Developments in Employee Benefits law and practice

14 March 2016

Week ending 13 Mar: Finance Bill 2016 | Tax and NIC changes from April 2016 and more

Finance Bill 2016

In a written ministerial statement, the Financial Secretary to the Treasury, David Gauke, confirmed that Finance Bill 2016 will be published on Thursday 24 March.

Options for alignment of IT and NICs

The Office of Tax Simplification (OTS) has published its report on the closer alignment of income tax (IT) and National Insurance Contributions (NICs). Key recommendations are:

  • moving to an annual, cumulative and aggregated assessment period for employees’ NICs similar to that for PAYE income tax;
  • replacing employers’ NICs with a flat rate charge on employer’s total remuneration costs;
  • aligning NICs rates and thresholds between the employed and self-employed;
  • aligning the rules for IT and NICs for employees; for example, a common definition of earnings; similar treatment of business expenses; and the extension of Class 1 NICs to benefits in kind;
  • running IT and NICs as common, parallel systems; and
  • making NICs more transparent.

An update may be given in the Budget, on 16 March.

Workplace pension participation has doubled following AE

Participation in workplace pensions has more than doubled following the introduction of automatic enrolment, according to the findings of the 2015 Employers’ Pension Provision survey, published by the Department for Work and Pensions. Key findings are -

Participation in workplace pensions has more than doubled following automatic enrolment

Before implementing automatic enrolment, two-thirds of staged employers offered pension provision, and around a third of their workforce were participating in workplace pensions. This increased to 93 per cent of employers offering provision, and 66 per cent of the total workforce were participating following automatic enrolment.

The majority (72 per cent) of employers yet to stage, offered no pension provision, and only 22 per cent of their workforce were participating in a workplace pension.

Employers yet to stage had almost universal awareness of automatic enrolment, with over half already making plans

95 per cent of employers yet to stage were aware of automatic enrolment, 65 per cent were aware of the legal minimum contribution and 46 per cent were aware of the need to declare compliance with The Pensions Regulator (TPR). Awareness was slightly lower for the smallest employers, but much higher for those within six months of their staging date.

55 per cent of employers yet to stage had begun planning for automatic enrolment, but had not yet taken action. The proportion of employers that had begun planning was much higher for employers within six months of their staging date.

Few employers are choosing to introduce automatic enrolment early, but half used flexibility to postpone

To date, 6 per cent of all employers had automatically enrolled in advance of their staging date.

Half of employers that had staged had used postponement, with the majority of these using the maximum period of three months. Just over two-fifths were using a waiting period for new workers, usually the allowed limit of three months.

Employers setting up a new scheme were most likely to use NEST

79 per cent of staged employers that had offered a pension scheme prior to automatic enrolment were, as expected, using their existing scheme for automatic enrolment. Employers that had staged but previously offered no provision were most likely to have used National Employment Savings Trust (NEST) (40 per cent), or to have set up a new stakeholder, occupational or Group Personal Pension (GPP)/Group Self-Invested Personal Pension (GSIPP) scheme (36 per cent). The few small and micro employers that had staged were more likely to have used NEST than another type of scheme. Overall, 23 per cent of staged employers were using NEST.

Employers that had not yet staged and already offered pension provision were most likely to plan to use their existing scheme (36 per cent). Many employers yet to stage who offered no pension provision did not yet know where they would be likely to enrol their workers (53 per cent); those that did know were most likely to set up a new stakeholder, occupational or GPP scheme (29 per cent) or to use NEST (17 per cent).

The vast majority of employers sought advice or guidance, but less than half paid for advice

Only 8 per cent of employers that had implemented automatic enrolment had done so without seeking some advice or guidance. The most commonly sought areas of advice were: understanding the legislation, choosing a type of pension scheme and choosing a pension provider. Of those employers that sought advice on choosing a provider or scheme type, the most commonly used sources of advice were Independent Financial Advisors (IFAs), pension providers and TPR.

Of staged employers, fewer than half (44 per cent) of those who sought advice had paid for any of the advice they received. The median cost of paid advice was £2,650, although larger employers tended to pay more for advice. These figures are heavily skewed by large and medium employers given the population of staged employers.

Employers yet to stage were similar to those who had staged in terms of their expected use of advice, and whether they would pay for advice. Those yet to stage were slightly more likely to say that they expected to use an accountant for advice, and less likely to expect to use TPR.

Fewer than one in ten automatically enrolled workers opt out

To date, 9 per cent of workers that had been automatically enrolled had opted out during the one month opt-out period. Workers enrolled into NEST and single employer occupational schemes were slightly more likely to opt out than those enrolled into stakeholder schemes or GPP/GSIPPs.

After the one month opt-out period, 8 per cent of automatically enrolled workers had left the scheme, although this includes those who had left the employer and who may have a new employer. Employers estimate that around half of these scheme leavers (4 per cent of automatically enrolled workers) had chosen to stop saving into a scheme after the opt-out period, referred to as ceasing active membership.

Overall 5 per cent of workers that were ineligible for automatic enrolment had opted in. These workers were more likely to opt in to a stakeholder or single employer occupational scheme.

The majority of employers are phasing in increases to contribution rates in line with legislation, but one in three are already contributing above the legal minimum

Overall, 62 per cent of staged employers were phasing in contribution rate rises in line with the legislation, but around a third were contributing at least 3 per cent from the start. The majority (72 per cent) of staged employers were already contributing or planned to contribute the same rate for all workers.

Of those employers that were phasing in contributions, 85 per cent planned to contribute at the legal minimum of 3 per cent following phasing, 9 per cent of employers planned to contribute between 3 per cent and 6 per cent and 2 per cent of employers planned to contribute more than 6 per cent. The average contribution rate for staged employers was 3 per cent (compared to current legal minimum of 1 per cent); this was higher for stakeholder schemes and GPP/GSIPPs and lower for NEST and other master trusts.

Employers that had not yet staged reported planned contribution rates that were similar to those who had already staged, with 14 per cent planning to contribute above the legal minimum.

The study makes it clear that, given the employer population and staging profile, the full impact of automatic enrolment is still to be felt in terms of overall access to workplace pension provision in Great Britain.

Tax and NIC changes from April 2016

The Social Security (Contributions) (Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2016 (SI 2016/343) make provision to give effect to the annual re-rating of various National Insurance contributions (NICs) limits and thresholds for the purposes of calculating Class 1 and 4 NICs liability for the tax year beginning 6 April 2016. These changes will come into force in Great Britain, with equal provision made for Northern Ireland, on 6 April 2016. (Updated from draft on 11 March 2016)

The upper profits limit (UPL), below which Class 4 NICs are payable at the main Class 4 percentage rate, is increased from £42,385 to £43,000 per year, and the upper earnings limit (UEL), below which primary Class 1 NICs are payable from £815 to £827 per week.

The Income Tax (Pay As You Earn) (Amendment) Regulations 2016 (SI 2016/329) make amendments to existing legislation which make provision for the assessment, charge, collection and recovery of income tax under the PAYE system. The amendments apply to the information which employers and pension providers are required to report to HMRC, and include information in respect of certain lump sum payments which are made from registered pension schemes.

These changes come into effect on 6 April 2016.

The payments to be reported are:

  • the taxable portion of an uncrystallised funds pension lump sum
  • a payment of lifetime annuity made under a flexible annuity contract to which the member became entitled after 6 April 2015, where the contract allows for the payments to decrease and to continue to be paid after the member’s death until the end of any guarantee period
  • a payment from a member’s flexi access drawdown fund
  • a payment of scheme pension paid from a money purchase arrangement where there are fewer than 12 members, including this member

Payments made to individuals on the death of a member who is under age 75 are not taxable. Employers, including pension providers, are required to report lump sum death benefit payments made to an individual where the member died after the age of 75, or where the member died before the age of 75, but the lump sum is paid more than two years after the death of the member.

Pension Savings Statement changes

Regulations which require scheme administrators to provide a pension savings statement automatically each year have been updated in order to reflect the introduction of the new tapered annual allowance from 6 April 2016.

Under the Registered Pension Schemes (Provision of Information) (Amendment) Regulations 2016 (SI 2016/308) the default position will be that the 2015/16 tax year will be treated as a single tax year for information requirements.

The key change is that a scheme administrator will only be required to provide a pension savings statement in respect of the 2015/16 tax year if either:

  • the member's pension input amount for that year as a whole exceeds £80,000; or
  • he member's pension input amount for the post-alignment tax year exceeds £40,000.

A provision in the draft regulations that would have required administrators to provide a pension savings statement where the member's pensionable earnings for that tax year exceed £110,000 has been dropped.

TPR re-launches TKU

TPR has re-launched its Trustee toolkit. In response to user requests, the toolkit has been redesigned for use on tablets and aims to provide an improved experience for customers.

Among new features is the ability to review assessment results so that trustees can focus their training on these areas. Trustees will also build up a history of their assessments.

Latest AE declaration of compliance report

As at February 2016 –

  • 6,091,000 eligible jobholders had been automatically enrolled; and
  • 9,557,000 workers were already active members of qualifying pension schemes.

Read the whole report here.

Charges and Governance amendments laid

Guidance to help service providers and trustees or managers of occupational pension schemes understand the regulations banning new member-borne commission in automatic enrolment pension schemes has been published by the Department for Work and Pensions.

Also, the Occupational Pension Schemes (Charges and Governance) (Amendment) Regulations 2016 (SI 2016/304) were laid in Parliament on 8 March 2016 and come into force on 6 April 2016.

The guidance helps to explain:

  • who is a service provider;
  • what services the regulations cover;
  • how the member opt-in procedure could work in practice.

Under the regulations, amendments are made to existing legislation to implement a ban on new member-borne commission arrangements in occupational pension schemes used as qualifying schemes for automatic enrolment, from 6 April 2016.

Miscellaneous changes to pensions legislation and valuation of pensions with a GAR

The government has published its response to a consultation on proposed changes to pensions legislation, to ensure that the new pension flexibilities operate as intended, and on the valuation of pensions with a guaranteed annuity rate.

The Pension Sharing (Miscellaneous Amendments) Regulations 2016 (SI 2016/289) and the Pension Protection Fund and Occupational and Personal Pension Schemes and (Miscellaneous Amendments) Regulations 2016 (SI 2016/294) come into force on 6 April 2016.

The response document is split into five chapters. Each chapter introduces the regulations that were consulted on, summarises the consultation responses and clarifies what changes the government has made to the regulations following this consultation.

Chapter 1: Pension Sharing on Divorce

Chapter 1 covers proposed changes to secondary legislation on pension sharing, which will be brought into law as the Pension Sharing (Miscellaneous Amendments) Regulations 2016 (SI 2016/289).

It includes various consequential amendments following the Pension Schemes Act 2015. It also creates two further exclusions from shareable rights and makes it clear that a reduction for underfunding should only take place in specific circumstances.

Chapters 2 to 4:

Chapters 2 to 4 address proposed changes to areas of secondary legislation which will be brought into law as the Pension Protection Fund and Occupational and Personal Pension Schemes and (Miscellaneous Amendments) Regulations 2016 (SI 2016/294).

Chapter 2: Occupational Pension Schemes: Scheme Wind-Up, Inalienability and Preservation of Benefits

This section clarifies what technical changes the government intends to make to reflect the pension flexibilities in specific situations, including when a scheme is winding up.

Chapter 3: Pension Protection Fund (PPF)

This section clarifies what amendments the government intends to make to the Pension Protection Fund (Entry Rules) Regulations (SI 2005/590) around schemes whose sponsoring employer cannot have an insolvency event.

Chapter 4: Retirement Risk Warnings for Members of Occupational Pension Schemes

This section clarifies what amendments the government intends to make to disclosure of information requirements, to place an obligation on trustees or managers of occupational pension schemes to issue risk warnings to scheme members at the point of decumulation.

Chapter 5: Valuation of Pensions with a Guaranteed Annuity Rate (GAR) and the Advice Safeguard

This section clarifies what steps the government intends to take to simplify the current valuation process for members with GAR pensions for the purposes of the advice requirement.

Guide to help public service pension schemes prepare for annual benefit statements

The Pensions Regulator has published an essential guide for public service pension schemes on issuing annual benefit statements plus an at-a-glance checklist to help with their planning.

Andrew Warwick-Thompson, Executive Director for Regulatory Policy at the Pensions Regulator, said: “Annual benefit statements are critical in helping scheme members to plan and make key decisions about their retirement. We know the process can be complex and the timescales challenging, so we urge schemes to start planning without delay.

“This new guide has been developed as a result of our conversations with schemes and brings together different factors and considerations they need to take into account to ensure they issue their statements effectively, efficiently and on time.

“While the guide has been designed with public service schemes in mind, all schemes can benefit from the lessons the guide contains.”

AE amendment regulations

Under the Occupational and Personal Pension Schemes (Automatic Enrolment) (Miscellaneous Amendments) Regulations 2016 (SI 2016/311), a number of pieces of legislation are amended in relation to occupational and personal pension schemes to simplify elements of the process for employers in meeting their duties under automatic enrolment legislation. The changes come into force on 6 April 2015.

Changes are made to the Employers’ Duties (Implementation) Regulations 2010, SI 2010/4, the Employers’ Duties (Registration and Compliance) Regulations 2010, SI 2010/5 and the Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations 2010, SI 2010/772, providing for:

  • a simpler process for the re-declaration of employer compliance
  • a simpler process for employers to bring their staging date forward
  • further exceptions to the employer duties
  • a transitional easement for employers using formerly contracted-out defined benefits schemes.

FAMR review outcome

According to the FCA, millions of consumers could have better access to affordable financial advice and guidance that meets their needs at every stage of their lives as a result of recommendations from the just published Financial Advice Market Review (FAMR).

Co-chaired by Charles Roxburgh, Director General, Financial Services at HM Treasury and Tracey McDermott, acting Chief Executive of the Financial Conduct Authority (FCA), the review has found that there is a clear need for intervention by the regulator and the government to help both consumers and industry benefit from new and more cost-effective ways of delivering high quality advice and guidance.

The FAMR recommendations will help to address current concerns about the affordability and accessibility of financial advice and guidance, particularly regarding the ‘advice gap’. FAMR builds on improvements made to the financial advice industry brought about by the Retail Distribution Review (RDR) which raised the standards of professionalism across the financial advice market.

FAMR outlines practical ways to enable consumers to engage with and access advice and guidance, urges changes to how financial advice is defined and suggests a new advice framework to help firms best meet the needs of consumers. The report makes a range of recommendations aimed at ensuring firms are able to provide more affordable advice for more consumers.

FAS to close to new schemes from September 2016

The Pension Protection Fund has announced that the Financial Assistance Scheme will close to Notification and Qualification of new schemes from 1 September 2016. Members currently receiving, or with a deferred entitlement to receive, assistance payments from the Financial Assistance Scheme are not affected by this announcement.

Equitable Life payment scheme

HMT has published an update noting that the scheme closed to all correspondence on 29 February 2016, except for complaints relating to payments received after 29 January. Policyholders will have one month from the date of their payment letter to lodge a complaint. All claims begun by 31 December will still be processed, and the annual payments to With-Profits Annuitants will continue unaffected.

Contact:

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