Employee Benefits | Call for ISAs to Replace Pensions

12 July 2015

Week ending 12 July: Summer Budget 2015| Centre for Policy Studies calls for ISAs to replace pensions

Summer Budget 2015

The Chancellor, George Osborne, delivered his Summer Budget on 8 July. The main proposals put forward by the Chancellor applying to pensions were:

  • The launch of a consultation on possible reform of pensions tax relief. The Government is approaching the consultation ‘with an open mind, rather than putting forward a specific proposal for reform.’ The Government is interested in views on the various options that have been suggested for how the system could be reformed. These range from a fundamental reform of the system (for example moving to a system which is ‘Taxed-Exempt-Exempt’ like ISAs and providing a government top-up on pension contributions) to less radical changes (such as retaining the current system and altering the lifetime and annual allowances), as well as options in between.
  • A reduction in the Annual Allowance from April 2016 for those with income, including pension contributions, more than £150,000. The standard Annual Allowance of £40,000 will reduce by £1 for every £2 of income above this level with a maximum reduction of £30,000. This means that for anyone with income of £210,000 or more the Annual Allowance will be £10,000. The new rules will not normally apply to anyone with income, excluding pension contributions, below a £110,000 threshold. However, as an anti-avoidance measure, where any salary sacrifice agreement is entered into after 8 July, the salary sacrificed will be added back in calculating a member’s income for the purpose of the threshold.
  • Pensions Input Periods (PIPs) for everyone will be aligned with the tax year. This has immediate effect so that PIPs which are open on 8 July 2015 will be closed on that date. A new PIP will start on 9 July and will end on 5 April 2016.
  • The Government confirmed that, as previously announced in the March budget, it will reduce the Lifetime Allowance for pension benefits from £1.25 million to £1 million from 6 April 2016. Transitional protection for pension rights already over £1 million will be introduced alongside this reduction to ensure the change is not retrospective. The Lifetime Allowance will be indexed annually in line with CPI from 6 April 2018.
  • The Government confirmed a further change to the taxation of taxable lump sum death benefits from pension schemes. Rather than being taxed at 45%, any lump sums paid on or after 6 April 2016 for members aged 75 or over will be taxed at the recipient’s marginal rate.
  • The Government has decided to delay the introduction of a secondary market for annuities until 2017 (the previous Coalition Government had said it would be introduced in April 2016), ‘in order to ensure there is a robust package to support consumers in making their decision’. It will set out further plans for introducing this measure in the autumn.
  • The Government is extending access to Pension Wise, the free and impartial guidance service, to those aged 50 and above, and is launching a comprehensive nationwide marketing campaign to further raise awareness of the service.
  • The Government will consult before the summer on options aimed at making the process for transferring pensions from one scheme to another quicker and smoother, including in relation to any excessive early exit penalties.
  • The Government will invest an additional £36 million over 5 years from 2016 to tackle serious non-compliance by trusts, pension schemes and non-domiciled individuals.
  • The Government will consult on tackling the use of unfunded employer-financed retirement benefit schemes as an avoidance measure.
  • The Equitable Life Payment Scheme will close to new claims on 31 December 2015.
  • The government will actively monitor the growth of salary sacrifice arrangements and their effect on tax receipts.

Access The Budget documents here.

The Summer Finance Bill 2015 will be published on 15 July. Access overview documents for the Bill here.

Centre for Policy Studies calls for ISAs to replace pensions

Traditional occupational pensions should be replaced with workplace ISAs, according to the Centre for Policy Studies think tank. In a briefing note published 3 July the Centre for Policy Studies urges the government to stop tinkering with pensions and instead undertake bigger reforms.

Michael Johnson, a research fellow at the think-tank, argues that a shift from conventional pensions to tax-free Isas would be popular with young people and that replacing an occupational pension with a workplace ISA would simplify the UK savings landscape in line with what people want from a savings product. In addition, he argues it would make a reduction of up to £10bn on the deficit.

“Many eschew pension saving, thereby missing out on tax relief, but engagement with Isas is high,” he said. “Ready access and flexibility is valued above tax relief. This could lead to an ISA Pension, a regular income stream derived from the liquidation of Workplace ISA assets. It would be tax-exempt, consistent with ISAs’ TEE tax framework”.

The think tank says Mr Johnson’s idea has been considered by figures within the Treasury.

Income tax exemption for payment of appropriate financial advice for employer-led DB to DC transfer exercises

The Government has announced it will introduce a new income tax exemption for payments made when employers are mandated to provide employees or former employees with appropriate independent advice as part of any employer-led transfer exercise from defined benefit (DB) to defined contribution (DC) pension schemes. The Pension Schemes Act 2015 introduced the new definitions of ‘safeguard’ and ‘flexible’ benefits, which broadly cover the benefits offered in DB and DC schemes, respectively.

Where the employer provides or pays for advice to an employee in order to meet their obligation, then that provision or payment is covered by the new income tax exemption.

When this obligation is met by an advisor whom the employer has contracted with for the purpose, the employee benefits. This would ordinarily be chargeable to tax and the exemption will remove this charge. No Class 1A National Insurance contributions (NICs) liability will arise as its treatment automatically follows the tax position. When this obligation is met by means of a reimbursement to the employee there will be a corresponding disregard for Class 1 NICs.

The Pension Schemes Act 2015 supports the delivery of greater flexibility in pensions, including setting out how transfers from a DB to a DC pension scheme will operate after April 2015. Before committing to a DB to DC transfer, members will be required to obtain appropriate independent advice from a Financial Conduct Authority approved advisor before the scheme can action the transfer. This is intended to ensure that the implications of giving up a valuable benefit are fully understood. Employers will be obligated to pay when they have raised the option of transferring by running an official transfer exercise. The scope of the tax exemption ensures that it will only apply when the employer bears the cost of providing the advice and does not pass this on to employees, for example through the use of salary sacrifice arrangements.

The provision of advice by employers would represent either a benefit in kind or payment of taxable earnings. The policy objective is to prevent employees from being subject to an additional tax charge or NICs liability as a result of receiving government mandated advice, and also to protect employers from the NICs liability that would arise. Consequently, advice provided by employers to employees or former employees under these circumstances will be exempt from income tax for the employee, nor will there be a NICs liability for the employer (or employee dependent on how provision of the advice is paid).

FCA sets out recommendation policy for Pension Wise

The FCA has issued a policy statement PS15/17 setting out its recommendation policy for Pension Wise. The statement summaries the feedback received from a consultation and publishes the FCA’s final policy. The policy primarily affects the designated guidance providers delivering Pension Wise.

When the FCA believes that a designated guidance provider has failed to comply with the required standard, it may recommend to the designated guidance provider steps that it might take to:

  • prevent the continuance or recurrence of the failure
  • make redress to those affected by the failure
  • both prevent the continuance or recurrence of the failure and make redress to those affected.

In most cases, the FCA will discuss its concerns with the designated guidance provider before making a recommendation to the designated guidance provider and the Treasury.

In general terms, it will consider making recommendations where it identifies consumer detriment or a risk of consumer detriment, arising from the failure of a designated guidance provider to comply with the standards.

Its guiding principle is that it will be more inclined to make recommendations in circumstances where there is material or recurrent detriment occurring. In making the decision to recommend it will generally have regard to the following considerations:

  • whether the breach had an adverse effect on the recipients of the guidance generally and, if so, how serious that effect was
  • whether the breach had an effect on particularly vulnerable people, whether intentionally or otherwise
  • where alternative market mechanisms such as improved information disclosure or competition could not generally be expected to address the concerns we have raised to protect consumers of Pension Wise in the absence of specific recommendations
  • whether the recommendation or the timing of the recommendation would in itself create undue risk of further consumer detriment, including harm to those currently using the service.

Examples of where the FCA might make a recommendation to a designated guidance provider and the Treasury, include but are not limited to, circumstances where it believes that:

  • a designated guidance provider’s non-compliance with FCA standards poses a serious threat to financial services consumers
  • there are issues that indicate a widespread problem or weakness at a designated guidance provider
  • a designated guidance provider has failed to comply with an action plan (agreed with the designated guidance provider further to the FCA’s monitoring of the designated guidance providers and prior to making any recommendations)
  • a designated guidance provider failed to bring the potential breaches of FCA standards to the attention of the FCA
  • the conduct in question is particularly egregious.

Access the policy here.

NEST appoints new chief executive

NEST announced on 3 July that Helen Dean, currently NEST’s executive director, product and marketing, has been appointed as NEST’s new chief executive. She will take on the role in the autumn.

Pensions Ombudsman rejects pension liberation complaint

The complaint was from Miss Hughes who wished to transfer from the Royal London Personal Pension Scheme to a Small Self-Administered scheme (SSAS) set up by Babbacombe Road 1973 Limited (the Company). The SSAS was established by deed on 30 June 2014 and registered with HMRC on 3 July 2014.

The Company was only incorporated on 4 June 2014 and its registered address was Miss Hughes’s home address. Miss Hughes was the only director of the Company and there was an employment agreement between her and the Company. There were no other employees, the Company was dormant and Miss Hughes hadn’t received any remuneration from it.

Miss Hughes submitted a transfer application and accompanying paperwork via Bespoke to Royal London on 23 July 2014. The submission included a copy of the trust deed and rules, the employment agreement and confirmation that Miss Hughes had received literature warning about the risks of Pensions Liberation.

The employment agreement had been witnessed by a person from a company called First Review Pension Services who were the first people to contact Miss Hughes about the transfer and who introduced her to Bespoke. Miss Hughes also said she’d expressed an interest in investing in property in Cape Verde. The investment provider was shown as The Resort Group PLC whose support office and sole UK promoter was First Resort Property Services Ltd. Both First Review and First Resort were based in Pride Park, Derby.

The rules of the Royal London scheme gave Royal London absolute discretion to make a transfer to ‘another registered scheme or qualifying overseas pension scheme’(QROPS), so that even if Miss Hughes didn’t have a statutory right to a transfer a transfer could still be made.

Royal London refused to make the transfer on the grounds that they were unable to satisfy themselves that the payment to the scheme would be used ‘for the purposes of providing appropriate pension benefits’ and said that their ‘fiduciary duty to the member overrides a member’s statutory right to a transfer’.

In his conclusions the Pensions Ombudsman found that if the receiving scheme was a registered pension scheme or a QROPS, Royal London had to make the transfer if there was a statutory right and if there wasn’t, they had discretion to allow the transfer.

The Ombudsman followed the analysis in the earlier determinations on Pension Liberation/Scam cases to establish whether the SSAS was an occupational pension scheme. To do this it had to meet the ‘purpose test’ (i.e. the scheme rules must adequately set out the employments to which the scheme applies) and the ‘founder test’ (i.e. the scheme was established by an employer who employed someone who fitted into that category of employment). He decided that both these tests were met so that the SSAS was, as it appeared, an occupational pension scheme.

He then addressed the question of whether Miss Hughes had a statutory right to a transfer. To do this she had to be capable of acquiring a transfer credit in the SSAS. To be able to do this she had to be an earner in relation to the SSAS. The Ombudsman followed the earlier Ombudsman decisions and held that to be an earner she had to be in receipt of remuneration from an employer participating in the scheme (in this case the Company). As she was not receiving any remuneration from the Company he held that she couldn’t acquire transfer credits under the SSAS and so did NOT have a statutory right to a transfer.

In the absence of a statutory right the Ombudsman then held that Royal London were entitled, in the light of their concern about the validity of the transfer, to exercise their discretion to refuse to make the transfer. Miss Hughes’s complaint was therefore not upheld.

The Ombudsman did, however, confirm that if a transfer had been made it would not have been an unauthorised payment because the transfer was to be made to a dedicated bank account for the scheme.

He also said that, having completed their due diligence and concluded that there was no right to transfer, Royal London should have been able to justify that to Miss Hughes – thereby confirming previous Ombudsman determinations that a member should be given explanations for the decisions taken by the trustees or managers.

Pensions Ombudsman awards for non-financial injustice

The Pensions Ombudsman has updated its factsheet How we investigate complaints to reflect its approach and the level of awards it is likely to make to compensate applicants who have suffered non-financial injustice, such as significant inconvenience, disappointment or distress, as a result of maladministration.

The factsheet confirms that the Ombudsman’s usual starting point for awards will be £500 or more. In most cases, they will range from £500 to £1,000. But sometimes higher awards are necessary. If the non-financial injustice is not significant, no award is likely to be made.

The updated factsheet can be accessed at:


The Pensions Regulator publishes guide for employers on DB funding code

As part of an ongoing communications campaign The Pensions Regulator has published a new guide to help employers understand how the code of practice on funding defined benefits applies to them.

The quick guide explains how employers should work with trustees in an open and transparent way to reach feasible scheme funding solutions.

The code balances trustees’ duties to pay benefits when due with employers’ objectives to grow their business whilst ensuring pension promises are kept.

Executive director for DB pension schemes Stephen Soper said: “Employers carry a huge responsibility to pay promised benefits to members when they have a defined pension scheme to support.

“The DB funding code recognises that the best way to fulfil this responsibility is to encourage employers to invest wisely in their business and thrive, whilst working with trustees to balance this growth against the needs of the scheme.

“The new quick guide emphasises the benefits of trustees and employees working collaboratively together in an open and transparent way, understanding the long-term plans for the business and the pension scheme and managing the associated risks accordingly.”

The guide also highlights the need for trustees to manage risk when setting investment and funding strategies which reflect both the employers’ appetite for risk and ability to fund the scheme now and in the future.

Access the guide here.


The Pensions Regulator publishes 2014/15 annual report

The Pensions Regulator (TPR) has published its annual report and accounts for 2014 - 2015. The report sets out the regulator’s performance against its corporate objectives during a time of unprecedented change in the pensions sector.

Key points include TPR’s ongoing work to ensure thousands of businesses have successfully met automatic enrolment duties and the production of new codes and regulatory guidance on defined benefit (DB) funding and public service pensions to help scheme trustees comply with their duties. TPR has also worked closely with its Government partners on the new governance standards for defined contribution (DC) schemes and regarding the implementation of the new decumulation freedoms at retirement.

The report details the complex work of TPR’s case teams which secured more than £200 million in settlements through engagement and intervention.

And it shows how TPR is embracing its opportunities to communicate and engage with the industry, for example through its Trustee toolkit learning programme, which saw a record number of passes during the last year, by attending 338 speaking events, embracing a broader range of media channels, including posting educational videos on YouTube.

The report details TPR’s work in 2014 - 2015, including:

Automatic enrolment

  • In recognition of the increasing numbers of medium-sized businesses due to stage in 2014 TPR’s industry liaison incorporated more sectors that would provide support to smaller employers. It provided bespoke educational products and online tutorials, remodelled TPR’s website and ran an advertising campaign targeting employers.
  • TPR responded to 674 whistle-blower reports and reviewed 1,362 suspected instances of non-compliance with auto enrolment duties.
  • During the year, 35,003 employers confirmed to TPR that they have met their duties by completing their declaration of compliance.

Improving outcomes for DC and DB scheme members

  • Three fifths (62%) of the DB schemes surveyed in Q3 said that they ‘fully integrate’ the management of the following risks: scheme funding, scheme investments and the employer covenant. This exceeded last year’s result (42%) and TPR’s target of 49%.
  • TPR found that 78% of schemes used for automatic enrolment had at least 80% of its DC quality features in place.
  • TPR’s work with government partners and other regulators has continued to both raise awareness of scams and provide a means through which to co-ordinate the responses of multiple agencies.

Improving governance and administration

  • A total of 17,385 modules of TPR’s Trustee toolkit were passed, the highest number since its launch.
  • In August TPR published a quick guide to record keeping, supported by a communications campaign.
  • On average 84% across TPR’s three target audiences (employers, trustee boards and actuaries) were aware of the key messages in the annual funding statement, versus a target of 80%. And 86% of actuaries reported that they would advise schemes in a way consistent with TPR’s views.

Improving organisational efficiency and effectiveness

  • Following the Government’s comprehensive spending review TPR has achieved the required 25% reduction on its levy cost base over the four years to 2014 - 2015.
  • An improved experience for online customers resulted in a 54% increase in the amount of time users spend on TPR’s website from a desktop and a 96% uplift by mobile users. TPR has increased online activity and use of social media resulting in a doubling of twitter followers and an almost doubling of subscribers to its news-by-email service.

Access the annual report here.


EIOPA consultation on the creation of a standardised Pan-European Personal Pension product (PEPP)

The European Insurance and Occupational Pensions Authority (EIOPA) has launched a consultation on the creation of a standardised Pan-European Personal Pension product (PEPP).

EIOPA invites stakeholders and interested parties to provide their feedback on the proposals for the creation of the PEPP, which is envisaged to be a long-term retirement savings product.

The overall objective of the proposal is to encourage EU citizens to save for an adequate retirement income by creating a simple, transparent, cost-effective and trustworthy product.

To achieve this objective, EIOPA suggests the creation of a harmonised legal framework for an internal European PEPP ​market. This framework would ensure  a level playing field between all providers; remove existing barriers to cross-border business and, thus, facilitate cross-border offering of PEPPs to consumers; as well as facilitate a multi-pillar approach to pension saving.

The consultation closes on 5 October 2015 and EIOPA intends to submit its final advice to the European Commission in the beginning of 2016.

Access the consultation here.

The Pensions Act 2014 (Commencement No. 5) Order 2015

The Pensions Act 2014 (Commencement No. 5) Order 2015 (SI 2015/1475) has been made and brings into force several provisions of the Act.

In particular, paragraphs 24 and 25 of Schedule 13 to the Act (abolition of contracting-out for salary-related schemes) came into effect on 7 July 2015 only for the purposes of making regulations in connection with the abolition of DB contracting-out. Paragraph 24 amends section 37 of the Pension Schemes Act 1993 (alteration of rules of contracted-out schemes) while paragraph 25 inserts new section 37A relating to the transfer of liabilities for schemes that contracted-out on or after 6 April 1997.


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

Julian Rowe, Head of Technical | Email: julian_rowe@jltgroup.com