Pension Matters February 2012

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

New timetable clarifies automatic enrolment starting dates

A revised timetable for when employers of all sizes must start enrolling their staff in a workplace pension has been set out by the Government.

Large employers, those with 250 or more employees, will not face any change in the date they are due to start enrolling their staff.

This follows the announcement in November that small businesses would be given more time to prepare for automatic enrolment to help them out in exceptionally tough economic times.

It was difficult for companies to prepare while the dates were still up in the air for many employers. Now that the dates have been published, all employers can put a plan of action in place. They should leave themselves plenty of time to get their auto-enrolment systems up and running.

Employers will not have to pay their full contribution rates of 3% of employee salaries until 1 October 2018, thirteen years after the Pensions Commission initially recommended auto-enrolment.

If you haven’t heard or seen any advertising evidence already, look out for a £11 million publicity campaign aimed at increasing awareness of the reforms among workers started 23^rd January 2012.

All FTSE 100 schemes are now closed to new entrants

Royal Dutch Shell is closing its final salary pension scheme to new employees and replacing the scheme with a defined contribution plan from early 2013. The scheme was the last remaining FTSE 100 final salary scheme still open to new entrants.

Two factors are likely to have had an impact on Shell’s pension provision. The first is auto-enrolment and the requirement to include almost all staff within a compliant scheme. For new members of the scheme, that is most easily achieved through a DC arrangement. If this is the reason for the DB scheme closure, it is an unfortunate side effect of legislation that has been designed to improve pension savings for all. However, as Shell has always auto-enrolled new employees into its scheme and has a take-up rate of 95%, it’s unlikely that the the new regulations would have hit the company as hard as it will hit others.

The second is the looming threat that Solvency II-style funding could be introduced for final salary schemes.  European regulatory body EIOPA’s consultation on the Institution for Occupational Retirement Provision directive, which includes the Solvency II recommendation, has seen a flurry of concerned responses from industry bodies and pension providers both sides of Christmas. The arguments against the proposal extend to government: pensions minister Steve Webb has put the total cost of compliance at around £100bn for UK schemes.

According to Shell, the closure of the scheme, which has 6,500 active and 30,000 pensioner members, was intended to "reflect market trends in the UK".

Auto-enrolment and the threat of Solvency II are just the latest regulatory moves that have made DB pensions unsustainable. Whether or not those are the “market trends” that have pushed Shell to close its scheme, where a company of the size of the oil giant leads, others will surely follow.

EU gender directive and occupational pensions

The European Commission’s decision to ban gender discrimination when pricing annuities does not apply to occupational pension schemes.

In March last year, the European Court of Justice ruled that insurers cannot price products based on gender from December 21, 2012.

The move will mean that providers will have to radically change the way they price annuities, life insurance, and health insurance.

A European Commission document, published on December 22, has now clarified that this ban will not apply to occupational pension schemes. It says: “Some insurance products, such as annuities, contribute to retirement income. The Directive however only covers insurance and pensions which are private, voluntary and separate from the employment relationship, employment and occupation being explicitly excluded from its scope.

“Equal treatment of women and men in relation to occupational pensions is covered by Directive 2006/54/EC of the European Parliament and of the Council of 5 July 2006 on the implementation of the principle of equal opportunities and equal treatment of men and women in matters of employment and occupation (recast).”

The government is planning to reinvigorate workplace pensions in the spring.

Pensions Minister Steve Webb has said the DWP would conduct a formal consultation into which rules should be scrapped, with every regulation up for discussion "from the absolutely trivial to the huge". "Every piece of regulation will go unless we can justify its existence,"

Webb has already announced his intention to abolish short service refunds, the repayment of contributions to both employers and staff when an employee who is moving jobs opts to cash in a small pension fund rather than have it transferred to another scheme.

He is also believed to be considering changing the rules on indexation of final salary pensions in an attempt to prevent the few remaining private sector schemes from closing. Although the government recently changed the rate at which pensions paid by such schemes increase from RPI to CPI, scrapping this requirement altogether would make funding them easier.

Webb also said the UK would combine forces with other governments, including those of Germany, Ireland and the Netherlands, to fend off European proposals of applying a higher capital requirement, known as Solvency II, to pension funds to ensure their solvency.

If the Solvency II requirements were implemented businesses would have to inject £300bn into their final salary schemes, inevitably leading to the closure of more schemes in the private sector, according to the National Association of Pension Funds.

HMRC updates

HMRC have confirmed pension related practices

• Flexible drawdown and auto-enrolment. If a member who has taken flexible drawdown opts out of scheme membership within one month of being auto-enrolled (or re-enrolled) under the Pensions Act 2008 (PA 2008) then HMRC confirms he/she will still meet the flexible drawdown conditions (i.e. no further contributions).
• Flexible drawdown and drawing benefits more than once. An individual can draw amounts more than once from the same arrangement under flexible drawdown, without being obliged to provide a further flexible drawdown declaration.
• Death benefits and life cover lump sum. The list of authorised lump-sum death benefits that may be paid since 6 April 2011 has been expanded to include a life cover lump sum (a small sum that could have been paid under a previously approved scheme before A-Day to cover, for example, funeral expenses. Payment of a life cover lump sum can only be made if a member died after reaching the age of 75 and the payment does not count as a benefit crystallisation event.
• Fixed protection and provision of information to HMRC. A member who has registered for fixed protection must as a minimum give the scheme administrator the reference number for his fixed protection certificate when he draws his benefits. In addition, the administrator may want to see the certificate itself.
• Fixed protection and giving up enhanced protection. If a member wishes to give up enhanced protection in order to register for fixed protection instead, he must tell HMRC in writing (members with Primary Protection cannot give this up).

Regulator will rely on 'whistle-blowers' to police auto-enrolment

The Pensions Regulator has said that it plans to rely on "intelligence-led spot checks" and an anonymous whistle-blowing procedure when policing compliance with the new auto-enrolment regime.

Charles Counsell, TPR executive director said, when speaking before the House of Commons Work and Pensions Committee, that he did not "want to generate an excess demand for information from the pensions industry," but expected the "triangle of employer, employee and scheme to work together on this". He added that, instead of routinely collecting contributions data from providers, TPR would watch for worrying trends.

Bill Galvin, TPR chief executive, said that TPR's focus would be on wilful non-compliance and not administrative matters.

Annual statements introduced on defined benefit schemes

The Regulator has announced it would issue annual statements to help pension scheme trustees “understand our expectations within the prevailing economic conditions”.

The hope is that such a statement will result in fewer recovery plans requiring in-depth scrutiny or challenge.

This annual statement might go as far as setting out acceptable discount rates and inflation assumptions to be used for calculating technical provisions. If it does, the regulator will have effectively created a quasi-prescribed statutory funding basis.

Given the cautious nature of the regulator, this is likely to be bad news for scheme sponsors as any prescribed basis is more likely to increase, rather than reduce, the value placed on liabilities.

The regulator plans to consult with the industry in April on the procedures that its case teams follow as they bring a case to the regulator's Determinations Panel. Alongside this, the Determinations Panel will also consult on an updated version of the procedures it follows for making a determination on a case.

Later in the year, the regulator intends to set out its strategic view on how it will regulate the DB landscape in the future.

GMP Equalisation

You couldn’t make this up if you tried, but as indicated in our previous ‘Pension Matters’ the Government has dug up 20-year old case law to plan new equality rules on pensions.

The Department for Work and Pensions (DWP) 20^th January 2012 outlined plans to force companies that offered “guaranteed minimum pensions” in the nineties to reassess the different accrual rates for male and female members of the scheme and equalise overall benefits to avoid discrimination. Companies affected will be those that opted out of the additional state pension and built up benefits in a final salary scheme between 1990-97 offering a guaranteed minimum scheme.

Under the law at the time, women could collect their state pension five years earlier than men, when they reached 60.  Men could only start claiming their pension at 65.

This rule has never been updated for the guaranteed minimum pension scheme despite case law in 1990 which ruled it was unlawful to discriminate between men and women in relation to occupational pensions. In short, this gives female members of the guaranteed minimum pension retiring today an unfair advantage as they can get hold of the benefits sooner than men.

The new rules outlined by the DWP would highlight that men are able to claim payments at the age of 60.  The accrual rate for females under the guaranteed minimum pension scheme was also better than for men, meaning employers could be forced to top up male members’ benefits to match the payments.

Unfortunately the DWP's consultation does not clear up whether equalisation would occur for members already retired or only for future payments to those workers yet to retire. In theory, a pensioner could be told they are owed money under the rule changes, however, those thinking they are due for a windfall have little to look forward to as payments could be rather small.

The EU has threatened to bring equalisation into practice as the complex issue has been knocking about for decades; but the UK has decided to make it compulsory regardless even though pension schemes could be faced with high additional administration costs.

The DWP’s proposal gives members the best of both worlds on a year on year basis, along the lines of what the PPF intends to do which will be complex to administer and more expensive than just paying the benefit with the higher present value.

Consultation closes on 12 April 2012.  Whilst this matter is being considered we are suggesting that employers/trustees:

• Not complete any bulk annuity buy-out/buy-in.
• Consider gathering the documentation and member communications prepared at the time equalisation was dealt with in the 1990’s.
• Consider the implications for members, especially males who are looking to transfer.  Members who have taken a transfer value who have GMP benefits between May 1990 and 97 in theory have been discriminated against.
• Not complete the process of wind-up!

The consultation document provides a suggested methodology which trustees can adopt to achieve this. The Government has said however that this suggested approach is for guidance purposes only and is not something which schemes will be required to follow, as helpful as ever. Based on the consultation document, it still remains very much a decision for each scheme as to how they equalise GMPs in practice.

What is clear however is that GMP equalisation is not an issue which will go away and is therefore something which will have to be addressed by all schemes which hold GMPs.

Finally, the impact of GMP equalisation is likely to be very modest in individual terms, however costly as a whole for the scheme especially in sorting it out!

The PPF 7800 Index has been updated to the end of December 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 £255.2 billion at the end of December 2011, from a deficit of £222.1 billion at the end of November.
• The funding ratio fell from 81.9 per cent to 80.0 per cent.
• Total assets were £1018.9 billion and total liabilities were £1274.1 billion.
• There were 5,473 schemes in deficit and 1,060 schemes in surplus.