The Pensions Regulator gets tougher on poor record keeping

The Pensions Regulator has launched a consultation on proposed standards of record-keeping for pension scheme trustees and administrators, which builds on guidance originally issued in December 2008.

The original guidance offered a framework for the clarification and assessment of member records.  Research carried out by the Regulator during 2009 indicated that there is no evidence of marked improvement in administration practices since the guidance was issued.  Therefore, although the Regulator expects to maintain its focus on supporting trustees to improve standards, the proposals contained in the new consultation set formal standards for member records and require schemes that fall short to improve their performance.

The Regulator proposes to set separate targets for the accuracy of both new and legacy data, with the highest standards applying to common data (as these are the fields needed to uniquely identify members and their status in the scheme). High standards are also expected to be applied to conditional data, but the Regulator recognises that the composition and importance of these data items will be scheme-specific. Where schemes fail to have adequate plans in place to resolve data issues, the Regulator will require them to improve.

The Regulator intends to select sample schemes, based on pre-defined risk criteria, which will be required to carry out data tests. If these reveal poor record-keeping, this will lead to the Regulator taking enforcement action unless agreed, specific action plans are in place to rectify the problems and these plans are implemented. The enforcement action would depend on the circumstances of each case but could include:

• directions to carry out certain tasks - e.g. to rectify gaps or errors in member records - using Improvement or Third Party Notices under sections 13 or 14 of the Pensions Act 2004;
• penalties (fines) for failure to comply;
• in extreme cases, prohibition of trustees and/or appointment of new trustees; and
• publishing the details of the actions taken.

The practical application of this approach would mean that any contact with the Regulator (e.g. through a whistleblower report, scheme return query, or scheme specific funding plans) could result in the scheme being asked to demonstrate compliance with the record-keeping guidance.

As part of its good governance campaign, and to accompany its recently published updated record-keeping guidance, the Pensions Regulator has today published a second 'bite-sized' e-learning module.  The Regulator also plans to host a number of governance workshops which will focus in part on record-keeping. The consultation on the proposed new guidance itself ends on 27th April 2010.

Department for Work & Pensions says pensions are changing because we are living longer lives

The good news is that we're living longer lives. Life expectancy is increasing and someone reaching State Pension age today could have around 20 years in retirement. This means extra years to enjoy - but people do need to think ahead about how they will fund them. To help with this, over the next few years the Government is introducing important changes to both state and private pensions

State Pension changes will come into effect from 6 April 2010. The State Pension will become more widely available, so more people will qualify for it when they retire.

 

Disclosure of Information: Proposed changes

The Department for Work and Pensions (DWP) carried out a consultation exercise in 2009 on a possible approach to simplifying the disclosure requirements.

The consultation was based on the adoption of a 'key overarching principle' which trustees would need to take into account when interpreting the requirements of more limited prescriptive legislation.

Although the DWP has now decided not to proceed with the majority of the initial proposals, it still intends to adopt some key reforms, most notably the permitted use of electronic communications.

With this in mind, the DWP has now produced a further, more limited, consultation document with draft regulations.  The consultation period ends on 1 March 2010, and the regulations are intended to come into force on 1 October 2010, with the exception of a change to the timescale for providing basic information which will come into force on 1 October 2012.

  

Taxpayers fail to claim higher rate pensions tax relief

According to Standard Life, a quarter of a million UK personal pension members who are higher rate taxpayers do not claim higher rate income tax relief on their pension contributions. Standard Life also warned that from 6 April 2010 the time limit on claiming higher rate tax relief on pension allowances is due to be reduced from six to four years.

Higher rate income tax relief is normally claimed on the self assessment return.

 

BT agrees deficit plan

British Telecom has agreed a 17-year plan to reduce its £9bn pension scheme deficit and believes it can generate sufficient cash to pay off the deficit and still pay dividends.

Despite assurances from British Telecom that it has used particularly cautious assumptions when calculating its latest valuation, the Pensions Regulator has expressed "substantial concerns" about the plan.

 

Bosses call for 68 retirement age

The Institute of Directors (IoD) has urged the Government to raise the default retirement age to 68.

In an IoD statement, the IoD said: "While it is the case that many people will be capable of doing their jobs past 65 and into their 70s, it is important that the Government recognises that this will not be possible for all employees in all job types. In some in instances it simply won't be possible for employers to adapt jobs to suit older workers and in small firms it may be completely impossible to redeploy older workers to suitable jobs.

For these reasons, many employers will continue to need the flexibility provided by the default retirement age. But this does not mean that there is no scope for reform. We propose that the Default Retirement Age is raised, initially to 68. Such a step would allow people to work longer, while ensuring that employers retain the flexibility they need to manage their workforces.

 

Conservative pension policy outlined

Theresa May MP, the shadow Secretary of State for Work and Pensions, has outlined Conservative thinking on Pensions Policy

In outlining the Conservative thinking on pensions policy she suggested the following:

• Security for all in retirement - restoring the earnings link to the Basic State Pension, bringing forward the rise in state pension age to 66 and supporting the review of the default retirement age.
• Restoring the health of UK occupational pensions - by exploring the possibility of introducing voluntary auto-enrolment ahead of 2012 and reviewing the Personal Accounts/NEST project.   She cannot pledge at this point to reverse the restriction in tax relief on high income individuals announced in the 2009 Budget. The Conservatives are also looking at what action can be taken to introduce some forms of risk-sharing into occupational scheme design. An audit of public sector pensions will be ordered and the requirement to buy an annuity by age 75 will be scrapped.
• Encouraging responsible saving - by introducing a free national financial advice service to provide impartial advice and exploring the possibility of early access to pensions savings.

 

Defined contribution investment principles proposed

The Investment Governance Group (IGG), an industry/government joint forum, has launched a consultation on draft investment governance principles and best practice guidance for both trust-based and contract-based defined contribution work-based pension schemes.

The IGG itself was established following the Treasury review of the Myners' principles of institutional investment in the UK.

The consultation paper sets out a framework, made up of principles, best practice guidance and a table of accountabilities, which is intended to complement legislative and regulatory requirements.

The principles are intended to be the accepted code of best practice for those responsible for investment decision-making and governance in defined contribution schemes. It is expected that those responsible will report against these on a voluntary "comply or explain" basis, although the IGG are at best lukewarm about this principle.

The first principle is that there should be clear roles and responsibilities for investment decision-making and governance. This leads into the table of accountabilities which sets out which decision makers are accountable at the main stages of scheme initiation, monitoring, review and change and communication to members. The aim of this table is to show that employers and trustees should assess the quality of investment governance, but can delegate the execution of decisions and processes to expert third parties, such as providers and advisers.

The remaining principles cover effective decision-making, appropriate investment options, appropriate default strategy, effective performance assessment and clear and relevant communication with members.

The best practice guidance expands upon each principle and its purpose is to provide a checklist against which decision-makers can identify and act on areas needing attention.


Ministerial announcement on adjustment of benefits for unequal GMPs

In a written statement to Parliament last week, Angela Eagle, the Minister of State for Pensions and the Ageing Society, has effectively said that virtually all UK occupational pension schemes with GMP liabilities are acting outside European law and that in anticipation of amending UK legislation, trustees and others should act as if existing domestic legislation also requires equalisation in respect of differences resulting from unequal GMPs.

Pension Protection Fund - Insolvency risk in the 2011/12 levy year

The Pension Protection Fund (PPF) has published its finalised policy statement on the way insolvency risk should be measured in the 2011/12 levy year and beyond.

The PPF has stayed with the changes proposed in its consultation paper (see Pensions Bulletin 2009/46) and has published a new "table of assumed probabilities of insolvency" to accompany the statement.

The changes to the insolvency probabilities will lead to a redistribution of the levy taken from those schemes with weak sponsoring employers to those with stronger employers. The PPF estimates that the impact on schemes backed by the very strongest employers, i.e. those with a D&B failure score of 100, would be an increase in the risk based levy of around 70% (although the effect for most other failure scores would be much lower). However, the PPF also goes on to say that, all other factors being equal, for most schemes an increase in the insolvency probabilities should be significantly mitigated by a reduction in the levy scaling factor.

A further consultation on the levy for 2011/12 is expected to be carried out in the autumn, covering the overall levy estimate, the scaling factors and the draft determination for 2011/12.

Notional Earnings Cap 2010/2011 confirmed

Under the pre A-day regime, the pensionable salary of members in tax-approved schemes could not exceed the statutory earnings cap for the purposes of calculating maximum pension benefits.

Following A-day, many schemes are relying on the notional earnings cap allowed for under modification regulations. HM Revenue and Customs (HMRC) has now confirmed that for 2010/11 this figure is £123,600. This figure is the same as in 2009/10 due to a 0% collar applying to the negative inflation in the year to September 2009.

Schemes that still have rules relying on the modification regulations for such matters as the notional earnings cap should be amending them since these regulations are expected to expire at the end of the 2010/11 tax year. When these regulations are gone, references in scheme rules to the "earnings cap" may become meaningless and could result in significant increases to pension costs if member benefits increase as a result of being uncapped.

 

Implementing the restriction of pensions tax relief

With effect from 6 April 2011 the government intends to restrict the availability of higher rate tax relief on pension contributions for individuals with 'gross' income of £150,000 or more. Anti-Forestalling measures were introduced in the Finance Act 2009, backdated to 22 April 2009.

Anti-Forestalling measures in the Pre Budget Report 2009 reduces the relevant income threshold from 150,000 down to £130,000

The impact of the anti-forestalling rules on final salary schemes suggest that HMRC has in mind a penal set of rules for the future. Here the anti-forestalling rules start by seeking to ascertain whether there is a material change to the way that the benefits are calculated. If this occurs on or after 22 April 2009, there may be a charge.

A material change is likely to include:

• a change in the method of calculating final salary; and
• an increase in the accrual rate.

There is a let-out where there are at least 50 active members in the scheme that also benefit from the change, so that the bigger risk is for smaller schemes.

The detail is complex, the extent of the problem can be illustrated by using an updated example taken from the technical guide issued by HMRC. An employee is earning £150,000 per annum and has been working for the company since 1995. The benefits of the scheme are amended, so that the accrual improves from one-sixtieth of salary for each year of service to one-thirtieth (and all years of service since 1995 are included).

This is a valuable enhancement. Enhancements are agreed commercially from time to time, either to improve benefits or possibly on a termination of employment maybe under a redundancy arrangement. The value of the benefit in that example is £375,000 which will result in a tax charge at the rate of 20% on that individual of £75,000.

Managers of Final Salary Schemes need to take care to avoid these types of charges and watch out for rules applying in unexpected circumstances.