Week ending 16 Feb: Government sets out proposals for automatic pension transfers| Pensions Schemes Bill
Government sets out proposals for automatic pension transfers
The government has published a policy paper which sets out proposals for a framework for the automatic transfer of people's small pension pots when they change jobs (also known as ‘pot follows member’ or ‘PFM’). The government intends to introduce this from October 2016, and there will be a phased approach to implementation which will allow the model to be tested ahead of full roll-out.
The paper‘Automatic Transfers: A Framework for Consolidating Pension Saving’ describes the government’s preferred implementation model. This is described as the ‘federated model’, which will see a network of registers that store and match information about eligible small pots. This will require schemes to match data in a standardised way, and whether they choose to do this on their own platforms or contract with third parties to provide this functionality is a decision they can make on an individual and commercial basis.
After introducing the federated model, the paper then describes the key stages of operation for a pension pot to follow the member. This includes details of the phased approach of implementation and the types of schemes and benefits that will be eligible to be automatically transferred. A step by step description of the actions schemes will take to process pension pot information is also included.
The aim is that automatic transfers will first apply to a limited number of schemes, but will still cover the vast majority of members. This first stage will introduce automatic matching of an individual’s small pots. The individual will then be contacted to confirm if they want these pots to be moved to their new scheme (i.e. they will need to ‘opt-in’). With minimal change the system will then transition to the ‘opt-out’ model. The transfer of dormant pensions will then take place unless the member decides not to make the transfer.
The government will now develop the legislation for the federated model of automatically transferring pension pots from October 2016. It will confirm its approach as early as possible, and expects this to be in advance of consulting on the draft legislation to implement the system later in 2015.
Introducing the paper, the Minister for Pensions (Steve Webb) said:
“This paper sets out the progress we have made in designing a model for automatically transferring a worker’s small pension pots when they change employment.
Automatic enrolment is helping people to save for retirement, but we must help them to keep track of their pension savings. We do not want members to end up with more dormant pots, but we expect 50 million dormant pots by 2050 if nothing is done. This is the rationale behind the system of automatic transfer of small pension pots into the new employer’s scheme when a member changes employment, which was outlined in the Pensions Act 2014. To ensure this system is workable for both industry and members, we need a practical implementation model.
The update paper is the culmination of work that has taken place since the Act with a wide section of the pensions industry to analyse different options and create a safe and efficient model that works in the interest of workers saving for their future.
As outlined in the paper, it is my aim that automatic transfers will first apply to a limited number of schemes, but will still cover the vast majority of members. This first stage will introduce automatic matching of an individual’s small pots. The individual will then be contacted to confirm if they want these pots to be moved to their new scheme. With minimal change the system will then transition to the opt-out model. The transfer of dormant pensions will then take place unless the member decides not to make the transfer.
I want to introduce the automatic transfer of pots as soon as possible, while also giving sufficient time for the industry to develop the new systems required. My goal is for the initial phase of automatic pot-matching to be in place by autumn 2016.”
TPR publishes two new guides in connection with the April 2015 tax and governance reforms
The Pensions Regulator has issued two new publications this week in connection with tax and DC governance reforms which come into force from 6 April 2015:
1.an Essential Guide for trustees of DC schemes to the new governance standards and charge controls and
2.a consultation on draft guidance for trustees of DB schemes on managing member requests for transfers from DB to DC schemes.
These two documents are the first parts of a package of communications designed to help trustees prepare for major pension reforms that come into force on 6 April.
In the coming weeks, tPR will also be publishing a new guide for trustees, following publication of further DWP regulations in March, to address the new pension flexibilities - including how trustees should direct their members to the new Pensions Wise service. They will be updating the ‘Scorpion’ communications materials too, in order to help members understand the risks of pensions and investment scams.
Pension Wise website
The government’s guidance guarantee website, Pension Wise, has gone live in "beta" (development) mode.
Pensions Act 2014 (Commencement No 4) Order 2015
Under this Order (SI 2015/134), new provisions made under the Pensions Act 2014 are brought into force. The provisions
- allow the State Pension Regulations 2015, SI 2015/119, to be made, which set out rules relating to the new state pensions, including rules for prisoners, deferral of state pension, the minimum number of qualifying years and pension sharing on divorce or dissolution of a civil partnership
- give employers sponsoring contracting-out salary related pension schemes a power to amend the scheme to reflect the abolition of the contracting-out for these schemes
- allow the Occupational Pension Schemes (Power to Amend Schemes to Reflect Abolition of Contracting-out) Regulations 2015, SI 2015/118, to be created, which set out the details of how the employer’s power can be used, and how an actuary is to calculate and certify the value of any proposed amendments
- provide that a member of an occupational pension scheme with entitlement to money purchase benefits has a right to a short service benefit if they have at least 30 days' qualifying service.
Pensions Schemes Bill – key points from third reading
An amendment that sought to place a separate and additional duty on the Treasury, to provide appropriate information on the effect of pension freedoms and flexibilities on income-related benefits and social care costs, was defeated.
However, it was confirmed that the Treasury is working to ensure that the content of the Pension Wise service includes information about entitlement and deprivation rules so that consumers are aware of these when choosing whether to access their pension savings.
The government also acknowledged that work is being done to ensure that people are aware of the need to plan for later life, including the risk of needing care and support and what that might mean for their choices.
The DWP plans to issue clear guidance on the treatment of pension pots in income-related benefits in advance of April. This is to help people make informed decisions about accessing their pension pot.
There was also discussion about differences in the treatment of ISAs and pensions
“As the noble Baroness said, she met my noble friend Lord Bourne and me earlier this week to discuss the substantive policy issue—namely, the interaction of pension flexibilities with the benefits and social care means tests.
The principal query that the noble Baroness raised is whether the distinction we make between ISAs and other savings vehicles, as opposed to pension pots, in benefits means testing remains fair after the introduction of the new flexibilities. ISAs are taken fully into account in income-related benefits, whereas we ignore untouched pension pots until someone reaches pension credit qualifying age. The noble Baroness argues that this is an arbitrary distinction now that the tax treatment of the two products is more aligned.
The Government, however, firmly believe that the difference is an important one. ISAs are for use at any time, but we specifically encourage people to save into pensions to provide for themselves in later life. We would not want to design our benefit system in such a way as to encourage people to spend their retirement savings when they are still below pension credit qualifying age. Aligning the treatment of ISAs with that of pension pots in the means test would be expensive for the taxpayer, as people with resources could secure more benefit. On the other hand, aligning the treatment of pension pots with that of ISAs would mean that claimants could lose benefits and so may deplete their pension savings before reaching their retirement. Neither outcome is desirable, and we therefore believe that the current position remains the right one.
This gives rise to a second question that concerns the noble Baroness, which is whether this situation gives individuals the opportunity to move their ISAs, which would be taken into account, into their pension pots, which would not be taken into account until pension credit qualifying age. The Government have considered the matter seriously and, in the light of our analysis, we do not feel that we need to act on this matter presently. The numbers of income-related benefits claimants with substantial ISAs is relatively modest and, should people move their savings to their pension pot, the additional upfront welfare costs to the Exchequer are partly offset by welfare savings in later life as those individuals would rely less on income-related benefits as a pensioner. On this issue, we plan to monitor behaviour after April when the new pension flexibilities are introduced, and respond proportionately if we need to.
I should add that people deliberately depriving themselves of money in order to secure or increase benefit entitlement may be subject to rules on deprivation of assets that already exist in both the benefit and social care systems.”
The Bill is expected to receive Royal Assent this month.
Millions more offered free pension statement
A free government service to help millions of people better understand their State Pension is being expanded from 7 February.
Anyone over the age of 55 is now able to request a personalised State Pension statement, giving them an estimate of what they are likely to receive based on their current National Insurance (NI) record. Until this week the scheme was only open to people over the age of 60.
An updated version of the booklet on the new State pension from 2016 is available here: Your new state pension explained.
HMT updates Preston guidance
Following the European Court of Justice and House of Lords’ rulings in 2000/01 in favour of part-timers gaining retrospective access to occupational pension schemes, provided they meet the necessary legal requirements, the Preston factors (earnings and interest factors) are provided for employers by HM Treasury. They are used to provide those entitled to reinstatement an opportunity to gain pension service at no cost to them. HM Treasury has now published February 2015 guidance. HM Treasury has now published February 2015 guidance.
Pensions Act 2014 impact assessments
This summary of impacts document explains the measures in the Pensions Act 2014 and summarises their impact. DWP have also published the impact assessments for the relevant individual measures.
These documents update the Pensions Bill impact assessments published in October 2013.
On 22 July 2014, DWP published an update to the main analysis of the impact of the single-tier pension reforms. This brings the analysis into line with assumptions used in the Office for Budget Responsibility’s (OBR) Fiscal Sustainability Report published on 10 July 2014.
On 9 February 2015, DWP published a new version of the short service refunds impact assessment, updated in November 2014. Since the publication of the last impact assessment, Parliament has passed the Pensions Act 2014. Section 36 abolishes short service refunds for new members of occupational defined contribution money purchase pension schemes and comes into force on 1 October 2015. The updated impact assessment reflects the new implementation date and makes use of more recent data.
NAPF’s top tips for savers using the new pension freedoms
According to research by the National Association of Pension Funds (NAPF), only one in three of the people who will be eligible to use the pension freedoms in the next five years currently feel very confident about making their own financial decisions. The NAPF has therefore outlined three top tips for savers to bear in mind when thinking about how to use the new pension freedoms that will be available from 6 April 2015
1.Be informed – gather a full understanding of your financial situation
2.Be realistic – think long-term as these decisions will affect your income for the rest of your life
3.Take your time – 6 April is the start not the deadline
DWP confirms amendments to pension schemes disclosure of information regulations
The government has published a response to its consultation on The Occupational and Personal Pension Schemes (Disclosure of Information) (Amendment) Regulations 2015. The regulations will come into force on 6 April 2015, and will ensure the disclosure of information regulations align with the new public service pension schemes which are being introduced from April 2015.
The current intention is to combine into a single statutory instrument:
the amendments to the Disclosure Regulations which are the subject of the consultation response; and
other amendments to the Disclosure Regulations resulting from budget flexibilities announced by the Chancellor of the Exchequer in March 2014.
Discussion paper on meaningful disclosure of costs and charges
The Investment Association has published a discussion paper on the meaningful disclosure of costs and charges, together with a summary paper. The objective is to define a framework for charge and transaction cost disclosure that would provide the underlying component pieces for good disclosure. See
FCA issues modification direction for ‘UFPLS’
The FCA has issued a modification direction, relevant to pension providers, which sets out a framework for the provision of product information in uncrystallised funds pension lump sum (UFPLS) sales.
The modification by consent is intended to ensure that there is a methodology for projections for UFPLS payments consistent with the methodology required for drawdown pension projections. The modification also clarifies that where a customer intends to withdraw their fund in full, whether by drawdown or UFPLS, any requirements to produce a projection are waived.
John W Wilson LLB(Hons) FPMI ACII, Head of Technical, JLT Benefit Solutions|