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.
At the time of writing, Europe is getting serious about imposing the principles of Solvency II on UK pension schemes and has taken a step in the potential imposition of insurance style capital requirements on UK pension schemes through the publication of a draft specification for the quantitative impact study (QIS) which is intended to inform the European Commission in formulating a new Pensions Directive. The specifications deal with how the value of the different components of a defined benefit scheme's holistic balance sheet should be calculated for the purposes of the QIS. These include scheme's assets, its liabilities, the employer covenant, and pension protection mechanisms such as the Pension Protection Fund and the solvency capital requirement.
The QIS exercise will take place this autumn, following publication of the final specification, expected in September. It is understood that the Pensions Regulator will carry out the exercise in the UK using data from annual returns rolled forward to the as at date of 31 December 2011. The results will then go to EIOPA which will send a final report to the European Commission who will then propose a draft directive, probably later in 2013. EU legislation could be in force by 2017/18.
Pensions Regulator's Stance On Auto Enrolment
The Pensions Regulator (TPR) has set out its strategy for tackling non-compliance with auto enrolment legislation, including when and how it will use powers and details on the approach to prosecutions and inspecting business premises.
Employers who fail to comply may be subject to statutory notices, penalties or escalating fines.
In addition to auto-enrolment, from July this year, all employers will not be able to offer incentives to their workers to opt out of an auto-enrolment pension, including refusing to employ someone because they want to join the company pension scheme.
The regulator will consider using powers against employers where there is evidence of employers not complying. In order to help detect breaches of pension law, it will provide a whistle-blowing facility, through which confidential reports of suspected non-compliance can be made.
Where the Regulator sees persistent or intentional non-compliance they will take action, and this will include issuing fines to make sure that employees receive the pension contributions they are due in law.
Pension Regulator Reminds Employers On Inducements
The Pensions Regulator (TPR) has reminded employers about the laws related to inducing staff to opt out of retirement savings post-auto-enrolment.
Although employers' staging dates are spread out over several years the law prohibiting inducements comes into effect on 1 July, Inducement are any action with the sole or main purpose to cause an employee to opt out of the employer’s sponsored pension scheme.
The Regulator may issue a compliance notice to any employer that breaches these prohibitions. The Regulator may also impose a fine of up to £50,000 on an employer that contravenes the prohibition against inducing opt-outs and a fine of up to £5,000 on an employer that contravenes the prohibition against prohibited recruitment conduct.
A worker who is a victim of detrimental treatment or unfair dismissal can enforce their rights in an employment tribunal.
These safeguards came into force on 30 June 2012 and all UK employers must now comply with them. These safeguards apply to employers ahead of their automatic enrolment staging date so that employers cannot take action ahead of that date which might prejudice their workers’ automatic enrolment rights.
Given the potentially serious penalties which apply to breaches of the automatic enrolment requirements, including these new worker protections, it is important that compliance is adhered to professional advice is sought, especially for those involved in the recruitment process.
HR should be reviewing any contracts of employment and offer documentation for provisions that may conflict with these safeguards, such as clauses that require workers to opt out of pension benefits for all or part of their probationary period or wider service, or which provide an enhanced rate of pay or benefits to workers who do not join a pension scheme. In addition, all those involved in the recruitment process should be instructed not to ask workers, directly or indirectly, whether they plan to opt-out of the pension scheme, during the recruitment process.
B&CE Announce Appointment Of Board Of Trustees For The People’s Pension
B&CE has announced the appointment of the board of trustees for The People’s Pension.
B&CE has selected Pan Governance corporate director and chief executive Steve Delo will be appointed as chairman. This means that B&CE’s master-trust will have a legally independent board of trustees.
Alan Pickering, chairman of BE Trustees, will also join as a director of the board of trustees.
PPF 7800 Index Updated To End Of May 2012
- The aggregate deficit of the 6,432 schemes in the PPF 7800 index is estimated to have increased over the month to £312.1 billion at the end of May 2012, from a deficit of £216.8 billion at the end of April.
- The funding ratio decreased from 82.6 per cent to 76.8 per cent.
- Total assets were £1030.8 billion and total liabilities were £1343.0 billion.
- There were 5,503 schemes in deficit and 929 schemes in surplus.
Voluntary Code Of Practice For Incentive Exercises On Enhanced Transfer Values
An industry working group has published a voluntary code of practice for incentive exercises on enhanced transfer values (ETVs). The aim is to establish good practice for employers, trustees and advisors when carrying out incentive exercises such as ETVs, total pension increase exchange (TPIE) and pension increase exchange (PIE) exercises.
The purpose of the Code is to help ensure that all incentive exercises enable members to make informed decisions and better choices, whilst permitting exercises and options to be offered in a responsible manner.
The code is made up of seven principles, which include:
- No cash incentives should be offered that are contingent on the member's decision to accept the offer.
- For transfer exercises, advice should be provided to the member. For modification exercises, advice should either be provided to the member or a value requirement should be complied with and guidance should be provided to the member.
- Communications with members should be fair, clear, unbiased and straightforward.
- Records should be retained by the various parties involved in an exercise so that an audit trail is maintained that can be examined in the future.
- Exercises should allow sufficient time for members to make up their mind with no undue pressure applied.
- Incentive exercises should only be offered to members who are over age 80 on an opt-in basis.
- All parties involved in an incentive exercise should ensure that they are aware of their roles and responsibilities, and act in good faith in the areas over which they have direct control.
Although voluntary this new code of practice must be adopted as the standard for all transfer exercises in the future, without exception.
Centre For Policy Studies Report On Incentivising Saving
A report setting out 104 recommendations, many of them for the pension industry to implement has been published by the Centre for Policy Studies.
Although not all are listed here, some of the more interesting recommendations include:
- All new-borns to be allocated a "Super ISA" (a cross between an ISA and NEST) account identified by their national insurance number. This single savings account would serve two basic needs: discretionary (rainy day) savings and retirement savings. Current ISAs could be linked to future NEST accounts for anybody else.
- Establishment of an industry-wide DC pension pot consolidation service. As a "BACs for pensions" clearing house, it would facilitate the payment of contributions and transfer values, with a bridge across to NEST.
- Higher rate tax relief on pension contributions should be abolished and the 10p tax rebate on pension assets dividends reinstated
- The 25% tax-free concession on lump sum withdrawals at retirement (the "pension commencement lump sum") should be replaced with a "top-up" of 5% of pension pot assets, paid prior to annuitisation
- The "open market option" for annuities should be replaced by a mandatory exercise through an annuities clearing house, established by the industry, in which all annuity providers participate. The clearing house should offer a limited number of simple, standardised annuity contracts, plus a more tailored suite of enhanced annuities. If it were not operative within three years, say, then the Government should itself establish such a facility
Confirmation Of Automatic Enrolment Earnings Triggers
The Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2012 (SI 2012/1506) confirms that the lower limit of the qualifying earnings band is £5,564, the upper limit is £42,475 and the earnings trigger is £8,105.
The Order also contains a table setting out which pay reference periods can be used and the proportionate versions of the above parameters for these periods. So, for example, if an individual paid monthly earns more than £676 in a particular month during 2012/13 they may be subject to auto-enrolment.
Salary Sacrifice & Auto Enrolment
HM Revenue and Customs (HMRC) has confirmed that salary sacrifice schemes can meet the requirements of auto-enrolment.
Salary sacrifice schemes are a consideration for employers in conjunction with auto enrolment in order that both they and their employees could save on national insurance. It is welcomed that in HMRC's view that these two mechanisms should be able to interact. But it also has much wider implications because it means that salary sacrifice arrangements used in association with the substitution of employee by employer contributions to registered pension schemes no longer have to stipulate a period for which the salary sacrifice is entered into or to set out lifestyle triggers.
In the true spirit of the law, employees entering into a salary sacrifice arrangement for pension contributions could not easily revert to their higher salary unless it was due a lifestyle change.
This was generally taken to mean that employees could not opt out within 12 months, unless it was because of a lifestyle change. If they did so all tax and national insurance (NI) benefits could be withdrawn. This conflicted with auto-enrolment regulations, which permit auto-enrolled individuals to opt out as soon as they have joined their pension.
HMRC has resolved this matter by adding pension contributions to the list of salary sacrifice schemes which allow opting out at any time.
TPR has said it has no objection to salary sacrifice or flexible benefits, although there is scope for employer inducement and it maintains that salary sacrifice must not create a barrier to automatic enrolment.
Employers not using salary sacrifice for their pension schemes should seriously consider doing so, due to the savings in National Insurance for both the employer and employee.
However be aware of the barrier to auto enrolment which involves the necessary exclusion of those whose earnings will be taken below the national minimum wage by salary sacrifice.
Individuals who are auto-enrolled to a workplace pension scheme which is linked to a salary sacrifice arrangement can invoke their statutory right to opt out within one month of being auto-enrolled and have any salary that had been held back (to meet employer contributions to the scheme in substitution for employee contributions) paid to them immediately subject to tax and national insurance in the normal manner.
The fact that HMRC is making positive statements about salary sacrifice in relation to auto-enrolment could be seen as an indication that the scrapping of it is not in HMRC's mind at the moment - salary sacrifice is often seen as an anomaly that could be withdrawn by HMRC at some point.
Auto Enrolment TV Campaigns
Due to concern the existing, low-cost adverts have failed to raise consumer awareness about the reforms the Government will run an automatic enrolment TV campaign.
The Department for Work and Pensions had secured £11m in additional funding from the Treasury for the campaign but decided against using TV adverts to promote auto-enrolment, instead focusing on radio, print, online and outdoor advertising.
Government officials have now decided a TV campaign is needed to boost consumer awareness before the UK’s biggest employers start auto-enrolling their workers in October this year.
The Government will now run TV adverts through September and October.
One Scheme Flys The NEST
One of the National Employment Savings Trust’s largest prospective clients is poised to sign with another provider.
The French catering firm Sodexo was going to be enrolling its 40,000 UK staff into Nest as part of a pilot for the state-funded master-trust.
Nest paraded the company in front of a large audience at a conference last October, as one of several flagship firms in its pilot scheme, which started in May.
But Sodexo has since ducked out of the pilot citing Nest’s lack of a payroll administration solution was significant deciding factor.
Nearly five years after the birth of the Personal Accounts Delivery Authority (PADA) in 2007, one could have believed the quasi state-run scheme would be the main beneficiary of auto-enrolment.
But with other providers have entered the market, this does not appear to be the case as pension scheme designs are competing for the same market and including offering master-trusts as alternatives to the National Employment Savings Trust (Nest).
However, master-trusts are not a new structure. According to the Pensions Regulator’s recent DC Trust survey, there are 44 master-trusts in existence in the UK. Of those, 10 are industry-specific, which means they are only open to employers within a certain industry.
Administratively, handing control of a scheme to an external trust only requires trustee consent, while switching to contract-based set-up needs permission from the wider membership.
Illness On Holiday
Although not technically in the remit of pensions, it is worthy of note that the European Court of Justice (ECJ) has ruled that employees who become ill while on annual leave have the right to reclaim additional paid leave of the same duration at a later date, regardless of when their ill-health commenced.
The ruling was prompted by a Spanish trade union case against a group of department stores.
The ECJ’s ruling stated: "The purpose of entitlement to paid annual leave is to enable the worker to rest and enjoy a period of relaxation and leisure. The purpose of entitlement to sick leave is different, since it enables a worker to recover from an illness that has caused him or her to be unfit for work.
It appears that the point at which the temporary incapacity arose is irrelevant. Therefore a worker is entitled to take paid annual leave which coincides with a period of sick leave at a later point in time, irrespective of the point at which the incapacity for work arose.
The ruling, which is binding across all European Union (EU) members, will apply from October 2012.
This will be a further financial burden for UK businesses at a time when they can least afford it. For payroll and HR departments, this will be more administration as employers will require some form of evidence that the employee was sick and then records would need to be amended accordingly.
Disclosure Of Directors' Pay
Business Secretary Vince Cable has announced details of reforms to the disclosure rules for directors' pay. The announcement follows consultation on executive pay launched in March.
The Government is to require companies to set out their executive pay policy under a number of headings. This policy will be subject to a new binding vote which will require the support of a straight majority of shareholders voting to pass. Once the shareholders have voted through the policy, companies will not be able to make payments outside its scope. The vote will take place annually unless companies choose to leave their directors' pay policy unchanged, in which case a vote will be required every three years.
If a proposed pay policy is rejected by the shareholders, then a board will either have to convene an extraordinary general meeting to propose a revised policy or continue with the existing policy until the next annual general meeting and submit a new proposal then.
Companies will be required to set out the implementation of the agreed pay policy in a standardised report format, including a new total single figure for the pay of each director, broken down into components including one relating to pension benefits. This will be subject to an annual advisory vote, which will also require the support of a majority of shareholders voting to pass.
The proposed single total figure of remuneration for each director will cover all types of reward received by directors in the previous year including fixed and variable elements as well as pensions. Where a director is a member of a defined benefit pension scheme, the additional pension benefit achieved in the year must be capitalised using a simple multiplier of 20:1.
Details of the accrued benefit under any defined benefit scheme at the year-end must also be disclosed, together with the "value" of any additional benefits payable on early retirement.
In order to have consistency between companies as to what is included and how it is calculated, the Government has decided that for variable elements of pay, the single figure will reflect actual pay earned rather than potential pay awarded.
The Government intends that all the above reforms should take effect for companies whose reporting year ends after October 2013. It will also be working with the UK Listing Authority to see whether the Listing Rules need to be reviewed.
The Government intends that defined benefit accrual should be valued for reporting purposes on a somewhat arbitrary 20:1 basis rather than, as until now, by examination of transfer values, which at least sought to place a realistic measure on pension costs.
It seems more than possible that the full complexity and unexpected outcomes of annual allowance calculations could be imported into directors' disclosures.