Weekly update on new developments in the pension industry for week ending 19 Dec 2016. News covered: Remedying poor value in workplace pensions | More than 7 million saving because of auto-enrolment | Annual review of AE thresholds | Review of AE announced | Scottish Budget | HMRC newsletter 83 | PPF levy rules 2017/18 | 21st century trusteeship – TPR response to consultation | TPR settlement in anti-avoidance case | TPR report on Monarch airlines | FSCS review suggests £1m pension compensation cap
Remedying poor value in workplace pensions
In 2013, the Office of Fair Trading (OFT) undertook a market study into both contract and trust-based defined contribution (DC) workplace pensions. It identified an estimated £30bn of customers’ money in schemes with charges at risk of delivering poor value for money.
In response to these findings, the Association of British Insurers established an Independent Project Board (IPB) to oversee an audit of these poor value schemes. The IPB recommended that the DWP and FCA undertake a joint review of progress in addressing and remedying these schemes and publish a report by the end of 2016.
The DWP and FCA have now published a report which gives their assessment of the progress providers have taken to address the IPB’s concerns, and outlines the next steps and the key actions that should be taken by pension providers, independent governance committees and trustees. Key findings are:
- Overall, the industry has made significant progress. For an estimated two thirds of the savings held within workplace pension schemes identified as being poor value for money, costs and charges have been, or will shortly be, reduced to a level of 1% or less. This means that over a million customers within these schemes are subject to lower charges than before, potentially resulting in larger pension pots to fund their retirement.
- However, there is still work to be done: in some cases there are schemes where providers have written, or plan to write, to customers asking for their permission to move them to lower charging schemes – if customers respond and grant this permission this will improve the overall position across the industry even further. The DWP and the FCA will continue to engage with these providers as it is not yet clear how they will improve the value of these schemes in the event that customers do not respond.
- In respect of a small number of schemes, the DWP and the FCA are concerned that providers have not yet taken sufficient action and customers are still exposed to higher costs and charges. Providers should address this as a priority. The DWP, The Pensions Regulator (TPR) and the FCA will take further action to work directly with these providers to address these concerns.
The report says the focus going forward will be on the 16% of assets under management in contract-based schemes and 15% in trust-based schemes which have been identified as remaining at risk of costs and charges above 1%.
Actions for providers, independent governance committees, and trustees
- The DWP and the FCA will engage with the small number of providers that have not reduced charges to encourage them to take action.
- Independent governance committees are expected to challenge these providers and agree actions that fully address the IPB recommendations as a priority going forward.
- Where providers have taken action to reduce charges, both providers and governance bodies will need to monitor the services provided to customers for any evidence of deterioration in quality.
Actions for the FCA and the DWP
- Detailed feedback letters will be issued to providers in the sample in the New Year for both contract-based and trust-based schemes.
- Where further action is required to address costs and charges remaining above 1%, the FCA and the DWP will write to providers no later than January 2017 and set out the actions that should be taken to ensure that no customers remain at risk over the longer term.
- Those providers who might claim they are unable to take any further action should explain fully the reasons behind this.
More than 7 million saving because of auto-enrolment
The latest automatic enrolment declaration of compliance report shows that:
- 7,050,000 eligible jobholders have been automatically enrolled into an automatic enrolment pension scheme;
- 341,495 employers have now completed their declaration of compliance.
In 2017, the largest number of employers so far will see their workplace pensions duties start and by the end of the year, more than one million employers will have complied with the law.
Annual review of AE thresholds
The annual review of the automatic enrolment earnings thresholds has been completed. The government has announced that the earnings trigger will be frozen at £10,000 for 2017/18, whilst band earnings will continue to be aligned with National Insurance contribution rates – £5,876 for the lower limit of the qualifying earnings band, £45,000 for the upper limit.
Review of AE announced
Through automatic enrolment almost 7 million people have been enrolled into a pension scheme by nearly 300,000 employers. This is expected to lead to around 10 million people newly saving or saving more by 2018, generating around £17 billion a year more in workplace pension saving by 2019/20.
However, the government is keen that as many people as possible can benefit from their own long-term saving, topped up with employer and government contributions, to give them greater financial security in retirement. It has therefore announced a review of automatic enrolment to encourage more people to save into a workplace pension.
The review will consider the success of automatic enrolment to date, and explore ways that the policy can be further developed.
It will gather evidence on groups such as people with multiple jobs who do not qualify for automatic enrolment in any single job. It will also consider how the growing numbers of self-employed people can be helped to save for their retirement.
The review will examine the automatic enrolment thresholds for triggering saving and the age criteria for when people will start to be automatically enrolled.
It will also include the requirements set in legislation relating to the statutory review of the alternative quality requirements for defined benefits schemes (section 23A of the Pensions Act 2008) and for the certification requirements for money purchase schemes (section 28 of Pensions Act 2008).
An examination of the level of the charge cap, which was intended to take place in 2017, will also be incorporated within the review. This will assess whether the level of the cap should be changed and whether some or all transactions costs should be covered by the cap.
The review will be supported by an external group chaired by and made up of experts from within the pensions industry, and people who will also represent member and employer interests. The government will announce membership and the terms of reference for this group in early 2017.
The government says it will publish a report setting out policy recommendations towards the end of 2017.
The proposed rates and bands of Scottish Income Tax are summarised in the table below.
Scottish Income Tax Rates
Scottish Basic rate 20%
Over £11,500* - £43,430
Scottish Higher rate 40%
Over £43,430 - £150,000
Scottish Additional Rate 45%
Over £150,000 and above**
*Assumes individuals are in receipt of the Standard UK Personal Allowance.
**Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000.
So, for 2017/18 the higher rate threshold in Scotland (£43,430) will be different from the rest of the UK (£45,000).
HMRC newsletter 83
HMRC has published newsletter 83 - December 2016. Contents are:
- Autumn Statement 2016
- Lifetime allowance
- Unauthorised borrowing
- Serious ill-health lump sums - reporting through Real Time Information (RTI)
- Relief at source - annual returns of individual information for 2015 to 2016
- Overseas pension schemes
- Scottish rate of Income Tax (SRIT) and relief at source.
PPF levy rules 2017/18
The PPF’s 2017/18 Levy Policy Statement confirms the PPF’s plans for the 2017/18 levy, the final levy year of the current three year period. To remain consistent with its goal to keep the rules stable over three year periods, the PPF is making only limited changes for 2017/18.
The changes for 2017/18 include a mechanism for stakeholders to notify Experian, the PPF’s insolvency risk services partner, where the move to new UK accounting standard FRS102 would otherwise cause an artificial movement in their rating. The rules extend the opportunity to certify impacts from FRS102 where accounts from different years are compared but have been calculated on different bases.
In the consultation paper the PPF also proposed to undertake additional work to develop the approach to charging a levy to an eligible scheme which ceases to have a substantive sponsoring employer after a restructuring.
David Taylor, Executive Director and General Counsel at the PPF, said: “We will put in place a special rule recognising the risk profile of schemes which cease to have a substantive sponsoring employer, should that be necessary. For that reason alone, the rules published today are not absolutely final, but our intention is only to change them in relation to this one area, if at all. Accordingly we encourage schemes to act on the levy rules now, for example putting in place and certifying risk reduction measures. This can both improve security for members and help to reduce bills by minimising the risk to the PPF – something we are keen to encourage.”
The final 2017/18 levy determination will be published by 31 March 2017 at the latest.
More substantial changes will be considered for the next triennium, starting in 2018/19, on which the PPF plans to consult in spring 2017.
A full list of the relevant deadlines for the 2017/18 levy year has been published alongside the levy Determination.
The PPF has also confirmed that the amount it expects to collect in 2017/18 – the levy estimate – will be set at £615m, unchanged from 2016/17.
21st century trusteeship – TPR response to consultation
The Pensions Regulator has published its response to the above consultation, setting out the common themes raised and TPR plans for a targeted education and enforcement drive in 2017.
TPR received 74 responses from lay and professional trustees, chairs, pension managers, public service board members, advisers, consultants and industry stakeholder organisations. A variety of opinions are expressed in the responses, but there are also some common themes, including:
- There was broad consensus among respondents that good governance is vital and widespread support for TPR’s increased focus on driving up standards.
- While most respondents supported the idea that the chair of trustees should have demonstrable leadership skills, few respondents thought that minimum qualifications for the chair or membership of a professional body would be helpful.
- Respondents highlighted regular evaluation, assessment and reporting as ways to focus trustees on achieving good governance and asked for simplified, streamlined and consolidated guidance for trustees.
- There was little support for mandatory qualifications. Most respondents felt that the knowledge and skills of the board as a whole, with the support of advisers and other service providers, should be considered, rather than the knowledge or skill of a single individual within the collective.
- Where there are schemes that don’t reach expected levels of governance, most respondents thought a targeted approach by TPR towards those particular schemes would be better than placing additional burdens across all schemes.
TPR says it is already treating basic trustee duties of scheme governance as a priority and is taking a tough stance on scheme returns and Chairs statement enforcement, imposing fines when schemes do not comply. TPR will clarify its expectations of trustees, and what its enforcement action will likely be when these standards are not met.
During 2017, TPR will undertake a targeted education and enforcement drive. It will seek to make its expectations clearer about what ‘good looks like’ and use data to more effectively target its communication approach as well as tailoring its methods to the scheme size, type and compliance history.
TPR settlement in anti-avoidance case
In 2013 and 2014, the Pensions Regulator (TPR) issued Warning Notices setting out the case for exercising its Financial Support Direction power in relation to three defined benefit (DB) schemes sponsored by companies within the Coats corporate group.
Pending the outcome of TPR’s case, Coats Group Plc (Coats) agreed to suspend intended payments to shareholders of the proceeds from the sale of its former investments.
TPR has now secured a settlement with Coats for two of the schemes covering approximately 90% of the total membership, and will discontinue its anti-avoidance action in respect of those two schemes. The schemes covered by the settlement are:
- the Coats Pension Plan (CPP), which has over 20,000 members and as at 1 April 2015 had an estimated deficit of just over £400 million on a scheme specific funding basis; and
- the Brunel Holdings Pension Scheme (BHPS), which has approximately 3,000 members and as at 1 April 2015 had an estimated deficit of approximately £80 million on a scheme specific funding basis.
The settlement will secure for scheme members all of the available cash following the sale of Coats’ former investments. The main points of the agreed proposal are:
- Upfront payments totalling £255.5 million into the two schemes (inclusive of the agreed Recovery Plan contributions paid to the BHPS since 1 January 2016). The allocation of these funds will ensure the two schemes are left in a similar funding position.
- A change in the statutory employer for the two schemes to Coats Limited, representing an improvement in the covenant support for the schemes.
- A full guarantee from Coats of the liabilities of the two schemes.
A comparable offer has been made to the trustees of the third scheme – the Staveley Industries Retirement Benefits Scheme, which has approximately 3,700 members and as at 31 December 2013 had an estimated deficit of just under £85 million on a scheme specific funding basis. Discussions are ongoing.
TPR report on Monarch airlines
The Pensions Regulator (TPR) started working with the trustees of the Monarch Airlines Limited Retirement Benefits Plan ahead of the scheme’s 2013 valuation. The scheme had 2,441 members and, as at 30 June 2013, assets of around £287 million and a deficit on a buy-out basis of approximately £594 million.
TPR’s regulatory intervention report gives details of the purchase of Monarch Group by Greybull Capital Limited, which was conditional on the scheme being separated from the group and there being no ongoing liabilities in respect of the scheme. The employer proposed using a Regulated Apportionment Arrangement (RAA), which would separate the scheme from the employer. This would result in the scheme eventually transferring into the Pension Protection Fund (PPF).
Following negotiations, TPR provided clearance for Greybull’s acquisition of Monarch, approved the RAA, and the PPF confirmed it did not object. The sale to Greybull completed on 24 October 2014 and the scheme entered the PPF assessment period.
TPR says the Monarch deal led to a better outcome for the scheme than would otherwise have resulted from uncontrolled insolvency. It also facilitated Greybull’s acquisition of the group, which has enabled the business to continue trading.
FCA moots one million FSCS compensation limit for pensions-related business
FSCS review suggests £1M pension compensation cap
In a consultation on reviewing the funding of the Financial Services Compensation Scheme (FSCS), the Financial Conduct Authority notes that more consumers are now investing their pension funds on retirement in drawdown products instead of buying annuities.
While the compensation limit for insurance-based annuities is 100% of the loss with no upper limit, for drawdown products it is capped at £50,000 (assuming that it is not a contract for insurance).
An option put forward to address this is increasing the FSCS compensation limit to £1 million for all investment business; i.e. the same level as the current Lifetime Allowance.
The FCA also warns, however, that introducing a higher limit of protection could increase the risk of the FSCS’s costs becoming unsustainable due to potentially high-value future claims. It could also encourage greater risk-taking by firms or consumers on the assumption that the investment may be underwritten by the FSCS.