Employee Benefits Updates | Pension Saving vs Property | JLT

03 February 2015

Week ending 1 Feb: Pension saving more important than property for retirement income|4.8mil risk poor decisions after pension reform

Pension saving more important than property for retirement income

Pensions are proving more popular than property as the main source of wealth, aside from the State Pension, to fund retirement years, according to NEST insight 2015, an annual research report published by the National Employment Savings Trust.

NEST also found that support for automatic enrolment into a workplace pension continues to grow, with 77 per cent of consumers agreeing it’s a good thing. In terms of support for employers, the NEST research reveals that accountants are less prepared to help employers with automatic enrolment into a workplace pension than other intermediaries and are less aware of what a surge in demand could mean for their business.

NEST says the new pension freedoms announced in the 2014 Budget may also be influencing people’s attitudes to retirement saving. Fears of pensioners buying expensive cars and squandering their money appear unfounded after only 7 per cent of people say they plan to take their whole pot out at once and do whatever they like with it.

Understanding about what the pension reforms mean is still patchy, however. Just over half (52 per cent) of survey respondents were unaware they had happened and more than a fifth (22 per cent) admitted they still do not know what they would be most likely to do with their pot when they come to retire.

Of those who did know what they might do, most people (32 per cent) wanted some form of flexibility, with the rest mostly split between preferring a drawdown type product (19 per cent) or something that resembled an annuity (16 per cent).

Dear CEO letter sets out ‘second line of defence’ for pension reforms

The Financial Conduct Authority (FCA) is responsible for setting, maintaining and monitoring the standards for organisations delivering guidance for Pension Wise (the Government’s new pension guidance service). The FCA also regulates the firms that hold and invest stakeholder and personal pension scheme savings. As the new pension reforms come into effect, these firms will play an important role in helping their customers make good decisions about what to do with their DC pension savings in retirement.

A FCA letter to pension providers says that to ensure appropriate protection of consumers accessing their pension saving, and to assist firms, it intends to seek approval from its Board for further steps to clarify what it expects firms to do.

These rules will, by April, provide additional consumer protection by placing a requirement on pension providers for ‘additional protection’ (sometimes referred to as a second line of defence). When a customer contacts their pension provider to access their pension, providers will be required to ask the consumer about key aspects of their circumstances that relate to the choice they are making.

Providers will be required to give relevant risk warnings, such as warning of the tax implications of their decisions, in response to answers from consumers. Firms must also further highlight the availability of the Government’s new Pension Wise scheme or regulated advice.

Firms will be required to deliver these messages in a direct and simple language which will be set out when the new rules are published.

Subject to agreement of the FCA’s Board, the rules will be introduced on a temporary basis from 6 April, and prior to consultation, to provide important additional protection for consumers. The FCA says it considers that the delay involved in consulting would probably be prejudicial to consumers. It believes it will be possible for firms to provide the proposed risk warnings without providing regulated advice.

The full requirements the FCA will place on firms will be made clear in the published rules.

It is understood that the FCA’s proposals will be extended to trust based schemes too.

Finance Act 2004 (Registered Pension Schemes and Annual Allowance Charge) (Amendment) Order 2015

Under this Order, the Finance Act (FA) 2004 is amended to ensure the changes to the annual allowance legislation made by the FA 2011 work as intended. These include provisions to ensure pension scheme administrators do not normally have to test deferred benefit rights against the annual allowance.

Unintended outcomes in relation to the following are remedied:

  • the ‘scheme pays’ facility
  • the treatment of certain transfers of pension pots

Further, the amendments ensure the legislation applies fairly to individuals who may be subject to an annual allowance charge.

4.8 million people at risk of poor decisions after pension reforms

New research from the National Association of Pension Funds - ‘The Unpredictability of Retirement’ - maps the changes that have led to a more unpredictable retirement and identifies three distinct groups of over 50 year olds, examining their expectations and experience of retirement. It outlines support that will be needed by those approaching retirement with defined contribution (DC) pensions, to navigate the new market place available under Freedom and Choice.

Within the age 50 – 70 demographic, the report identified the following three groups:

Satisfied Sarah & Simon

Sarah & Simon have worked for most, or all, their lives in roles such as a lecturer or teacher. Their average individual income when working is £37,520 and £30,000 when retired. They own and live in their home and typically have paid off the mortgage in full.  On top of the State pension they also have a significant defined benefit (DB) pension through their employers. They have little or no DC pension savings and so have a limited exposure to making unsuitable decisions about their pensions once the new freedoms are introduced.

Sarah & Simon feel satisfied because their DB pension provides them with the certainty and level of income they want or need in their retirement. Sarah & Simon are a shrinking group as DB pension provision becomes less common.

Maggie & Malcolm in the middle

Maggie & Malcolm have worked for most, or all their lives, in roles similar to that of a retail manager. Their average individual income when working is £30,000 and £20,000 when retired. They own and live in their home but typically still have some mortgage to pay off. On top of the State pension they have saved into DC pension schemes, again mostly through their employers, and have very little or no DB pension savings.

Maggie & Malcolm are in the middle of the two groups. Like Sarah & Simon they have significant private pension provision but unlike Penny & Paul they are not used to living on a tight budget and have saved into a pension to avoid having to do so in retirement.

For Maggie & Malcolm the decisions they will now have to make under the new reforms carry the greatest risk / benefit. Maggie & Malcolm now represent the largest group of non-retired 50-70 year olds at 4.8million. Looking ahead there will be many more Maggies & Malcolms than Sarahs & Simons as the shift from DB to DC pensions works through.

Pinched Penny & Paul

Pinched Penny & Paul have either worked for most of their lives in a factory or a similar job, or have spent limited time in paid employment due either to commitments as a carer or ill health. Their average individual income when working is £12,500 and £8,213 when retired. They do not own their own home but typically rent in the private market.

Penny & Paul are used to living on a budget and while they have concerns about retirement the prospect of living on a budget is not unfamiliar. As they have little or no private pension provision beyond the State pension the pending reforms on accessing private pensions are of little relevance to them. The number of Pinched Pennys and Pauls also looks set to rise as the cohort who missed out on a pension reach retirement.

Understanding the reforms and seeking advice or guidance

Overall, Malcolm & Maggie view the pension reforms positively but admit they do not yet fully understand the reforms. Only one in three feel very confident about making a decision on what to do with their pension savings at retirement.

The NAPF’s research indicates that most over 50 year olds who seek help with decisions on their retirement finances postpone doing so until they are close to retirement. 61% of working Maggies & Malcolms said they had not yet sought advice about their retirement finances as they feel comfortable making their own financial decisions. This percentage may reduce in time as the number of people who seek help with their finances increases as they approach retirement, but perhaps not as much as might be expected given that nearly half (48%) of the retired Maggies & Malcolms feel comfortable about making their own financial decisions and do not seek help.

Although reluctant to seek help this group are still very clear about what they want in retirement: 82% of the retired and 78% of the working Maggies & Malcolms said they would rather have a secure income for their retirement than a pot to dip into as and when they need it.

How to relieve the pension pressure

To help Maggie & Malcolm make the best use of the choices they have under the pension reforms, the report says they need three things:

  • Pathways: Clearly defined pathways into retirement should be developed so that people have easy access to at least one straightforward, good value option.
  • Guidance: The Government’s Pension wise service should be promoted heavily to ensure people use it to explore the wider range of options available to them.
  • Products: Savers should also be able to choose from a full range of high quality products built around their needs.

State Pension Countdown Bulletin

The January edition is available on the HMRC website.

It gives current information on new State Pension, and publicises and encourages the use of the Scheme Reconciliation Service and highlights the potential consequences that could arise if schemes do not reconcile their records. It also includes updates on the withdrawal of the Temporary Scheme Contracted-out Number (SCON).

DWP report examines how the provisions of the Pensions Act 2007 are working

The DWP has published a report - ‘Post-legislative scrutiny of the Pensions Act 2007’ - which provides the Work and Pensions Select Committee with the DWP’s analysis of the implementation and operation of the Act and also reflects subsequent reforms from the Pensions Act 2008, the Pensions Act 2011 and the Pensions Act 2014.

The Pensions Act 2007 included measures which: strengthened and extended coverage of the basic State Pension; required the basic State Pension to be uprated in line with earnings rather than prices; simplified the State Second Pension; increased the State Pension age in line with increases in longevity; provided the foundation for the National Employment Savings Trust; and abolished contracting out for defined contribution pension schemes.

Many of the measures in the Pensions Act 2007 have largely been superseded by subsequent legislation, such as the Pensions Act 2011 on the timetable for increasing State Pension age and the Pensions Act 2014 on state pension generally, while the Personal Accounts Delivery Authority wound up in 2010. However, the key principles underpinning the 2007 Act, namely ensuring people make adequate saving for their retirement and making the state pension fairer and more widely available, remain at the core of the reformed pensions system.

169 employers fined for failing to comply with pensions duties by the end of 2014

The total number of employers fined for failing to comply with their workplace pensions duties reached 169 by the end of 2014, a small number compared to the tens of thousands of businesses which have now complied with their automatic enrolment duties, according to figures released by The Pensions Regulator. Key points are:

Approximately 30,000 medium sized employers, (those with approx 62 - 149 workers), who staged in April-July had reached their deadline to complete their declaration of compliance by the start of December 2014.

  • A total of 166 Fixed Penalty Notices (£400 fines) were issued in the last three months of the year.
  • The number of compliance notices issued also rose with 1,139 notices issued. These notices instruct an employer to remedy a contravention of one or more of their employer duties or risk a fine or further action from the regulator.
  • A significant number of the notices issued in this period were to employers who had missed their deadline to submit their declaration.

The Regulator’s own research shows that the majority of employers who have completed the automatic enrolment process regret not allowing more time.

Experience to date also shows that employers should begin gathering the information they need to complete their declaration of compliance well in advance of their deadline.

Pensions Regulator agrees £8.5m settlement in Carrington Wire case

An £8.5 million settlement has been reached with two Russian companies following an investigation into the Carrington Wire Defined Benefit Pension Scheme by the Pensions Regulator.

Carrington Wire, based in West Yorkshire, was sold to a shell company in 2010 and was declared insolvent in December 2012. In November 2012, the Pensions Regulator issued a warning notice to three potential ‘targets’, indicating its intention to issue contribution notices in connection with the Carrington Wire Defined Benefit Pension Scheme. This included two businesses domiciled in Russia - PAO Severstal and OAO Severstal-Metiz.

Following representations made by the various directly affected parties, including the Russian companies, the matter was passed to the Regulator’s Determinations Panel in June 2014. An oral hearing was scheduled to take place in January this year.

Shortly before the hearing was due to take place, an offer was made by the Russian companies to pay the sum of £8.5 million to the scheme. The Regulator agreed that if that sum was paid, it would withdraw its case against the Russian companies.

A report on the case will be published under section 89 of the Pensions Act 2004, when the case has been concluded.

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No 2) Order 2015

Under this Order, anew regulated activity is created in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, SI 2001/544, concerning the giving of advice on the conversion or transfer of a class of pension benefits known as safeguarded benefits. The change comes into effect on 6 April 2015.

New papers from the European Insurance and Occupational Pensions Authority

Consultation paper on good practices on individual transfers of supplementary occupational pensions

In this consultation, EIOPA sets out eight main impediments to cross-border transfers of supplementary pension rights and a number of good practices which are intended to overcome them. The consultation is published with a view to preparing a formal response from EIOPA to an EC call for advice.

Report on Investment options for occupational DC scheme members

This report sets out the available choices that members of occupational DC pension schemes have in the European context regarding investment in their retirement plans. It also considers the main issues that national supervisors address in order to ensure that effective investment decisions are made.

New NI thresholds

Two draft statutory instruments have been published which are to give effect to the annual re-rating of various NIC limits and thresholds. The Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations 2015 sets out the relevant thresholds and limits for the purposes of calculating Class 1 NICs for the tax year beginning 6 April 2015. The Social Security (Contributions) (Re-rating and National Insurance Funds Payments) Order 2015 deals with Class 3 and Class 4 NICs.

For more details, read here and here.


John W Wilson LLB(Hons) FPMI ACII, Head of Technical, JLT Benefit Solutions|

Email: john_wilson@jltgroup.com