Employee Benefits Updates | Pension Freedoms | JLT

14 June 2015

Week ending 14 June: PM to crackdown on providers not offering pension freedoms| FCA Policy Statement on pension transfers| Lords debate drawdown charges

Prime Minister to crackdown on providers not offering pension freedoms

The Prime Minister, David Cameron, has threatened to crackdown on pension providers that fail to offer all of the retirement freedoms announced in last year’s Budget.

Speaking at the G7 Summit in Germany, he promised to keep a “careful eye” on providers. His statement follows Friends Life’s decision not to allow customers to withdraw money from their pension pots as and when they like.

The Daily Mail responded with the following headline – “What a pensions shambles! Revolution in crisis as savers are barred from taking out cash and charged £1,000 just for advice” – with key points in their articled including:

  • Firms refusing withdrawals for fear of being sued for negligence in future
  • Savers being forced to pay up to £1,000 for advice and others turned away
  • Delays of up to 90 days in paying out and sky-high charges for withdrawals

It has been suggested that changes to the rules on pensions decumulation could feature in the stability budget on 8 July.

The news story coincides with latest call volume figures from the Association of British Insurers which show that, in the first month since the introduction of new pension freedoms on 6 April, ABI members have dealt with just over one million phone enquiries from customers, an 80% increase on what they would normally expect. The ABI has also set the record straight on some of the common questions as the reforms bed in, by providing answers to the following common questions:

Why are not all providers offering all of the options available?

The ABI says all insurers offer full access to your pension fund, and the majority offer partial withdrawals such as drawdown. In any market you would not expect all providers to offer all options. Most insurers offer different options, such as income drawdown and lump sums; this can depend on the pension scheme and the customer’s circumstances, and customers can transfer out to access flexible products. This is why providers are encouraging customers to contact the free, impartial Pension Wise service for help in assessing their options.

Why are some insurers not allowing access to a pension like a bank account?

A pension fund is not a bank account. You cannot incur a tax liability for taking money out of an ATM, whereas you can from a pension fund. The majority of insurers offer partial withdrawals, but this is not the same as a bank account

Why do some providers charge for exercising an option and others not?

Most customers will not face any charges, and where any apply they will reflect the type of pension scheme and the customer’s circumstances. Customers are recommended to contact Pension Wise for help in considering their options.

Will I face an exit fee if I withdraw my pension early?

Nearly nine out of ten customers eligible for the pension freedoms will not face an exit fee. Some older schemes may charge an early exit fee where customers leave before the term of the policy. These early exit fees reflect the expenses involved in setting up the policy, which would normally have been paid off had savers stayed in the scheme as intended to their retirement date.

Why may I be required to get independent financial advice before I can access my pension?

Where your pension policy offers a guaranteed annuity rate then the law requires that you seek financial advice before making any decision. Any options that leave your money invested, like income drawdown or partial withdrawals, require you to make investment decisions so it will be prudent to seek financial advice first. Depending on your circumstances and the risks involved, some providers may say that you must take advice before choosing one of these options from them.

FCA Policy Statement on pension transfers

A new policy statement from the Financial Conduct Authority (FCA) sets out the changes to its pension transfer rules following a consultation. It will be of interest to firms carrying out these activities, and to employer sponsors of defined benefit (DB) schemes and employee benefit consultancies.

Since April 2015, the government’s new flexible pension regime has allowed defined contribution (DC) pension schemes to offer pension savers aged 55 and over immediate access to their pension savings.

Members of DB schemes do not have this flexibility. To protect consumers who might otherwise lose valuable DB benefits, the government has:

amended the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, SI 2001/544, to make advising on conversions or transfers of safeguarded benefits to flexible benefits a specified activity

introduced a requirement that individual scheme members take advice from an FCA-authorised adviser before a transfer is allowed to proceed

The amendment brings advice on transfers from DB schemes to occupational DC schemes within the FCA’s remit, so the new specified activity must be incorporated within FCA rules.

More broadly, the legislation refers to transfers of ‘safeguarded benefits’, which are primarily benefits in DB schemes but may also be benefits such as guarantees or other promises in other types of scheme.

In March 2015 FCA consulted on proposed changes to its rules which will be necessary following the amendment to SI 2001/544. This makes advising on the conversion or transfer of safeguarded pension benefits into flexible benefits a regulated activity.

FCA also consulted on related changes to ensure its Conduct of Business Sourcebook pension transfer requirements will apply to all pension transfers, regardless of when the transferred benefits are being crystallised.

FCA received 57 responses to its consultation from a variety of stakeholders, including consumer groups, trade bodies, firms, professional bodies and consultancies.

Respondents were generally positive about the proposals, and FCA has proceeded with most of the proposed rule changes with a small number of amendments.

The full details of the changes, along with consultation feedback, can be found here.

There is also a factsheet on insistent customers.

Regulator publishes latest compliance and enforcement policy for public service pension schemes 

The Pensions Regulator has published its latest policy to help deliver improved outcomes for more than 13 million members of public service pension schemes. The compliance and enforcement policy for public service pension schemes details how the regulator will work with schemes to help them to comply with new governance and administration legislation, and how if necessary it will use its enforcement powers where schemes do not comply.

Over the next 12 months, the regulator intends to reinforce and reflect its expectations for public service pension schemes in the material it publishes. This will take into account its ongoing work to understand the key areas of risk in public service schemes through the intelligence it gathers in its regulatory activities.

The regulator plans to carry out a governance and administration survey this summer to assess current standards and to monitor improvements year on year. In due course, thematic reviews will be undertaken, focusing on key risk areas, to gather information and report back to the regulated community on best practice.

Public sector pensions re-tendering guidance

The Department of Health has issued a short guide to the process that should be followed to ensure that appropriate bulk transfer arrangements are in place where an NHS organisation is re-tendering for the provision of services that will involve a transfer of staff back into the NHS pension scheme (NHSPS) in accordance with Fair Deal 2013.

Alongside the guidance, the Department of Health has also published the actuarial assumptions which are to be used to calculate the total bulk transfer amount required for transfers to and from funded schemes and involving the NHSPS.

Updated ROPS list published

A list of schemes that have told HM Revenue and Customs (HMRC) that they meet the conditions to be a Recognised Overseas Pension Scheme (ROPS) was published on 8 June.

Lords debate drawdown charges

Members of the House of Lords have debated a need for the government to introduce a charge cap on drawdown products to protect savers' investments. The following is an extract from Hansard on 9 June –

Asked by Lord Bradley

To ask Her Majesty’s Government what assessment they have made of charges on drawndown pension products; what plans they have to assess such charges on an ongoing basis; and whether they have any plans to impose a cap on those charges.

The Minister of State, Department for Work and Pensions (Lord Freud) (Con): The new pension flexibilities have given people greater choice to select the retirement product that is right for them. The pensions industry is designing new draw-down products and will actively monitor the market as it develops. We already have the power to limit or ban decumulation charges and if we see that providers are charging excessive fees, we will not hesitate to act.

Lord Bradley (Lab): But does the Minister agree with his new ministerial colleague, the Pensions Minister, the noble Baroness, Lady Altmann, who I am pleased to see on the government Bench, when she said in the Guardian this year that a cap on draw-down charges was important,

She further said:

A 2% a year charge just to keep your pension invested and have access to it would take away much of the investment return and be a terrible deal for customers”.

In the light of these comments, do the Government intend to introduce a cap on such draw-down charges?

Lord Freud: We are going to see how the market develops. It has been going for only two months, and if it looks appropriate, as I just said, we will introduce a cap on charges. I know that my new noble friend, the Minister for Pensions, absolutely agrees with that. The Prime Minister has also promised that we will keep a close eye on this.

Lord German (LD): My Lords, at all stages between the pension saver’s pocket, the investment and back again, there are hidden charges and fees—admin charges, investment charges, platform charges, transaction charges and advice costs, to name just a few. Does the noble Lord agree that there should be transparency for pension savers, and that they should know what hidden fees and charges are attracted to the money that comes from their pocket?

Lord Freud: My Lords, I imagine that quite a lot of noble Lords in the House today will remember the amendment we made to ensure that we would get transparency of charging, and we are working on that process. That is for accumulation funds, but there is no reason why we should not introduce the same thing for decumulation funds, if that is appropriate.

Lord Flight (Con): My Lords, the last Government introduced some really useful reforms for people saving for their pensions, and I trust the new Government will continue in that vein. I would simply make the point that it would be more useful if the Government were to put pressure on those firms providing products to have a reasonable charging structure, rather than seek to achieve this by legislative means. It seems to me that there is a very strong moral case for the Government so to do.

Lord Freud: We are doing that, as exemplified by the new Pensions Minister meeting the industry and working with it to make sure that it produces the right level of charging. The Government and the FCA are able to monitor that to see that we get appropriate and fair charges.

Baroness Drake (Lab): My Lords, I refer to my entry in the register of interests, including my role with the Pensions Advisory Service. Some providers of income draw-down will charge between £150 and £200 each time a customer takes out cash, so a person with a £30,000 pot who takes out £5,000 in cash over six years will lose between £900 and £1,200. Will the Minister challenge the industry on why the charge to access cash now is so ridiculously high?

Lord Freud: As I said at the outset, this market is two months old and we are watching very closely to see how the charges develop. There is a range of different charges; some providers charge for drawing down and others do not, but we will be watching it very closely.

Lord Hughes of Woodside (Lab): My Lords, when this policy was first made, to a great fanfare of trumpets, the Government were warned of the difficulties that would arise unless they took control of the matter. What the Minister is really saying is that no planning was done whatever and no thought whatever was given to how this matter would develop. Is he aware that, the way things are going, this will make the PPI scandal look like a children’s tea party?

Lord Freud: My Lords, noble Lords will be pleased to know that a great deal of effort has gone into making sure that this reform works. In particular, we introduced guidance in the shape of Pension Wise. We are working with the industry and monitoring what is happening. As I said, we will be prepared to go in and put caps on charges and address the issue of transparency if that is thought to be necessary.

Lord McFall of Alcluith (Lab): My Lords, complexity and inertia still define the characteristics of this industry. The Government said that they would not hesitate to intervene if there is a rip-off, but rip-offs take place daily at the moment. In the absence of the Government’s will to go one step further, is there not a compelling case to ensure that the cash element is disclosed in these documents, so that people can see exactly what they are being charged on a monthly or yearly basis?

Lord Freud: That is one of the things that we will look at very closely. Clearly, we need to get evidence of how this particular part of the market develops. We already have transparency in the accumulation phase. If that is necessary in the decumulation phase, we will not hesitate to introduce it.

Lord Davies of Stamford (Lab): My Lords, you do not need to wait to watch the market to believe that transparency is absolutely essential in any honest financial business. Why cannot the Government decide that there should be complete transparency of charges from the beginning? Should they not have decided that at the outset, when they introduced this new reform?

Lord Freud: My Lords, we have a marketplace and it is fair to give it a chance to develop. At the moment, according to the FT and Which?, the annual charges applied to decumulation pots are somewhere between 0.25% and, for high-end performers, 1%. For the set-up, the charge is somewhere between £70 and £300. As we start to gather this evidence and assess it, we will know whether we need to intervene.

Lord Campbell-Savours (Lab): Is the noble Lord’s ministerial colleague, sitting at his side, equally in favour of this watching approach?

Lord Freud: I think the noble Lord will be able to see a quote saying exactly that: she is monitoring this very closely.

Press Release: Insolvency Service takes action to protect pension funds

The High Court has placed two occupational scheme trustees into provisional liquidation for taking £19.4m from members of the public, the Insolvency Service has announced.

The companies, trustees of two separate occupational schemes, took the pension pot money with the promise that they would provide greater returns.

Omni Trustees Ltd was the trustee of the ‘Henley Retirement Benefit Scheme’ occupational pension fund. The fund received £8.6m from members of the public, of which £2.6m was invested in self-storage units and £3.7m held in cash, before being transferred to another occupational scheme in July 2014.

Imperial Trustee Services Ltd was trustee of the ‘Capita Oak Pension Scheme’ occupational pension fund, which took £10.8m from the public.

The Insolvency Service noted the company had suffered governance issues, going swiftly through several directors, as well as from an inability to transfer member benefits according to their wishes. Because of this, the Pensions Ombudsman said the scheme was a ‘pension liberation scam’.

Company Investigations, a part of the Insolvency Service, used its powers under the Companies Act 1985 to conduct a fact-finding investigation into the companies on behalf of the Department for Business, Innovation and Skills.

The High Court Order put the companies into provisional liquidation following hearings of applications issued by the Insolvency Service.

Both cases are now subject to High Court action, with no further information to be made available until petitions to wind the companies up are heard on 22 July 2015.


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