition of a discounted cash flow model of pension accounting through the accounts of the firm can be viewed as the long-term position of the scheme. To make this number useful, company accounts should also disclose the market value of scheme assets relative to a discounted pension liability.
The report argued that the current standards are not only inappropriate for assessing the long-term liabilities of pension funds, but can also lead to unintended consequences.
The key thrust of the authors' argument is that by valuing assets based on market prices, the current accounting standards introduce short-term volatility into the measurement of companies' pension surpluses and deficits. This is at odds with the long-term nature of pension schemes, whose position in economic terms changes only gradually over time.
According to the report, this volatility has led companies to close perfectly viable pension schemes, and has encouraged schemes to adopt extremely cautious investment policies. This in turn has led to an increase in the cost of pension provision and a misallocation of investment in the economy through excessive investment in low return government bonds.
Speeding up the increase to State Pension age
Ministers have indicated in the press that the current timescale to increase the state pension age to 67 in 2036 and to 68 in 2046 will be speeded up.
The Pensions Bill, currently working its way through Parliament, already provides for an accelerated equalisation of male and female state pensions ages in 2018 and their subsequent increase to age 66 in 2020.
Iain Duncan Smith, Secretary of State for Work and Pensions, suggested that the scheduled increase to age 67 could be brought forward. The pensions minister Steve Webb has stated that the increase in state pension age to 67 could be accelerated from 2036 to 2026. The Government is also seriously considering an automatic mechanism to give effect to further increases.
The retirement age was due to rise to 67 in 2036 and to 68 by 2046 but Duncan Smith has stated that the timescale, set out by the previous government, was ‘too slow’ thinking that’s too late because people’s age levels have increased even since the announcement was made.
The government has been holding a consultation over the summer into reform of state pensions.
More information on Flat Rate Pensions
Pensions minister Steve Webb has defended government plans for a flat-rate state pension of £140 per week, saying it is fairer and would not cost more than the current pensions system.
Speaking at a Liberal Democrat conference meeting Webb shed more light on how a universal, non-means-tested state pension would be funded, and whether existing entitlements would be honored.
He said the reforms would not cost more than what had already been budgeted by the previous government.
‘We will take the state pension budget for 2016 and look at how we can spend it better,’ said Webb.
Webb said those about to retire when the reforms come in could expect to receive the same state pension as they would have otherwise done. However, those further away from retirement would see their expected entitlements change by the time they retired.
He said: ‘You will still get your £160 a week if that is what you are about to get now. In the future high earners will not be entitled to any more than £140. But on day one there will not be that many whose entitlement is lowered because we have to honor the past, so we have done little things to fix that, for example if you have only spent a few months in the country you don’t get anything.’
He also stressed the importance of removing means-testing to ensure the success of auto-enrolment.
DWP to revisit risk sharing
Steve Webb, the Pensions minister, has indicated that the government will revisit the issue of risk-sharing pension schemes as part of its drive to reinvigorate occupational pensions. Webb said the Department for Work and Pensions would encourage the development of models that transfer some investment risk away from members.
Webb has also reiterated the government commitment to largely remove short service refunds from occupational pension schemes, warning employers not to take them into account in their decision making process when setting up schemes.
Webb repeated his call to stamp out ‘bad practice’ in the conduct of enhanced transfer value exercises and confirmed that the results of a call for evidence would be released in the autumn.
Update of the PPF index
The PPF 7800 Index has been updated to the end of August 2011.
Highlights include:
- The aggregate deficit of the 6,533 schemes in the PPF 7800 index is estimated to have increased over the month to £117.5 billion at the end of August 2011, from a deficit of £67.3 billion at the end of July.
- The funding ratio fell from 93.7 per cent to 89.2 per cent.
- Total assets were £974.2 billion and total liabilities were £1091.6 billion.
- There were 5,012 schemes in deficit and 1,521 schemes in surplus.
ACA queries ‘Scheme Pays’ operation
The Association of Consulting Actuaries (ACA) has written a letter to HM Revenue & Customs (HMRC) regarding the operation of Scheme Pays - the mechanism under the revised Annual Allowance regime, by which, at a member's request, a scheme meets the Annual Allowance charge due from the member and makes an equivalent reduction in the member's scheme benefit.
The letter highlights that the guidance that HMRC published in August has not fully addressed the ACA's concerns and has raised additional issues. The letter focuses on the operation of Scheme Pays around the time when a member retires where the law is complex, so HMRC's views would be particularly welcome.
The issues raised could be important for affected scheme members retiring now (and so for how schemes process any retirements now) as well as for trustees to set ongoing policy. It may be advisable to delay definitive actions and decisions in this area where possible until the picture becomes clearer.
Legal Challenge to Civil Partnerships
Human rights campaign group Liberty has had some initial success in its legal challenge to the treatment of surviving civil partners' pension’s rights when Foster Wheeler, a major multi-national company, agreed to give the civil partners of its employees the same pension benefits as spouses.
Under Foster Wheeler's pension scheme the surviving civil partner of a scheme member who retired in 1999 would receive no survivor benefits as the scheme rules at that time did not recognise civil partnerships. Although the Civil Partnership Act 2004 requires schemes to treat surviving civil partners and spouses alike from 5 December 2005, an exemption in the Equality Act 2010 allows them to continue to exclude surviving civil partners in respect of pension rights accrued before then.
Liberty argued this would contravene both European Union law and the European Convention on Human Rights. However, whilst Foster Wheeler has agreed to amend its scheme to give civil partners the same benefits as spouses, the company maintains that the old terms were not unlawful - and continues to defend the claim of discrimination on grounds of sexual orientation.
A hearing is due to take place in Reading Employment Tribunal in January 2012 to determine whether the original pension scheme rules unlawfully discriminated against the couple on grounds of their sexual orientation.
DC default funds should consider human capital and financial wealth
According to Pensions Institute research, an age-dependent approach to DC default funds, which takes into account a member's human capital and financial wealth, is better than traditional lifestyling.
The two studies identified three factors which should be considered when designing DC plans: a member's human capital as represented by their salary profile over their career, their attitude to risk, and their preference for current versus future consumption.
Details can be found at - http://www.pensions-institute.org/papers.html.
PPF Announces £550m Levy Estimate, Consults on 3 Year Levy Rules
- Pension protection levy for 2012/13 will be £550m, the lowest ever set
- Rules governing new levy framework for next three years are confirmed
- Levy rules deliver stability and predictability called for by levy payers
- PPF remains on course to reach self-sufficiency by its 2030 target
This is the lowest levy that the PPF has ever set and marks a reduction from £600 million in 2011/12, the second cut in two years.
Alongside this announcement, the PPF began consulting on the rules which will govern its new levy framework coming into effect for the first time in 2012/13 and are needed to calculate individual levy bills.
In a significant break from the past when the PPF changed the way the levy is calculated every year. These new rules are intended to be fixed for three years.
This means that levy bills will be more predictable then ever before and schemes can expect that if their risk falls over the three years, then so will their levy. The rules are also designed to make the levy more stable.
Speaking at an industry conference, Alan Rubenstein said: “The further reduction in the amount of levy we want to collect again recognises our desire to protect employers and pension schemes which are still navigating choppy waters, while remaining mindful that we also have to protect our own financial position.
The PPF confirmed the details of its new pension protection levy framework earlier in the year. The levy is paid by all eligible defined benefit, e.g. final salary, pension schemes to fund the compensation the PPF pays to people whose employers have become insolvent and their pension schemes cannot afford to pay the pensions they promised.
Complexity of employers self certifying pension scheme structures
Employers could be forced to rethink their pension contribution structures after the Government included geographic salary allowances in its definition of basic pay for automatic enrolment self-certification.
In May, change to the tests used by firms to self-certify their scheme meant they would be based on basic rather than pensionable earnings.
In July, the Government amended its definition of basic pay to exclude “variable elements”, such as commission and bonuses. However, the definition includes salary allowances given to employees working in different parts of the country with higher living costs, such as London.
Companies are going to have to think about their contribution structures and it is going to cost them more money, even if they just extend the definition of basic pay to include pound allowances for these staff.