Developments in Employee Benefits law and practice

12 December 2016

Weekly update on new developments in the pension industry for week ending 12 Dec 2016. News covered: ICAEW publishes revised Master Trust Assurance Framework | Consultation on measures to combat Pension Scams | Purple Book 2016 | Institutions for Occupational Retirement Provision (IORP) II | Design of funded private pensions needs to be improved says OECD | Industry consultation on pension and investment transfers and re-registrations | Pensions Advice Allowance | Countdown Bulletin 21 | PLSA annual survey 2016 | Salary Sacrifice for provisions of BiKs |

ICAEW publishes revised Master Trust Assurance Framework

The Institute of Chartered Accountants in England and Wales (ICAEW) has updated its guidance on Master Trusts to help pension trustees demonstrate good governance standards.

The new changes bring the voluntary assurance framework on Master Trusts up-to-date with current legislation and codes of practice issued by The Pensions Regulator.  

Consultation on measures to combat Pension Scams

Project Bloom is a cross-government taskforce led by the Pensions Regulator (TPR), comprising government, regulators and law enforcement agencies. Its remit is to monitor trends, share intelligence on emerging threats and help co-ordinate action to tackle pension scams.

The taskforce has developed a definition of activity that it believes should be considered as pension scams, namely:

Marketing products and arrangements and successful or unsuccessful attempts by a party to:

• release funds from an HMRC registered pension scheme, often resulting in a tax charge that is normally not anticipated by the member

• persuade individuals over the age of 55 to flexibly access their pension savings in order to invest in inappropriate investments

• persuade individuals under 55 to transfer their pension savings in order to invest in inappropriate investments

The government is now consulting on a package of measures aimed at tackling three different areas of pension scams:

  • a ban on cold calling in relation to pensions to help stop fraudsters contacting individuals—simplifying the anti-fraud message that the general public will never be cold called about their pension
  • limiting the statutory right to transfer to some occupational pension schemes—addressing one of the key routes used to access people’s pension savings through a fraudulent pension scheme
  • making it harder for fraudsters to open small pension schemes—preventing fraudsters from setting up small tax-registered pension schemes that require no registration with TPR and using a dormant company as the sponsoring employer for the scheme

Separately, HMRC has published draft legislation setting out the changes to conditions to be a ‘qualifying overseas pension scheme’ and a ‘qualifying recognised overseas pension scheme’. The legislation will:

  • Replace the “70% rule” (currently requires overseas schemes to use at least 70% of funds that have received UK tax relief to provide the individual with an income for life) and requires those who provide non-occupational pension schemes to be regulated in the country where the scheme is established if the scheme itself is not regulated.
  • Amend the pension age test to allow for payments to be made before age 55 where the payment would be an authorised payment if paid by a registered pension scheme.
  • Expand the type of agreement that satisfies one of the conditions to be a recognised overseas pension scheme to include tax information exchange agreements.

Published alongside the draft regulations are:

New guidance on overseas pensions is available covering:

Purple Book 2016

The latest Purple Book from the Pensions Regulator and Pension Protection Fund covers the 5,794 DB pension schemes the PPF protects. It provides a comprehensive view of the private sector DB universe and of the risks the PPF faces in protecting them. The majority of the data is based on information that eligible DB schemes are obliged to provide to the Pensions Regulator, and cover the 12 months from 1 April 2015 – 31 March 2016.

Scheme Funding

The data shows that scheme funding is little changed in the twelve months to March. The aggregate deficit on an s179 basis fell slightly from £244.2 billion at the end of March 2015 to £221.7 billion at the end of March 2016, while the aggregate funding ratio rose from 84.2 per cent to 85.8 per cent.

Asset Allocation

The asset allocation of schemes has seen a more marked change, with the average allocation invested in bonds rising to over 50 per cent for the first time, reflective of schemes’ desire to diversify and de-risk. At the end of March 2015, the proportion invested in bonds was 47.7 per cent; this grew to 51.3 per cent at the end of March 2016. Meanwhile the proportion invested in equities fell from 33.0 per cent to 30.3 per cent, continuing the trend seen since the Purple Book was first published.

Scheme Demographics

There has been a very small increase in the number of schemes closed to future accrual, from 34 per cent to 35 per cent. This is a continuation of the trend that has been in place since the start of the Purple Book in 2006. Meanwhile the percentage of schemes that are open remained at 13 per cent in 2016 and has seen little change over the last four years.

Institutions for Occupational Retirement Provision (IORP) II

The Council of the European Union has adopted the IORPs Directive following approval by Parliament at first reading last month. Member states will have two years to transpose it into their national laws and regulations.

The directive has four specific objectives:

  1. clarifying cross-border activities of IORPs;
  2. ensuring good governance and risk management;
  3. providing clear and relevant information to members and beneficiaries;
  4. ensuring that supervisors have the necessary tools to effectively supervise IORPs.

Finance Bill 2017

The government has published nearly 400 pages of new tax legislation setting out the draft provisions for Finance Bill 2017 for technical consultation, including changes to salary sacrifice arrangements and changes to the taxation of payments from overseas pension schemes to more closely align the UK tax treatment of payments from overseas pension schemes with the taxation of payments from UK registered pension schemes.

Also, pension schemes established by UK employers for employees working outside of the UK, known as ‘section 615 schemes’, will no longer be able to obtain special tax treatment after 6 April 2017.

Design of funded private pensions needs to be improved says OECD

The 2016 OECD Pensions Outlook report analyses how the pensions landscape is changing in the face of challenges that include ageing populations, the fallout from the financial and economic crisis, and the current environment of low economic growth and low returns.

The report shows that there were 13 OECD countries in which assets in funded pensions represented more than 50% of GDP in 2015, up from 10 in the early 2000s. Over the same period, the number of OECD countries where assets in funded private pension arrangements represent more than 100% of GDP increased from 4 to 7 countries.

The increased role of funded pension arrangements mostly comes from defined contribution (DC) pension arrangements in which there is a direct link between contributions, assets accumulated and pension benefits. However, the OECD warns that, although these arrangements have important advantages, they put more of the risks of saving for retirement (e.g. investment and longevity risk) and decision making in the hands of individuals.

The main policy messages from the report are:

  • In most OECD countries, the tax treatment of retirement savings provides an overall tax advantage for individuals over their life cycle, but the size of the advantage varies. In at least 20 OECD countries, tax benefits for retirement savings (in relative terms) increase with income. Using flat-rate subsidies and matching contributions can help target assistance towards lower-income individuals and prevent a further widening of inequalities upon retirement.
  • A coherent framework for retirement is needed to accommodate and encourage the use of annuity products as they can play an important role in helping individuals mitigate investment and longevity risks. However, increased product complexity heightens the need for appropriate financial advice and comprehensible product disclosures to ensure that consumers purchase products suitable for their needs. It also underlines the need for the regulatory framework to adapt to innovations in product design and encourage appropriate risk management for annuity products.
  • Policy makers need to ensure that consumers receive appropriate financial advice for retirement. Measures need to be put in place to ensure that the conflicts of interest that advisors face are mitigated and that advisors are adequately qualified. However, attention also needs to be paid to ensure the continued accessibility and affordability of advice, an area in which technology-based advice can potentially play a role.
  • Low financial literacy poses serious challenges, as individuals are increasingly responsible for managing their own retirement wealth. Financial education for retirement planning should be implemented, whilst information about pensions should be available, clear and not overwhelming for individuals; where possible it should be standardised (e.g. costs, fund performance). All information for individuals’ pension plans should be combined and available to use with calculators/simulators in order to provide greater insight.
  • In the four OECD countries with separate civil service pension schemes, civil servants’ future pension promises measured in terms of replacement rates are 20 percentage points higher for a full career than those of the private sector. The OECD recommends a pension framework that applies the same rules to the public and private sectors; this should facilitate labour mobility and increase efficiency.

Separately, according to a report from the OECD on annuity products and their guarantees, product design is a crucial factor in the potential role of annuity products within the pension system.

The report aims to help policy makers better understand annuity products and the guarantees they provide, in order to optimise the role that these products can play in financing retirement.

It says that product design is a crucial factor in the potential role of annuity products within the pension system, along with the cost and demand for these products, and the resulting risks that are borne by the annuity providers.

Increasingly complex products, however, pose additional challenges concerning consumer protection. Consumers need to be aware of their options and have access to unbiased and comprehensible advice and information about these products.

Contents include:

  • What is an annuity product?
  • Overview of the different types of annuity products
  • The risks presented by annuity products and how they are managed
  • Drivers of annuity product availability, design and sustainability
  • Ensuring suitable products for consumers
  • Policy considerations with respect to annuity products

Industry consultation on pension and investment transfers and re-registrations

The Transfers and Re-registration Industry Group (TRIG), which is comprised of eight leading UK investment and pension trade associations, has launched a consultation to investigate ways to improve the process of transferring and re-registering pension and investment assets. Following a review process, the consultation paper was published on 5 December 2016, and is seeking input from stakeholders by 31 January 2017. A final set of recommendations is due to be published in Spring 2017.

There are five proposals:

  1. the creation of clear service expectations for transfers and re-registrations, including a 48-hour standard for completing each step in the process
  2. the collection of high level management information and a common reporting methodology for all transfers and re-registration instructions
  3. the creation of a forum to identify, prioritise and implement solutions that resolve unnecessary barriers to transfer and re-registration processes
  4. the development of common industry standards and good practice guidelines for the retail investment and pensions industry
  5. the establishment of an independent governance and oversight body to oversee the implementation of the final proposals.

Pensions Advice Allowance

HMRC has put out a policy paper introducing an income tax exemption to cover the first £500 worth of pensions advice arranged by an employer and provided to an employee in a tax year, which is applicable to advice not only on pensions but also on the general financial and tax issues relating to pensions. See -

Countdown Bulletin 21

Countdown Bulletin 21 has been published on Gov.UK. It provides details of the closure scan for active members that will be run later this month.

This scan will automatically close open periods of contracted-out employment held on HMRC records.

To obtain their closure scan data, schemes will have to submit a completed closure scan request form.

Part 1 of the form is for administrators and third party administrators who already have Trustees approval to receive the data.

The completed form should be sent to: schemereconciliationtelephoneenquiry.inbox@hmrc.gsi.gov.uk.

HMRC will provide closure scan data to schemes via the Shared Workspace.

Closure scan output will be placed in each scheme’s Scheme Reconciliation Service e-room between January and March 2017.

PLSA annual survey 2016

According to the findings of the Pensions and Lifetime Savings Association’s 42nd Annual Survey, costs for operating defined benefit pension schemes have increased by 37% in one year, with the costs for smaller schemes rising by 63%. Meanwhile, defined contribution schemes continue to grow, fuelled by the success of automatic enrolment.

Since 2015, the mean running cost of defined benefit (DB) schemes has increased by 37% from £400 to £546 per member. This is largely driven by increases in fund management and custody costs, up 32%. Smaller schemes, those with 5,000 or fewer members, have seen the greatest rise in running costs with an average increase of 63%, to £787 per member.

In 2016, only 10% of DB schemes were open to new members compared to 21% in 2015. That figure is only 4% in the private sector. Rising costs, as well as economic volatility and low interest rates, are proving key factors in the decision to close to new members.

Defined contribution (DC) schemes continue to grow, fuelled by the success of automatic enrolment. Master trusts have played a significant role in automatic enrolment and between June 2015 and June 2016, master trusts enrolled an estimated 1.8 million new members.

Within DC schemes the average employee contribution rates remain at 4.2% (the same as 2015) and employer contribution rates sit at 7.9% (8.0% in 2015). Savers continue to benefit from low charges, with the average annual management charge of 0.4% as it has been for a number of years.

Salary Sacrifice for provisions of BiKs

HMRC has published responses received from a consultation on salary sacrifice for the provision of benefits-in-kind (BiKs). Following review of the responses, HMRC said it would act on the proposal to limit the range of BiKs which attract income tax and NICs advantages when provided through salary sacrifice arrangements.

Employer pension contributions, employer-provided pension advice, employer-supported childcare and cycle-to-work schemes will continue to benefit from Income Tax and NICs relief when provided through salary sacrifice arrangements.

HMRC said it would also exempt ultra-low emission vehicles (ULEVs), with emissions between 0 and 75g CO2 per kilometre.

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