Developments in Employee Benefits law and practice

11 December 2017

Weekly update on new developments in the pension industry for week ending 11 December 2017: PC wants Government to act now on scammers | More DB schemes close to future accrual | Changes to relief at source regulations | New HoC paper on section 75 employer debt | Crack down on charges | New Memorandum of Understanding for Pensions Ombudsman and Financial Ombudsman Service |

WPC wants Government to act now on scammers

In its just published report - Protecting pensions against scams: priorities for the Financial Guidance and Claims Bill - The Work and Pensions Committee says Government should act now, through the Financial Claims and Guidance Bill, to ban pension cold calls and make people either take or expressly opt out of guidance before they can access their pension pot.

With regard to the reforms to Pension Wise, the WPC says –

“We recommend that Clause 5(2) of the Financial Guidance and Claims Bill be strengthened to ensure that an individual receives or expressly refuses guidance before being granted access to a pension pot. The details of what constitutes a choice not to receive guidance should be set out in Financial Conduct Authority rules, following public consultation. So too should the details of appropriate exemptions in instances where:

  • the pot concerned is of low value;

  • the individual has already received guidance or advice; or

  • the transfer in question is a routine consolidation of pots.

The Government should use its existing powers to place equivalent requirements on trust-based defined contribution pension schemes. These measures would establish a proportionate system of default guidance on pension freedoms, promoting shopping around, better-informed decision-making and protection against scams.”

More DB schemes close to future accrual

In its twelfth edition of the Purple Book, the Pension Protection Fund (PPF) reveals that while the proportion of open defined benefit pension schemes has remained relatively steady in the twelve months to March 2017, the number of schemes closed to future accruals has seen a marked increase.

The figures show 12 per cent of DB pension schemes are currently open to new members, falling from 13 per cent in 2016 and down from 43 per cent in 2006 (when Purple Book records began).

Conversely, the number of schemes closed to future accruals has risen to 39 per cent in 2017, up from 35 per cent in 2016. This is a more notable rise when compared to the steady trend seen over the preceding years.

Asset allocation

The Purple Book reveals that the aggregate proportion of schemes’ assets invested in equities continue to fall, from 61 per cent in 2006 to 29 per cent in 2017. The trend away from UK quoted equities is even more noticeable with a decline from 29 per cent of assets to just 6 per cent, challenging the perception that pension funds own a huge proportion of the UK stock market.

At the same time, the proportion of bonds rose from 28 per cent in 2006 to 56 per cent in 2017, a sign that as schemes mature they are more likely to hedge. The proportion invested in instruments other than bonds and equities fell from 18 per cent to 15 per cent over the same period.

Scheme funding

Scheme funding has shown considerable volatility over the last 12 years. In 2017, however, it has continued its positive trajectory, rising to the highest level in 3 years. On a s179 basis, the funding level reached 90.5 per cent in the year to the end of March 2017, rising from 85.8 per cent in 2016. Meanwhile the aggregate deficit fell to £161.8 billion from £221.7 billion a year earlier.

Market movements made a small negative contribution to funding – the impact of lower gilt yields on liability values more than offset the impact of the rise in equity markets and bond prices on assets. More up-to-date valuations and the shrinking universe also contributed to the improvement.

Risk reduction

Scheme sponsors have continued to make deficit reduction contributions. Data from the Office for National Statistics show that in the year to 31 March 2017 sponsoring employers made £11.4 billion in special contributions (i.e. those in excess of regular annual contributions) compared with £16.3 billion in the year to 31 March 2016.

At the same time, the latest figures from the Purple Book show the average recovery plan length is 7.5 years, the lowest period recorded since 2005/06 (when records began).

Changes to relief at source regulations

HMRC has published draft regulations in respect of changes to the Registered Pension Schemed (Relief at Source) Regulations 2005. The changes introduce shorter filing deadlines and a new annual return. These will help HMRC to advise administrators of the correct rate of tax relief to apply to members’ contributions following the introduction of the Scottish rate of income tax.

New HoC paper on s75 employer debt

An updated House of Commons library briefing looks at application of the section 75 employer debt provisions to multi-employer pension schemes.

Crack down on charges

A government and FCA crackdown on excessive costs has lowered charges on £24 billion worth of assets for members of older workplace pension schemes.

The saving over the past 4 years revealed in a report published 6 December 2017 means high charges levied on members of older workplace, or legacy, pension schemes, are soon expected to be a thing of the past.

The report published by an Independent Project Board, commissioned to investigate high charges, found that £25.8 billion of assets in defined contribution workplace pension schemes were potentially exposed to charges of more than 1%, failing to give savers value for money. This has now been reduced by over 90%.

Since 2013, the government and the Financial Conduct Authority (FCA) have worked closely with these pension providers to bring their legacy schemes in line with the standards of new workplace pension schemes introduced since the launch of automatic enrolment.

New Memorandum of Understanding for Pensions Ombudsman and Financial Ombudsman Service

The Pensions Ombudsman and the Financial Ombudsman Service have agreed an updated version of their Memorandum of Understanding to help clarify the remit of both organisations and ensure that consumers are directed to the correct complaints body.

Contact:

John W. Wilson LLB(Hons) FPMI ACII, Head of Research| Email: john_wilson@jltgroup.com

Stephen Williams, Senior Research Consultant | Email: stephen_williams@jltgroup.com