Developments in Employee Benefits law and practice

14 December 2015

Week ending 13 Dec: Final version of HMRC Pensions Tax Manual published| Pensioners have greater wealth than under 45s

Final version of HMRC Pensions Tax Manual published

HMRC has replaced the initial draft version of the Pensions Tax Manual with an updated version. It reflects the changes introduced by Finance Act 2015, but not those made by the Finance (No 2) Act 2015.  The Pension Tax Manual replaces the Registered Pension Scheme Manual and sets out the requirements for Registered Pension Schemes.

HMRC has also published Pension Schemes Newsletter 74. Contents include

  • Autumn Statement 2015
  • Relief at source – annual returns of individual information for 2014 to 2015
  • Lifetime allowance reduction
  • Double Taxation/Certificate of Residence requests
  • Pension flexibility
  • Form APSS146 and reclaiming tax deducted from investment income
  • Publication of the Pensions Tax Manual (PTM) on GOV.UK
  • Annual allowance reporting regulations
  • Appendix 1 – communicating the next LTA reduction
  • Appendix 2 – a summary of the changes made to the PTM this week

TPR guidance on integrating risk management (IRM)

The Pensions Regulator has published new guidance for trustees of defined benefit (DB) occupational pension schemes on the development and implementation of an integrated framework for managing risk. The guidance is the latest in a series of guides to help trustees apply the DB funding code of practice.

The guidance takes trustees through the five important steps:

  1. Initial considerations for putting an IRM framework in place. There is no one set formula for what IRM should look like. It will be determined by, and be proportionate to, trustee and employer objectives, needs and circumstances.
  2. Risk identification and the initial risk assessment. Trustees should first examine the scheme’s current position and risks. This should reflect the trustees’ objectives and the funding and investment strategies already in place and the employer’s covenant. IRM risk assessment is then developed from this point.
  3. Risk management and contingency plans. An analysis of the current position and possible reasonable alternatives enables trustees and the employer to know whether they are comfortable with current investment and funding strategies or if these should be modified straight away. Contingency planning will then enable action to be taken swiftly to reduce or manage risk levels acceptably.
  4. Documenting decisions. The great benefit for trustees in recording their thinking and decisions is that this should distil matters down to a series of key points so that they retain a clear overview on what is important and why. A better understanding of risks leads to better decisions.
  5. Risk monitoring. Planning and monitoring should be proportionate. The frequency and depth of review and the trustees’ response to it depends on a scheme’s circumstances and their risk assessment. As a minimum, trustees should consider conducting high level monitoring at least once a year.

According to the regulator, a commitment to IRM can result in the following benefits:

  • Better decision making resulting from greater trustee and employer understanding of risks.
  • Better working relationships between trustees and employers because of open and constructive dialogue.
  • More effective risk assessment, contingency planning and monitoring arrangements resulting from an evidence-based focus on the most important risks.
  • Greater efficiency due to more effective use of trustee, employer and adviser resources.

PAYE (Amendment) Regulations

HM Revenue and Customs has published draft regulations and draft explanatory memorandum for a technical consultation. The draft regulations make changes to the PAYE Real Time Information (RTI) regulations consequential to changes made by the Taxation of Pensions Act 2015 which allow individuals to access their pension savings flexibly, and the changes in the taxation of lump sum death benefits following the changes made in Finance (No 2) Bill 2016.

The changes require pension providers to indicate in their real time information returns whether the payment they are making includes a payment of a certain type.

Draft Finance Bill 2016

New draft legislation, created to implement financial policies set out in the Summer Budget and Autumn Statement 2015, has been published by HM Treasury (HMT). New tax consultations and responses to policy consultations which occurred throughout 2015 have also been published.

Pension measures include changes to the inheritance tax treatment of pension scheme drawdown funds on death and a reduction in the Lifetime Allowance from £1.25m to £1m.

Secondary Annuity Market update

On 6 April 2015, ‘freedom and choice’ changes to how people access their pensions were introduced. However, people who had already bought an annuity are effectively still subject to the ‘old’ system. To address this, the government is introducing a secondary annuity market and is:

  • compelling the Financial Conduct Authority to make rules requiring certain authorised entities to check that holders of a relevant annuity have received appropriate financial advice before they can sell their annuity
  • providing the Treasury with delegated powers to determine what a ‘relevant annuity’ is, including what the threshold should be, how it should be calculated and whether it should take into account an individual’s circumstances
  • giving the Treasury delegated powers to specify what is meant by appropriate financial advice.

Pensioners have greater wealth than under 45s

The share of wealth enjoyed by the recently retired has overtaken that held by under 45s since the financial crisis, according to research by David Willetts.

Willetts drew on new analysis by the Resolution Foundation which shows that the share of total wealth held households headed by someone aged under 45 fell from 20 per cent in the years approaching the recession to 16 per cent in 2010-12.

As a result, households headed by someone aged 65-74 now hold more wealth, despite there being more than twice as many households headed by someone aged 16-44. Recent retirees’ account for almost a fifth (19 per cent) of the UK’s total household wealth, despite making up just 14 per cent of all households.

The stark generational wealth divide has grown since the financial crash, as a result of the recently retired being relatively protected in a downturn where house prices had a swift recovery, while real wages took six years to start increasing again.  The over 60s were least affected by the UK’s pay squeeze.

However, some older households are still likely to face problems in retirement, with one in seven having less than £50,000 in household wealth. This shows that older households are not universally doing better than younger ones, says the Resolution Foundation.

The analysis also looks at the components of wealth for the different age groups before and towards the end of the downturn. Approaching the recession in 2006-08, households aged 16-44 held 22 per cent of property wealth in the UK, dropping to 17 per cent in 2010-12. This compares with the recently retired – a considerably smaller group – which held 17 per cent of UK property wealth in 2006-08, rising to 20 per cent in 2010-12. This in part reflects falling home ownership rates for younger households, says the Foundation.

Continuing shift from DB to DC

The shift from defined benefit to defined contribution pension provision over the past five years has been highlighted by the Pensions and Lifetime Savings Association, which has published five year trend analysis based on 63 of its fund members who responded to its Annual Survey every year between 2011 and 2015.

The trend data analysis is taken from a sub-sample of respondents to the Pensions and Lifetime Savings Association’s full Annual Survey 2015. The 63 fund members represent 2.8 million members and £243 billion in assets under management in 2015.

The data highlights the continued shift from defined benefit (DB) to defined contribution (DC) pension provision over the five years, with 60% of the sample’s active scheme membership in DC (40% in DB) compared to just 32% in 2011 (68% in DB). 48% of DB schemes are now closed to both new employees and future accrual, compared to 31% in 2011.

Defined contribution

  • DC employer and employee contribution rates have been generally level over the last five years, and over this time matching contributions have been the most common contribution base.
  • An encouraging trend is the rise of good DC governance with growing oversight of contract-based arrangements. The existence of a management or governance committee grew from 60% of contract based schemes to 78% among these respondents over the five years.
  • Over the last four years (question only introduced in 2012), trends in the investment strategy for the default fund are evident among these respondents. For the growth phase, passive tracker has remained the most common approach since 2012 but the at retirement phase has seen a very recent shift from a focus on fixed interest, in direct response to the pension freedoms. The PLSA says that whilst it is too soon to draw any strong conclusions about asset allocation of DC default funds during at retirement phase following the reforms, this development could be an indication of the direction of travel.

Defined benefit

  • The overall running costs of a DB scheme have become more expensive. Within the data there has been a particular jump in the average cost of administration and record keeping, which in the 2015 survey stands at £48 per member, up from £29 per member in 2011. Fees to consultants have also risen to £30 per member in 2015, from £21 in 2011. However, the cost of fund management has dropped to £197 per member in 2015, down from £206 in 2011.
  • Also, whilst employee average contributions in DB schemes were generally level over the last five years, typical employer contributions rose to 23% in 2015, up from 17% in 2011.
  • Over the last five years the strength of DB schemes’ employer covenants among this sample has largely stayed the same, or improved. The exception to this was at the beginning of this period in 2011 when 55% of schemes reported their covenant had weakened over the last three years; almost certainly a symptom of the financial crisis of 2008-2010.
  • For DB schemes, the last five years have seen a shift away from equities (42% in 2011, 34% in 2015) and increased diversification through investment in ‘other’ assets (15% in 2011, 28% in 2015) including hedge funds and infrastructure.

Press Release: Pensions and Lifetime Savings Association publishes five year trend data from annual survey

TPR call on public service schemes to raise standards

The Pensions Regulator has warned public service pension schemes to improve their standards of governance as new figures from a survey published by the Regulator suggest that despite progress being made, less than a third have a plan of action to ensure they are meeting their new legal duties.

The Regulator’s survey assessed what schemes are doing to meet the requirements, and also the standard to which they are being run. It indicates that some schemes are slow, or have yet to take action, in key governance and administration areas including record-keeping. However, schemes report good progress in terms of setting up processes.

Key findings:

  • While over 9 in 10 respondent schemes have established a pension board, only 28% of schemes have a plan in place and are addressing key issues to ensure compliance with the requirements introduced by the Public Service Pensions Act 2013 (NI 2014).
  • 44% have reviewed their scheme against the practical guidance and standards set out in the regulator’s code of practice for public service pension schemes.
  • 45% of schemes have measured themselves against the requirements of the record-keeping regulations, and so far only 27% have as a result undertaken a data cleansing exercise.
  • Generally there were high levels of reported processes in place against the majority of areas in the regulator’s code of practice.

EIOPA update on financial stability

There remains a challenging macro-economic and financial environment with persistent low interest rates in the (re)insurance and occupational pension fund sectors of the European Economic Area, according to the second biannual European Insurance and Occupational Pensions Authority (EIOPA) report on financial stability.

The December 2015 Financial Stability Report highlights the ‘double-hit scenario’ as a key concern as the persistent low interest rates in both sectors can lead to a situation where the value of assets decreases while the value of liabilities increases causing severe negative implications for the sustainability of the European (re)insurance and pension sectors.

With regard to pensions, Institutions for Occupational Retirement Provision are struggling with low interest rates, making it difficult for them to keep pension promises. Investment allocation of pension funds remains broadly unchanged.

Pensions Act 2014 (Consequential, Supplementary and Incidental Amendments) Order 2015

This Order (SI 2015/1985) provides for various amendments to be made to add references to the new State pension scheme to existing secondary legislation which are consequential, supplementary and incidental to the introduction of the new scheme.

Amendments are made to various regulations under the SSAA 1992 and SSA 1998 to extend existing administrative arrangements to do with:

  • claims
  • decision-making
  • payments
  • overpayments
  • adjustments between overlapping benefits to the new state pension

The amendments will largely come into force on 6 April 2016, at the time the new scheme comes into operation.

Latest ONS stats on workplace pensions and longevity


  • In 2014, there were 10.2 million active members of occupational pension schemes in the UK, of which 5.4 million were in the public sector and 4.9 million in the private sector.
  • The private sector has seen an increase in active members from 2011 (2.9 million) to 2014 (4.9 million). Automatic enrolment is likely to have contributed to this increase.
  • In 2014, 53% of total active membership was in the public sector and 47% in the private sector. In 2011, these figures were 65% and 35%, respectively. Automatic enrolment is thought to be the explanation for the changing proportions.
  • In 2014, 82% of active members of occupational Defined Contribution (DC) pensions were in schemes with 10,000 or more members, an increase from the 2011 proportion of 50%. Automatic enrolment started with the largest employers in 2012, which has mainly been delivered through large pension schemes.
  • The proportion of active members of occupational Defined Contribution (DC) pensions with employer contribution rates of “Under 4%” increased from 22% in 2013 to almost 69% in 2014, explained by the increase in active members joining through automatic enrolment and the associated minimum contribution rates.
  • In 2014 in the private sector, 1% of active members of occupational DC schemes had employer contribution rates of “15% and over”, whilst for occupational Defined Benefit (DB) the figure was 57%.

Life expectancy

  • In 2014 period life expectancy at birth in the UK was 79.3 for males and 83.0 for females.
  • By 2039 period life expectancy at birth is projected to reach 84.1 years for males and 86.9 years for females, an increase of around 4 years since 2014.
  • By 2039 cohort life expectancy at birth is projected to reach 93.9 for males and 96.5 for females, almost 10 years longer than period life expectancy.
  • Period life expectancy at birth is projected to rise by 8 years for males and 7 years for females over the 50 years to 2064.
  • By 2064, cohort life expectancy at birth for females in England is projected to reach 100 years, 99 in the UK, Wales, and Northern Ireland and 98 in Scotland.


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

Julian Rowe, Head of Technical | Email: