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
Automatic Enrolment Guidance
The DWP has delivered a consultation on the changes intended to complete much of the legislative framework for automatic enrolment ahead of its introduction from 2012.
As well as the consultation document, the DWP has published four draft statutory instruments together with draft guidance on money purchase certification. These documents are primarily intended to implement the recommendations of the independent Making Automatic Enrolment Work review, which was conducted during 2010. In addition to the recommendations of the review, the DWP is proposing to make a series of minor technical regulatory amendments in order to ensure that the policy intentions are fully and accurately expressed in legislation.
Important aspects of the consultation include:
Entry for small and micro employers
Micro employers, defined as those with fewer than ten full-time equivalent employees immediately before 1 April 2011, are to have their entry dates for auto-enrolment put back if they would otherwise have been set at before 1 April 2014. This is because the Government announced in the 2011 Budget a general moratorium on regulation affecting micro businesses until 31 March 2014.
This moratorium also affects the "test tranche" of small employers (those with less than 50 employees) who were due to enter during March 2014. As it contains micro employers this test tranche will now enter during April 2014.
This has a knock-on effect to the entry dates for all the other small employers.
Early auto-enrolment
All employers will be able to bring forward their entry date to an alternative specified date, up to October 2012. This is a change from the independent reviewers' proposal that this should be available from 1 July 2012 only to employers with more than 50,000 employees (they will still be able to volunteer from this date).
Accidental jobholders
The Government now proposes to remove the "Person A provision", so that such a spike will result in the individual being auto-enrolled. Contributions will then need to be paid in relation to future pay periods so long as earnings exceed the starting point of the qualifying earnings band.
Employers will still have to monitor those on low pay. But instead of further monitoring after an earnings spike to see whether an individual remains low paid, the employer will have to auto-enrol the individual, even if as a result of remaining low paid no contributions are paid into the scheme.
Automatic re-enrolment
It is confirmed that the requirement to automatically re-enrol three years after the employer duty first applied is to be made more flexible by allowing the employer to choose a date within three months either side of the anniversary.
Waiting periods
It is also confirmed that, subject to notification requirements, details of which are set out in the draft regulations, and employees being able to opt in, employers may operate a three month waiting period without infringing the auto-enrolment requirements.
Certification of money purchase arrangements
As currently drafted, in order to qualify as an "automatic enrolment scheme", a money purchase arrangement (a trust-based money purchase scheme, a personal pension scheme or the money purchase element of a hybrid scheme) must provide for contributions of 8% of earnings between £5,715 and £38185 pa, of which 3% must be paid by the employer. The independent reviewers proposed that three alternative tests be introduced and these are contained in the draft regulations:
- Tier 1; 9% (inclusive of a 4% employer contribution) of "pensionable earnings" (being at least the entirety of basic pay)
- Tier 2; 8% (inclusive of a 3% employer contribution) of pensionable earnings provided that this equates to more than 85% of total earnings for the relevant group of employees; and/or
- Tier 3; 7% (inclusive of a 3% employer contribution) of all the individual's earnings
The consultation runs until 11 October 2011 and it is proposed that the finalised regulations will come into force in early 2012.
There is still confusion by the policy reversal for accidental jobholders and the certification for money purchase arrangements will need close examination.
Finance Act 2011 Arrives
The Finance Bill received Royal Assent on 19 July 2011 and is now the Finance Act 2011.
This piece of legislation details
- The reduced Annual Allowance (AA) regime applying for 2011/12
- Reduces the Lifetime Allowance from £1.8m to £1.5m with effect from 6 April 2012 and introduces the associated Fixed Protection option
- Removes the effective requirement to buy an annuity with money purchase funds on or before reaching age 75
Now that the Act has received Royal Assent, the window closes for making retrospective nominations of pension input periods (PIPs) except for an easement for the first PIP for new joiners. Different routes are available now for schemes that want to align all PIPs with the tax/scheme year for the future.
With the legislation now finalised, schemes will move into a phase to check exactly how it interacts with their rules. Guidance from HM Revenue & Customs (HMRC) as to their reading of the operation of this complex legislative package will be essential. The first cases to test many angles to the operation of the regime in earnest may well be retirements in the near future, especially ill-health pensions where potentially large tax charges can now occur if strict HMRC eligibility conditions are not met.
Review of Employee Share Schemes
The Office of Tax Simplification (OTS) is to turn its attention to pensioner taxation and employee share schemes in two new projects.
These will run alongside the OTS’s ongoing review of small business tax administration and will continue its work to simplify the UK’s tax system.
The OTS consultations with business have found that employee share schemes are perceived to be a highly complex area of the tax code. This complexity is seen as a frequent cause of error in tax returns and as a source of administrative burdens on employers, their advisers and employees.
With this in mind, the Government is asking the OTS to carry out a two stage project, first looking at the four tax-advantaged, or Government approved, share schemes; and second looking at complexity around non tax-advantaged or unapproved share schemes.
The initial work on approved share schemes will
- Evaluate the four schemes and identify where they create complexities and disproportionate administrative burdens for scheme users
- Examine how the schemes could be simplified
- Cover all four Government schemes: Save As You Earn (SAYE), Company Share Option Plans (CSOP), Share Incentive Plans (SIP), and Enterprise Management Incentives (EMI)
The review should have regard to:
- the impact on companies and their employees and on HMRC; including the impact on employers with international workforces;
- the Government’s corporate tax reform agenda including the need for fairness and simplicity
- the wider economic and policy implications of any proposals, including the original purpose of the schemes and overall tax receipts
- the take–up of the schemes by companies and employees;
- the availability of non tax advantaged share schemes
- accounting treatment of share schemes
- the risk of non-compliance and avoidance opportunities;
- the Spending Review resource constraints on HMRC
The review of pensioner taxation will gather evidence from pensioner groups and other interested parties in order to identify and examine the parts of the tax system that cause taxpayers the most difficulties, look at how this varies across the pensioner population, and propose ways to improve the situation.
The OTS will go on to look at unapproved share schemes later in 2012.
Beware of Solvency ll
In the largest ever change to European insurance solvency regulations the European pension supervisor has published a draft response to the call for advice from the Commission on its review of the European Pensions Directive.
Based on three pillars; Pillar 1 sets out capital requirements, Pillar 2 covers governance and Pillar 3 concentrates on disclosures and transparency it is a complete review of the way insurance business is conducted in the EU.
Key features relating to capital requirements are the use of market consistent bases to quantify assets and liabilities, a value at risk approach to setting the Solvency Capital Requirement and the ability for individual firms to use their own internal models in the process.
The key issue is the application of market consistent valuation bases to long term insurance business. There are concerns in the case of Solvency II. Firstly, because equities have more short term market volatility than bonds, a market consistent basis results in more capital being required to support equity investment. Secondly, using short term market volatility to evaluate capital required for long term business results in capital requirements which are too high. Current discussions focus on adding an “illiquidity premium” to discount rates to reflect the long term nature of the liabilities.
How is this relevant to pension schemes? EU pension schemes are covered by the Institutions for Occupational Retirement Provision Directive and are out of scope for Solvency II. It has been agreed that there will be no direct read across of Solvency II to this Directive. However, the overwhelming majority of EU member states do not have UK style schemes.
Aside from the direct application of Solvency II to pension schemes, pensions and insurance are inextricably interlinked. As Solvency II currently stands, capital requirements for long term insurance products such as annuities and pension buyouts are going up. Their costs are therefore going to increase with a direct and substantial impact on pension schemes.
Finally, in the EU, finance splits into banking and insurance. There is no middle ground. Pensions sit firmly on the insurance bracket. The same regulatory philosophy and supervisory authority underpins insurance and pension provision. If regulations are good for insurance, they will be considered good for pensions.
Solvency II is coming and it is right for UK pension schemes to worry about it.
Pension tax charges from personal pension funds
Individuals who have exceeded pension contribution limits could have their tax bill deducted directly from their personal pension pot, according to proposals being considered by HM Revenue & Customs.
HMRC is examining whether to extend measures proposed for occupational pensions to personal pensions, to allow the charges to be taken from the pension provider.
Pension Scheme Charges Revisited
Lord John McFall’s pensions commission has called on the Government to cap scheme charges at 1.5 per cent as part of wide-ranging proposals aimed at reinvigorating occupational saving.
The commission says the cap should match the existing limits for stakeholder pensions, which are 1.5 per cent a year for the first 10 years and one per cent a year thereafter.
Last month, pensions minister Steve Webb stated that the Government could cap charges if it thinks people are not getting value for money.
RPI Annuities & Flexible Drawdown
The Treasury has backtracked on plans to prevent savers using RPI-linked annuities without a floor to meet the minimum income requirement for flexible drawdown.
Initial thinking was that those with index-linked annuities offering no protection against deflation would not be able to use these assets to fund the £20,000 MIR under draft regulations.
However, legislation laid before the House of Commons says annuities linked to the retail prices index will now be considered as “relevant income” for the purposes of meeting the MIR.
The new legislation will come into force on August 11.
Under the new legislation annuities are allowed to vary in line with the RPI without having to have a floor for the purposes of meeting the minimum income requirement.
However, under the new rules investment-linked annuities without a guarantee will not count towards the MIR so this good news will not extend to all investment-linked annuity holders.
State Pension Reform
In April pensions minister Steve Webb unveiled two potential reforms to the state pension:
- Option one: a two-tier state pension where the means-tested second state pension (S2P) becomes flat rate by 2020. Proposals already exist to create a flat-rate S2P by 2030.
- Option two: a £140-a-week flat rate, single-tier pension set above the level of the pension credit standard minimum guarantee, effective from 2015.
Respondents to the announcements appear to have overwhelmingly backed option two.
Pensions minister Steve Webb said: ‘A simple, decent state pension, that is easy to understand would give people more clarity and certainty about what they will get from the state. It is these clarity and firm foundations that will help people make decisions about saving for retirement, a crucial step as we prepare to enroll 10 million people into workplace savings from 2012.’
Under option one, faster flat-rating, contracting out would continue, although the value of the rebate would fall. Under option two, a single tier pension, contracting out for defined benefit (DB) schemes would end completely.
The Confederation of British Industry (CBI) said under faster flat rating the contracted-out rebate would reduce as the overall level of the S2P reduced. The TUC said it was concerned a reduction in the rebate paid to DB schemes would cause more to close.
Definition Of Pensionable Earnings
The DWP has set out a model and definition of pensionable pay that combines simplicity for employers with safeguards for members.
The Government has bowed to pressure from the industry after concerns were raised that automatic enrolment self-certification rules would see employers’ cut-back pension provision.
Previously reported changes to the tests used by employers to self-certify their pension scheme meant they would be based on basic rather than pensionable earnings.
However, the DWP has amended its definition of basic pay so it excludes “variable elements” such as commission, bonuses and overtime.
The draft regulations and guidance set out in detail a three tier certification test as recommended by the ‘Making automatic enrolment work’ review and will mean that employers can use their own definition of pensionable pay, as long as it meets the standards of basic pay.
It will mean that employers who already offer good quality pension schemes can continue to do so without getting lost in unnecessary red tape.
This is good news for low earners in basic pay schemes who will still get a pension contribution on the first £5,715 of their earnings. If the change had been pushed through, employers running good quality schemes would have been forced to change their certification process.
Auto-enrolment Advertising Campaign
The Government will launch a £10m automatic enrolment communications campaign featuring TV and radio ads in January2012.
The Department for Work and Pensions’ ability to orchestrate a large-scale auto-enrolment awareness campaign was in doubt after its marketing budget was frozen as part of a comprehensive spending review.
However it is understood that the DWP has secured £10m of additional funding from the Treasury to publicise the flagship pension reforms ahead of the October 2012 launch date.
It will be interesting to see how people who are not affected by the reforms until 2016 will remember an advert from four years ago.
Pension Regulator & Communication
The Pensions Regulator has published a response to its industry discussion paper 'Enabling good member outcomes in work-based pension provision' about the regulation of defined contribution (DC) pensions.
The response reflects opinions from across the industry and sets out next steps in each of the 9 key areas raised. Consensus was reached on a number of key issues and suggestions made about possible mitigations.
The response, including more details about the proposed next steps, will follow in the autumn.
The document consists of statements that further work will be carried out. Two specific proposals are:
- Some form of accreditation or kite-mark for DC schemes with a particular view to making them fit for the purpose of auto-enrolment
- The introduction of a "notifiable event" requirement as an early warning system where the protection of scheme assets is compromised
The document concludes with a set of expectations that the Regulator has in relation to specific stakeholders.
A further response is promised in the Autumn with the Regulator updating its Defined Contribution regulatory approach to mitigate risk to members.
Gender Pricing Factors
The government is legislating to ensure that insurers can continue to use gender as a pricing factor for all contracts entered into prior to December 21st, 2012.
The announcement was contained in City minister Mark Hoban’s response to the European Court of Justice’s recent ruling in the Test Achat case, that gender cannot be used as a risk factor when drawing up insurance contracts.
In a written statement, he said the government’s view was that the ruling only applied to contracts “entered into on or after 21st December, 2012.Any contracts with gender-sensitive pricing of premiums or benefits concluded ahead of 21 December 2012 can continue unchanged after that date.”
He added that the government would be amending its own Equalities Act in order to ‘’bullet proof’’ contracts entered into before date against the risk of being challenged on sex discrimination grounds.
Hoban said the government had been “very disappointed” about the ruling with the judgment going against the grain of the common sense approach to equality which the UK government wants to see. The government believes that nobody should be treated unfairly because of their gender, but that financial services providers should be allowed to make sensible decisions based on sound analysis of relevant risk factors.
Recommended Reform Of Care System
The Commission, chaired by Economist Andrew Dilnot, is to announce proposals for the funding of the elderly care system.
Reforms are expected to include a cap of £35,000 on the amount individuals pay towards the costs of a care home place.
Mr. Dilnot said the proposed system would allow companies to offer products such as disability-linked annuities in which retired people could forego a portion of their income when taking out an annuity and instead receive cover against future care costs.