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
NEST Restrictions Criticised
The Government has rejected calls from the work and pensions select committee to scrap the restrictions on NEST ahead of the 2017 review.
Under current plans, annual contributions into NEST will be capped at £4,200 and transfers in and out of the Scheme will not be allowed.
MPs have published a document calling for NEST’s contribution cap and the ban on transfers in and out of the Government backed scheme to be removed ‘as a matter of urgency’ so it can compete more widely.
The evidence that the NEST restrictions are acting as a barrier is not unequivocal and the Government is conscious that the restrictions were designed to ensure that NEST’s focus remained on its target market.
The committee is right to raise the issue of state aid as it would not be lawful for the Government to remove the restrictions simply to increase take up of NEST. There would need to be evidence that such action is required to address market failure.
The Government confirmed that it will reflect further on the issues raised by the Committee in relation to the removal of the contributions cap and the ban on transfers into NEST. Other recommendations of the Committee were also rejected; in particular, the suggestion to consider increasing the 8% minimum contribution rate before the auto-enrolment review scheduled for 2017.
Regulator’s Governance Survey Shows Mixed Results
The Pensions Regulator has published a report detailing the key findings of the latest Record-keeping survey. The research was conducted amongst a representative sample of administrators and trustees of trust and contract-based pension schemes in February this year.
The regulator set a standard in 2010 for schemes to achieve by December 2012 100% of common data in place for members joining a scheme after June 2010, and a 95% standard for members joining schemes before June 2010. High standards are essential as there are many risks associated with inaccurate data. Throughout a scheme’s lifecycle, trustees need to ensure that accurate and complete membership data and records are maintained and regularly reviewed.
The research shows encouraging progress on scheme data quality, however there is still significantly more for some schemes to do to ensure they maintain accurate records.
Amongst schemes that knew their data score, the percentage with 90% or more ‘common’ data present in their records, such as name, address, date of birth, nearly doubled to 47% from 24% in 2011. The percentage of schemes able to provide this information (their basic data score) was 66% compared with 33% last year.
The frequency with which a trustee board meets is also highlighted this year as a strong indicator of good scheme governance and administration.
Schemes' assessment of how trustee boards communicated with members was less positive than that recorded in 2011 indicating that member communications is an area in which trustee boards continue to feel that improvements can be made. There has also been a decline in the proportion of schemes that provide trustees with an induction programme and almost half of all trustees are unlikely to have undertaken any formal structured training in the last twelve months; this is much more likely amongst small Defined Contribution (DC) schemes.
Member communication is an area where there is always room for improvement and the fact that trustee boards recognise this is welcome. The decline in introductory and on-going training opportunities for trustees may reflect the economic climate as budgets have tightened.
Queen’s Speech Signals Flat Rate Pension
The Queen's Speech tells us nothing particularly new in re-affirming the Government's commitment to push ahead with the flat-rate state pension sooner rather than later.
There are also a number of points of detail which will bear further scrutiny when they emerge, including how accrued rights to the state second pension above the baseline of £140 will be treated, and what impact the ending of contracting out rebates from defined benefit schemes will have on national insurance contribution payments for employees and employers.
- A Pensions Bill will give the detail of the Government's proposals to introduce a simplified, flat rate state pension of around £140 per week, and accelerate the increase in the state pension age (SPA) to 67 between 2026 and 2028. It will also ensure that SPA will increase further if future life expectancy continues to increase
- A Public Service Pensions Bill will implement the reforms to public sector pensions agreed with trade unions for the three largest public service pension schemes.
Clarification on TUPE: The Procter & Gamble Company V Svenska Cellulosa Aktiebolaget SCA And Another
The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) provides (broadly) that an employee’s employment rights are protected on a business transfer (also known as an asset transfer). However, TUPE provides that an employee’s rights to “old age, invalidity or survivors” benefits (Old Age Benefits) in an occupational pension scheme do not transfer.
The European Court of Justice cases of Beckmann v Dynamco Ltd in 2003 and Martin and others v South Bank University in 2004 (both considering benefits under the NHS Pension Scheme) decided that liability for providing early retirement benefits and enhancements which are contingent on dismissal will in fact transfer because they are not Old Age Benefits, regardless of the parties’ intentions.
In the above case, the High Court considered the treatment of pension liabilities where the assets of a business are sold and the Transfer of Undertaking (Protection of Employment) - TUPE - Regulations apply.
The High Court held that:
- If the pension scheme rules provide for early retirement to be available subject to the consent of the employer then an employee's right to be considered for early retirement benefits in good faith transfers to the purchaser under TUPE.
- The purchaser, however, assumes liability only for enhancements to an early retirement pension that are no longer available to a transferring employee following the TUPE transfer, not for the full amount of an early retirement pension. So, where transferring employees become deferred members in the vendor's scheme on the TUPE transfer, they cannot claim entitlement to a full early retirement pension from vendor and buyer.
- Liability for an "Old-Age Benefit" - which does not pass to the buyer under TUPE (i.e. the occupational pension scheme exemption under the TUPE Regulations) - includes pension instalments paid to a member after normal retirement age (NRA) provided that the purpose of the pension is to support the member after retirement.
The scope of the TUPE pensions’ exception has long been unclear. This ambiguity has not been helped by the European decisions of Beckmann and Martin. The Proctor & Gamble case is the first time that the courts have grappled with the extent of the Beckmann and Martin principles.
It is often argued that early retirement rights which are subject to consent do not transfer because the right is conditional. This case clearly disposes of the distinction between expectations and rights and discretionary benefits and contingent rights on the basis that European law does not look to these distinctions. In this case the judge accepted that it was the right to apply for the early retirement benefit and to have that application properly considered which transferred.
The judge’s conclusions in relation to the extent of the TUPE exclusion did not turn on whether or not the scheme was public or private sector. Instead, the judge limited the benefits which can transfer by concluding that early retirement benefits are only those which are payable before normal retirement date and not after.
It remains to be seen whether or not this decision is appealed.
Local Government Pension Scheme: The Outcome
The Local Government Association and the Unions have announced the outcome of their negotiations on the shape of the LGPS for England and Wales from 2014.
These proposals will now be subject to consultation with LGPS employers and Union members. Should the proposals be acceptable the Government has confirmed that it will look to implement the them. The main provisions of the 2014 LGPS are as follows:
- Career Average Revalued Earnings Scheme with an accrual rate of 1/49th and revaluation using CPI
- Normal retirement date will be the member's State pension age
- Average contribution rate to remain at 6.5% with contributions for the lowest paid remaining substantially unchanged but with the highest paid contributing more
- Members who have already (or who are considering) opting-out may elect to pay half contributions for half the pension while retaining the full value of other benefits
- Benefits accrued prior to 1 April 2014 will be protected
- Members who are outsourced will be able to stay in the LGPS on both first and subsequent transfers.
FRC & FSA: Consultation Paper On Actuarial Assumptions Used In Pension Scheme Projections
The Financial Services Authority (FSA) and Financial Reporting Council (FRC) will hold a joint consultation on reducing the current projection rates to ensure consistency across both personal pensions and statutory money purchase/defined contribution schemes.
This will allow both advisers and investors to compare projected rates of return on a like for like basis.
The FRC part of the consultation looks at the assumptions used for Statutory Money Purchase Illustrations (SMPIs). Their proposals aim to make these assumptions more consistent with the FSA rules.
The FSA proposes to reduce the rates including:
- reducing the adjustment for tax-disadvantaged products from 1% to 0.5%.
- the projection rates for tax-advantaged products are proposed to change to 2%, 5%, and 8% from the current 5%,7%,9%.
The consultation paper also addresses other issues aimed at giving investors a fairer indication of future pension benefits:
- Revised mortality rates for insurers to use in Key Features Illustrations (KFIs) from 21 December 2012. This will provide investors with a better indication of possible returns from a personal pension or group personal pension in retirement. The consultation follows from the European Court of Justice ruling which requires insurance firms to charge the same rates for men and women to ensure gender equality.
An explicit Consumer Price Index (CPI) assumption for advisers to use when assessing whether a member of a defined benefit pension scheme would be better off moving their money into a personal pension. This will allow all advisers to use the same rate and will provide pension scheme members with a more accurate analysis of the benefits of a transfer.
Solvency II Delay
European Commissioner Michel Barnier has announced that UK pension schemes will be included in Solvency II but there will be a delay to the timetable.
Revisions to the Institutions of Retirement Provision Directive will not be tabled until summer 2013, instead of the end of 2012.
The UK industry has raised concerns that the introduction of insurance solvency rules for schemes would impose huge costs and force more defined benefit schemes to close. However, Barnier has stated that it was important to conduct "first-rate quantitative impact assessments" to take into account the differences between pension systems across Europe. He is concerned that the necessary reforms would be needed to guarantee that the occupational pensions paid out in 10 or 20 or 30 years will be adequate and it is important in regulatory terms to maintain a level playing field between insurance companies and pension funds when they supply similar and interchangeable products.
The Commissioner also outlined a delay to the implementation of Solvency II for insurance companies until 1 January 2014.
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