Employee Benefits Updates | NAPF Research on Pension Freedom

19 July 2015

Week ending 19 July: Over £1.8bn withdrawn in 1st two months of pension freedoms|NAPF research on pension freedom

Finance Bill 2015

The Finance Bill 2015 has been introduced into Parliament. It includes the following pension provisions outlined by the Chancellor in the Summer Budget:

  • Reduced annual allowance. From the start of the 2016/17 tax year, the annual allowance will be tapered for high earners. The taper will apply to individuals who have an "adjusted income" (which includes their pension contributions and those made on their behalf) of more than £150,000. For these individuals, the annual allowance will be reduced by £1 for every £2 that their adjusted income exceeds £150,000, up to a maximum reduction of £30,000. Individuals with a "threshold income" of less than £110,000 (excluding pension contributions) will not be caught by the taper.
  • Aligning pension input periods with tax years. Amendments to the Finance Act 2004 will align an individual's pension input period (PIP) with the tax year from 2016/17. This change is intended to facilitate the annual allowance taper. All PIPs open on Budget day are deemed to have closed with immediate effect and complex transitional provisions in the Bill will apply for the 2015/16 tax year to protect individuals who might otherwise be adversely affected by the changes.
  • Taxation of lump sum death benefits. The Bill will amend the Finance Act 2004 by further limiting the cases where the 45% special lump-sum death benefits charge applies following a member's death. From 6 April 2016, lump-sum death benefits payable from a registered pension scheme or non-UK scheme on the death of a member over age 75 will be taxed at the marginal rate of income tax that applies to the recipient, rather than under the special lump-sum death benefits charge, where the benefits are paid to an individual who is the "ultimate beneficiary". The legislative amendments provide that where the recipient is a trust or a company without a marginal tax rate then the special lump-sum death benefits change will still apply.

The Occupational Pension Schemes (Schemes that were Contracted-out) Regulations 2015

The Occupational Pension Schemes (Schemes that were Contracted-out) Regulations (SI 2015/1452) have been brought into law. The Regulations set out the rules which schemes that were contracted-out will need to comply with following the abolition of contracting-out. They ensure that members’ entitlements resulting from contracted-out employment will be preserved. A number of provisions are designed to ensure a smooth end to contracting-out for schemes. The regulations come into force on 6 April 2016.

The DWP has also published the Government’s response to the consultation on the draft Regulations.

The Pensions Act 2014 (Savings) Order 2015

The Pensions Act 2014 (Savings) Order 2015 (SI 2015/1502) has been brought into law. The Order allows HMRC, and trustees of pension schemes that are contracted-out on a DB basis to carry out, after the abolition of contracting-out date, any necessary activity related to any period of contracted-out employment which occurred before the abolition date. These include:

  • Provisions relating to the certification of contracted-out schemes, cancellation of certificates, the national insurance rebate, HMRC supervision of contracted-out schemes and state scheme premiums. These are saved for three years in order to require or allow schemes and HMRC to carry out "necessary tasks" relating to a period of contracted-out employment which occurred before 6 April 2016.
  • Allowing a contributions equivalent premium to be paid after 6 April 2019 in circumstances where the scheme entered a PPF assessment period before the 6 April 2016, and the assessment period continued beyond 6 April 2019.
  • The revaluation of earnings factors for early leavers, in relation to an earner whose service in contracted-out employment ended before 6 April 2016.

More than £1.8bn withdrawn in first two months of pension freedoms - ABI

The Association of British Insurers (ABI) has published figures which show that nearly a quarter of a million payments worth £1.8 billion were made to customers from pension pots in April and May. In the same period £1.3 billion was put in to buying nearly 22,000 regular income products, with over 50% of this going into income drawdown products rather than annuities. In 2012, when annuity sales were at their peak, over 90% of the total value of sales were annuities. Less than 10% of total sales were income drawdown sales.

The data publication coincides with 100 days since the pension reforms came into force, and shows the choices savers have been making about their retirement.

The figures reveal that those with small pots were cashing out and those with big pots were buying incomes. There has been a shift from buying annuities to buying income drawdown products.

The ABI data shows:

  • Savers have taken out over £1billion in 65,000 cash withdrawals from their pension pots. The average pot taken was £15,500. These cash lump sum payments take advantage of new forms of withdrawal called Uncrystallised Funds Pension Lump Sum (UFPLS).
  • Savers have taken out £800m worth in payments from income drawdown policies in 170,000 withdrawals.
  • Savers have put in £630m to buy 11,300 annuities and a further £720m to buy 10,300 income drawdown policies. This compares to nearly £1.2 billion a month in sales of annuities at the peak in 2012, when only £0.1 billion per month was put into income drawdown products.
  • The average annuity was purchased with £55,750 and the average fund put into drawdown was £69,900.

The data also shows that many customers are shopping around for the best deal, with nearly half (45% of sales) choosing a different provider when buying an annuity and over half (52% of sales) switching when buying an income drawdown product.

NAPF research on pension freedom

The National Association of Pension Funds (NAPF) has published new research commissioned to understand what the 2.2m people aged 55-70 with approximately £175bn in defined contribution pension pots not yet in payment plan to do with their savings under the new pension freedom reforms.

The research found that 70% were attracted to the idea of drawdown. This implies a potential market of 1.5m investors and between £50bn to £100bn in assets. Of particular note was that even among those with smaller pots (less than £25,000) the majority (54%) were attracted to the idea of drawdown.

Preferences for drawdown (among those with an opinion):

  • 54% of respondents with under £25,000 of DC wealth showed a preference for drawdown.
  • 60% of respondents with £25,000-£100,000 of DC wealth showed a preference for drawdown.
  • 87% of respondents with £100,000+ of DC wealth showed a preference for drawdown.

However the NAPF were concerned about the assumptions that many people have about drawdown: 53% of respondents believed drawdown offered a guaranteed income and 25% thought that drawdown carried no risks at all.

Number of small firms planning to contribute more than the minimum for auto enrolment has doubled

New research from workplace pensions provider NOW: Pensions reveals that the number of employers planning on contributing more than the legislative minimum has nearly doubled in the past year.

Of the 400 SMEs surveyed, nearly one in three (30%) say they plan to, or will consider, contributing more than the legislative minimum when they enrol their employees into a workplace pension. This compares to nearly one in five (17%) of SMEs surveyed last year.

Of those that intend to be more generous, 17% say they plan to pay more than the minimum from the outset with a further 13% stating that they will pay the minimum initially, with a view to increasing contributions over time. This is an improvement on 2014 when 8% of SMEs surveyed said they intended to pay more than the minimum with a further 9% stating they will pay the minimum initially with a view to increasing contributions over time.

Over half (57%) of those surveyed who intend to pay more than the minimum say they believe it will help with the recruitment and retention of employees. One in two (51%) hope that by contributing more, their employees will be encouraged to do the same. Over a third (39%) think the minimum contribution has been set too low for a comfortable retirement. Nearly a quarter (24%) say they don’t offer any other benefits so are happy to spend a bit more on providing a more generous pension while an equal proportion believe it is the employer’s responsibility to ensure employees have a healthy pension pot that will provide them with a comfortable retirement.

Of all the companies surveyed, 43% say they think offering a good quality pension helps with employee retention while a third (34%) think it helps to improve the attractiveness of the company to potential employees.

Of the 44% of firms that plan to make minimum contributions, over a third (36%) say it is because their focus is on ensuring compliance. While a similar percentage (32%) claim they want to keep things simple and think paying more would complicate matters, while nearly a quarter (24%) say keeping costs low is a priority. 16% say they don’t really want to offer a pension at all so plan to keep costs as low as possible.

FRC feedback statement on Joint Forum on Actuarial Regulation: A risk perspective

The Financial Reporting Council (FRC) has published a feedback statement on the discussion paper, ‘Joint Forum on Actuarial Regulation: A risk perspective’, which sought views on the Joint Forum on Actuarial Regulation’s (JFAR) identification of risks to the public interest where actuarial work is relevant.

Common themes emerging from the feedback of over 300 respondents include risks arising from the fast changing pensions environment and the interconnectedness of many of the risks where actuarial work is relevant.

As a result of the feedback, JFAR will focus on three areas in 2015/16 to help determine if the risks are being appropriately mitigated and if additional co-ordinated response is needed:

  • Defined benefit (DB) to defined contribution (DC) pension scheme transfers: this review will look at the actuarial work being performed to support DB to DC transfers in the light of the new pension freedoms.
  • General insurance provisions: this review will investigate the actuarial work supporting the setting of general insurance claims provisions in the light of the current economic environment and competitive insurance market.
  • Group think: this review will consider the factors affecting actuarial group think including whether regulation itself can cause group think.

JFAR intends to maintain its risk perspective using a range of inputs including from further public feedback.

NEST scheme annual reports and accounts 2014/15

NEST has published its annual report and accounts 2014/15 for the NEST pension scheme.

The NEST scheme key stats as at the end of March 2015 are as follows:

NEST had over 2 million members (2013/14: over 1 million), including over 1,000 self-employed members. The average opt out rate was 8 per cent on average and lower for younger members.

NEST had nearly £420m assets under management (2013/14: £104m), largely invested in the default funds (NEST Retirement Date Funds). Over 99 per cent of members are invested in those funds.

NEST was working with over 14,000 employers (2013/14: just under 4,700).

There were around 1,400 intermediaries signed up to NEST Connect, its online hub for professionals offering auto enrolment services to employers.

PPF 7800 Index update

The PPF 7800 Index has been updated to the end of June 2015.

Highlights include:

The aggregate deficit of the 6,057 schemes in the PPF 7800 index is estimated to have decreased over the month to £223.1 billion at the end of June 2015, from a deficit of £241.3 billion at the end of May 2015.

The funding ratio increased from 84.1 per cent to 84.8 per cent.

Total assets were £1,244.3 billion and total liabilities were £1,467.4 billion.

There were 4,794 schemes in deficit and 1,263 schemes in surplus.

Pensions Ombudsman rejects pension liberation complaint

The Pensions Ombudsman has rejected a complaint from Mr Andrew Johnston who complained that, following his application, Prudential transferred his pension from the Prudential Personal Pension Plan to the Capita Oak Pension Scheme without sufficient checks on the receiving scheme. Mr Johnston is now unable to locate his pension fund.

Mr Johnston complained to Prudential that they had not carried out a proper procedure in making the transfer and maintained that they had responsibility for reimbursing him the missing money. He does not dispute that he authorised the transfer or instructed the parties.

Prudential replied that they had acted in good faith under Mr Johnston’s specific instruction. They obtained and reviewed the relevant paperwork, checked it was in order and that the receiving scheme was registered with HMRC, and were satisfied that they had followed the correct process required at that time.

The Ombudsman rejected Mr Johnston’s complaint and in doing so, followed the principles established in previous determinations concerning pension scams.

The Ombudsman cannot apply current levels of knowledge and understanding of pension liberation/scams or present standards of practice to a past situation.

Prudential were faced with a member who apparently wished to exercise his legal rights, and a receiving scheme that was properly registered with HMRC which had provided the appropriate declarations and information. Mr Johnston could not be deprived of a statutory right by regulatory or other guidance. To the extent that Prudential had a duty of care to Mr Johnston, it would have been overridden by a statutory obligation to make the transfer and simply met by doing as he apparently wished. The same is true of their regulatory and contractual responsibilities to him.

Even if Mr Johnston was right that Prudential should have carried out greater due diligence (though the Ombudsman did not find that he was) that would not necessarily lead to the reinstatement of his benefits with Prudential. It is possible that even if he had been warned further that transferring was an unusual and/or risky step, he would have persisted at that time.

The Ombudsman had ‘great sympathy’ for the position Mr Johnston now finds himself in, but did not consider that there was an administrative failure by Prudential in complying with his transfer request. The Ombudsman therefore did not uphold Mr Johnston’s complaint.

ONS analysis of AE workplace pension contribution rates

The ONS has published Employees Eligible for Automatic Enrolment: Contributions to Workplace Pensions, 2005-2014, an analysis of workplace pension contribution rates in the context of automatic enrolment.

The main points are:

  • Total contributions are increasing following the introduction of automatic enrolment as there has been a large increase in the number of people that are contributing, but median contribution rates are lower. Median contribution rates are expected to increase as the planned implementation of higher minimum contribution rates proceeds.
  • In the private sector, the number of employees who make contributions at rates above the automatic enrolment minimum contribution rates has remained stable. However, there has been a large increase in the number contributing at rates corresponding to the automatic enrolment current minimum contribution rate, reflecting increased participation in workplace pensions.
  • Private sector employee median contribution rates fell between 2013 and 2014, particularly in the 22 to 29 age band (3% in 2013; 1% in 2014). The fall in the 22 to 29 age band is likely to be because there was a large increase in membership following automatic enrolment, with new members often starting at the minimum contribution level.
  • Employer private sector median contribution rates were stable until 2013 when they began to decline in all but the highest age band, falling across all age bands in 2014. The increase in workplace pension membership following automatic enrolment is the likely explanation for decline in median contribution rates.
  • Employee median contribution rates for the smallest private sector businesses, those with 1 to 4 employees, rose to 2.4% in 2013 and 2.5% in 2014, having been largely zero from 2005 to 2012.
  • For employees earning more than £40,000, there was no change in private sector employee median contribution rates between 2012 and 2014, standing at 5% in each year. In contrast, for private sector employees earning under £40,000, median contribution rates fell following the introduction of automatic enrolment. This fall is likely to be explained by the increased participation in workplace pensions in these earnings bands.

Pensions Regulator guidance to help small employers choose AE scheme

The Pensions Regulator has published guidance to help the 1.3 million small and micro businesses preparing for automatic enrolment by to help them find a good quality pension scheme. Research by the Regulator suggests one in five (290,000) employers will not seek advice when choosing a pension scheme, while one in ten (130,000) do not know how to select a scheme, or think it will be difficult.

The Regulator is updating the suite of information and tools on its website to make it as straightforward as possible for smaller employers, many of which have little or no experience of pensions, to get automatic enrolment right.

The Regulator has refreshed its website content to include information to help employers find a scheme including, for the first time, a list of ‘master trust’ pension schemes open to employers of all sizes, and which have been independently reviewed to prove they are administered to a high standard. The voluntary master trust assurance framework was developed by the Institute of Chartered Accountants of England and Wales (ICAEW) in association with The Pensions Regulator to enable auditors to provide independent assurance on scheme quality.

In addition, a quick guide for small and micro employers on what to look out for when choosing a scheme suited to their needs, and updates to website pages for IFAs and accountants, have been published.

The Regulator’s communications material will continue to signpost employers to NEST, the NAPF’s PQM READY site and the ABI’s list of automatic enrolment providers.

EIOPA highlights measures to facilitate the transfer of pension rights

EIOPA has published a Good Practices Report on transferability of supplementary pension rights. With this Report, EIOPA identifies the main impediments to cross-border and national transfers as well as a number of good practices to overcome these. This would create more transparency in the interest of consumers and facilitate the internal market for supplementary pension rights.

EIOPA outlines three key areas which – if addressed – could significantly facilitate the transferability of supplementary pension rights:

Domestic and cross-border transfers should be treated equally. EIOPA considers it a Good Practice if cross-border transfers are not subject to stricter regulations or requirements than domestic transfers are. (Good Practice 3).

Scheme members should receive adequate information in order to take informed decisions on whether a transfer is beneficial for them. It is essential that information is structured in different layers in order to make it more comprehensive. Additional relevant information can be provided via appropriate tools such as online platforms (Good Practice 7). Furthermore, it is considered as a Good Practice to enable the scheme member to receive advice on costs and charges in order to understand whether a transfer is in his/her best interest or not (Good Practice 8).

In case scheme members are charged for the transfer, such charges should reflect the actual work necessary to carry out the transfer. This does not preclude lump sum charges as long as they reflect actual costs (Good practice 9).

The transfer process could be more efficient to enable schemes to complete the transfers within reasonable time limits (Good Practice 11). The timescales should be reasonable for completing transfers, but without unnecessary delays.

Gabriel Bernardino, Chairman of EIOPA, said: "The increasing mobility of the workforce has made the issue of transferring pension rights nationally and across borders extremely relevant for many employees. EIOPA was asked by the Commission to explore measures for improving the transferability of vested pension rights. With this Good Practices Report, we promote more transparency and inform future discussions on this topic".


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