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
Salary Sacrifice & Auto-Enrolment
The Pensions Regulator recently issued information on how salary sacrifice and flexible benefit schemes will interact with employer’s requirements to meet minimum duties under automatic enrolment, as part of the pensions reform commencing from October 2012.
This was also emphasized at the Pensions Insight/Engaged Investor Auto-enrolment seminar at the Grocers’ Hall, London and endorsed by the Pensions Minister Steve Webb.
The good news is that it appears that salary sacrifice and flexible benefit schemes are here to stay. However, there remains a large amount of uncertainty in how such arrangements will work in practice. There is no doubt that employers with salary sacrifice and flexible benefit schemes linked to their pension offering will need to review their current operation to ensure they meet the new duties under pensions reform.
The review of salary sacrifice and flexible benefit schemes are just two more areas to be added to their project plans.
The risk to employers is that they do not review their salary sacrifice and flexible benefit schemes and they are found to not be acceptable under automatic enrolment. The employers could find their national insurance contributions increasing and their employees unhappy due to reduced take home pay because their national insurance contributions have increased too.
Treasury Chief Secretary Suggests Further Cuts To Pension Tax Relief
Danny Alexander, the Chief Secretary to the Treasury, has said that higher earners should not receive marginal rate tax relief on their pensions and has called for tax relief on the schemes to be cut from 40% to 20%. He also set out plans for workers on minimum wage to pay no income tax.
These remarks could open up a new dispute between the Lib Dems and the Tories over tax. The Lib Dems also want those on minimum wage, earning up to £12,500 to pay no income tax at all.
Ministers could come under pressure to disclose any plans for changing the system of pension tax relief, but the Treasury is already waiting for the results of HMRC’s study into the top 50p tax rate which the Lib Dem’s favour, but Conservatives oppose.
It has also been suggested that the government is looking at cutting the amount of tax free cash which can be taken as a lump sum from pension pots, as part of ongoing discussions on cutting pensions tax relief. Under the proposals, tax free cash could be limited to a monetary amount as opposed to a percentage of the Lifetime Allowance on tax privileged pension savings.
Updated Auto-Enrolment Guidance From Regulator
The Pensions Regulator has updated its "detailed guidance" on the auto-enrolment reforms. The guidance is aimed at larger employers and their advisers.
The main changes from last July's version reflect Pensions Act 2011 measures and also subsequent regulations.
New content includes material covering:
- Postponement - the circumstances in which employers can postpone assessment and automatic enrolment of workers
- DC certification - in light of consultation by the Department for Work and Pensions
- The determination of whether a person is "ordinarily working" in the UK - including further examples for employers
- Contractual enrolment - including clarification around the use of salary sacrifice and flexible benefits arrangements, as a result of general feedback
- Updated staging information in light of the Government's announcement on 25 January 2012)
DWP Consultation On Automatic Enrolment & European Employers
This seeks views on the draft Occupational and Personal Pensions Schemes (Automatic Enrolment) (Amendment) (No. 2) Regulations 2012, which set out proposals to exempt employers who employ individuals who work both in the UK and in other member states from automatically enrolling individuals who are subject to the social and labour laws of EEA member States relevant to the field of occupational pension schemes other than the UK.
The regulations are intended to come into effect from 1 July 2012.
Announcing the consultation, the Minister of State, Department for Work and Pensions, Steve Webb said: "This addresses an issue that could place an unnecessary burden on employers to find a pension scheme into which they can automatically enrol dual-status workers-those who are simultaneously jobholders and qualifying persons."
A jobholder is a worker who is working or ordinarily works in Great Britain under the worker's contract. A qualifying person is an individual whose place of work under contract is sufficiently located in an EEA state other than the UK so that the relationship with the employer is subject to the social and labour law relevant to the field of occupational pension schemes of the other EEA state.
The consultation proposes an exemption for employers from having to automatically enrol dual-status workers.
Charities & Auto-Enrolment Awareness
According to a survey by THE Pensions Trust, only 9% of third sector organizations such as charities believe they are fully aware of auto-enrolment regulations, with 14% either barely aware or completely unaware of auto-enrolment.
With auto-enrolment less than a year away, it is important that all organisations are properly prepared and are fully aware of the measures they must put in place. The research highlights that a large number of charitable and social sector organisations are still in the dark when it comes to getting the necessary arrangements in place, in particular those at the smaller end of the scale who have fewer employees. While smaller organisations will have more time to prepare for auto-enrolment, this does not mean they should rest on their laurels and do nothing; it is vital that all organisations, regardless of size, do what they can now to make sure they are properly prepared.
Torquil Clark have developed online information, checklists and relevant information guides as important areas of support employers are looking for, with auto-enrolment workshops and regulatory updates available.
FSA Outlines Plans For Pension Transfers
The FSA has outlined plans to change the way pension transfers from defined-benefit to defined-contribution schemes are calculated in a move expected to prevent benefits being undervalued by up to £20bn.
The FSA says the proposed changes will ensure the assumptions used by advisers to calculate a pension transfer are consistent and that the growth rates used for illustrating the comparison to the member are “reasonable”.
Under the plans, the rules for calculating mortality will be aligned with those used by the Board for Actuarial Standards, making them consistent with the annual pension statements personal pension holders receive.
The FSA also proposes changing the inflation measure used in pension transfer assumptions to take account of the Government’s decision to switch from RPI to CPI indexation.
In addition, annuities will be calculated on a gender-equal mortality rate in line with the European Court of Justice’s decision in March last year.
The comparison provided to the member when a transfer takes place will have to take into account the likely returns of pension fund assets as well as the transfer of risk from the DB scheme to the member.
Pensions Minister Floats Idea For Defined Aspiration Pensions
Speaking at a NAPF event, Steve Webb, the Pensions Minister, proposed a "third option" for pension scheme design which he described as "defined aspiration".
This type of arrangement would provide individuals with greater certainty in terms of what they might receive in retirement, but would be subject to a "light touch" regulatory regime. He said "A defined aspiration pension could allow employers to offer a measure of security to their staff, but would have a degree of flexibility that would recognise when external factors, be it increases in longevity, or significant changes in market conditions make a firm promise impossible to keep".
A consultation on reinvigoration of DB pensions is expected in the first half of 2012.
Pensions Minister Confirms There Will Be No Early Cap On Charges
Speaking in Parliament, in response to a question on pension scheme charge caps, Steve Webb commented that he does not see a need to amend the auto-enrolment qualifying criteria in the Pensions Act 2008 to set a charge cap or include additional requirements to meet the UK Stewardship Code.
The Government has already set clear guidance about the standards it expects all schemes to use for automatic enrolment and stipulated how each scheme's default fund (i.e. the investment fund individuals will be enrolled into if they make no active choice) should be managed.
Warning Against Early Release Pension Offers
The Pensions Regulator, Financial Services Authority (FSA) and HM Revenue and Customs (HMRC) are warning consumers to steer clear of pension offers that claim to be able to provide loans or release tax-free cash from people’s pension pots before they reach age 55.
Having recently detected an increase in these offers they urge trustees to communicate to their scheme members that they should not be taken in by website promotions, cold-calls or adverts encouraging them to transfer their existing occupational or private pension to a new arrangement in order to access a cash payment or loan.
The Pensions Regulator has also published a press release warning against early release pension offers and details of its investigations in two cases.
Pensions Regulator To Look At Multi-Employer Pension Schemes
The Pensions Regulator plans to scrutinise multi-employer pension schemes ahead of automatic enrolment due to concerns over durability.
TPR highlighted the issue in a document outlining its approach to the regulation of employers and pension schemes ahead of auto enrolment.
The Regulator says it will engage with industry and the Government to address the specific risks posed by non-insurance provider based multi-employer schemes which are marketed to non-associated employers.
The Regulator has hinted that this segment, in particular, is an attractive segment for new vehicles coming to market to take advantage of the increased money flows into pension saving and in the lead up to the introduction of automatic enrolment there has been continued growth in the number of providers offering multi-employer schemes for non-associated employers.
There are greater risks in schemes that are marketing themselves to a broad scope of employers, because there is no single employer with a keen interest in what trustees are doing.
Regulator Reveals Governance Failings In Hugh Mackay Scheme Led To Prohibition Order Against Trustees
Three people have been prohibited from acting as trustees following an investigation by The Pensions Regulator into the Hugh Mackay Retirement Benefits Scheme.
The Pensions Regulator has published its full reasons for prohibiting Robert Hill, Nicholas Halton, and Simon Ragg.
The three, who resigned from the scheme in October last year, conceded that they had breached investment regulations and legislation requiring them to demonstrate sufficient trustee knowledge and understanding. The carpet makers Scheme had a funding position of liabilities totaling £42m and assets worth £800,000. Having breached investment regulations the vast majority of the Scheme’s assets were directly in property or property related investments, including commercial property stated to be worth more than £35m in the Scheme accounts. The panel concluded that the breaches were so "serious and persistent" that the three former trustees should be prohibited from acting as trustees of trust schemes in general on grounds that they were not ‘fit and proper' persons.
However, the then current Trustees responded that they had taken proper legal, investment, administration, actuarial advice and had auditors.
The case is a reminder of the importance of trustee knowledge and understanding (TKU).
New Questionnaire For Schemes Entering Assessment Period
The PPF has introduced a new information-gathering ‘Scheme Questionnaire’ which will be given to schemes when they enter the PPF assessment period to support their journey from validation to compensation.
This questionnaire has been introduced because the PPF needs to gather all relevant scheme information from scheme trustees and administrators at the start of the assessment process.
It will be pre-populated with scheme information supplied on the last scheme return submitted to the Pensions Regulator. Schemes will then be asked to update that information, if necessary, and supply any information that is missing.
The aim is to achieve ‘efficiency, consistency, accountability, visibility and professionalism’ from the outset, in line with the principles of the Assess and Pay programme.
This will enable PPF scheme delivery associates - in partnership with trustees and administrators - to take evidence-based decisions at a much earlier stage in the journey of the scheme transitioning to the PPF.
Decisions will be based on evidence supplied by scheme trustees and administrators and will be subject to regular review, particularly as further evidence is uncovered or the circumstances of the scheme change.
The PPF believes that this innovation will provide the following benefits:
- The preparation and use of the questionnaire will lead to clear outcomes at the initial meeting, optimising time for all parties.
- It will become a consistent feature in the process, providing a clear signpost for trustees and third parties as to what information is needed and why.
- Helps trustees and administrators in planning their internal workflows and resources.
- The information gathered will serve as an invaluable audit trail for all parties and it will remove the duplicative requests currently experienced by trustees from time to time as a scheme transitions into PPF.
- Relevant information is gathered at a much earlier stage in the process.
- All information supplied is evidenced-based.
- Decisions are taken on the evidence available at the time and will be subject to regular review.
- Enables trustees and administrators to provide realistic project plans.
- Helps to achieve the PPF’s aim, articulated through the Assess and Pay programme, of reducing the assessment period, so giving our customers earlier security that their benefits will be protected.
FRC To Consult On Actuarial Standards For Pension Incentive Exercises
The FRC's Board for Actuarial Standards (BAS) has announced that the FRC will consult on bringing actuarial work on pension incentive exercises into the scope of its technical actuarial standards (TASs).
The consultation will also consider whether the TASs should include specific principles to be followed when providing actuarial advice on incentive exercises.
The FRC's move is one of several initiatives being undertaken by regulators and industry groups in order to address concerns expressed by the Pensions Minister, Steve Webb, that members of defined benefit schemes may be overly influenced by financial incentives being offered, without appreciating the value of the benefits they are giving up.
PPF Index Update
The PPF 7800 Index has been updated to the end of January 2012.
- The aggregate deficit of the 6,432 schemes in the PPF 7800 index is estimated to have decreased slightly over the month to £265.5 billion at the end of January 2012, from a deficit of £270.8 billion at the end of December.
- The funding ratio increased from 78.9 per cent to 79.5 per cent.
- Total assets were £1031.2 billion and total liabilities were £1296.8 billion.
- There were 5,388 schemes in deficit and 1,044 schemes in surplus.