Developments in Employee Benefits law and practice

21 December 2015

Week ending 20 Dec: Outline of new secondary annuity market| Pension Wise moved to DWP| 1,000 DB schemes at risk of falling into PPF and other news

Outline of new secondary annuity market

In its response to the recent consultation into the introduction of a secondary annuity market, the government has confirmed that, from 6 April 2017, tax restrictions for people looking to sell their annuity will be removed, giving people with an existing annuity, and anyone who purchases an annuity in the future, the freedom to sell their right to future income streams for an upfront cash sum.

These changes will give people the freedom to use that capital as they want – just as those who reach retirement with a pension pot can do under the pension freedoms introduced in April 2015. Under the new changes retirees will be able to take the annuity as a lump sum, or place it into drawdown to use the proceeds more gradually.

Further details on how the new secondary annuity market will work have been set out, including:

  • setting out that pension annuities belonging to an individual and held in their own name will be eligible for the new freedoms;
  • requiring that all UK-based annuity purchasers and intermediaries are regulated by the Financial Conduct Authority (FCA);
  • allowing annuity providers the choice to buy back an annuity, subject to robust safeguards;
  • introducing a comprehensive consumer protection package to ensure people make informed decisions about their savings, including:
  • extending the free and impartial Pension Wise service to cover the secondary annuity market;
  • requiring individuals to seek independent financial advice for annuities worth above a certain threshold;
  • asking the independent regulator, the FCA, to put in place a consumer protection framework which could include consulting on a range of extra consumer protections, such as risk warnings and ways for consumers to understand the fair value of their annuities.

The government has also responded to consultation feedback and will work with the industry and the FCA to create a simple online tool to help consumers work out an estimated value of their annuity.

Pension Wise moved to DWP

Pension guidance is currently generated by the Treasury in the form of the ‘Pension Wise’ service, launched in March 2015. It is designed to provide free, impartial guidance to those over 50 and who are members of defined contribution pension schemes.

The Financial Services and Markets Act 2000 is amended to move Pension Wise to the Department for Work and Pensions (DWP). This will allow the use of the DWP’s expertise.

AE earnings trigger and qualifying earnings band

For 2016/17, it is proposed that the automatic enrolment earnings trigger will remain at £10,000, the lower limit of the qualifying earnings band will remain at £5,824 and the upper limit of the qualifying earnings band will increase to £43,000 (up from its 2015/16 value of £42,385).

Impact of AE on OPS membership

The Office for National Statistics has released a statistical bulletin which looks at the numbers and distribution of active members of occupational pension schemes in the UK in 2014, by employer contribution rates and by benefit structure. The private sector has seen an increase in active members of 2 million in the years 2011 to 2014, and automatic enrolment is likely to have contributed to this increase. The main points from the bulletin are as follows:

  • In 2014, there were 10.2 million active members of occupational pension schemes in the UK, of which 5.4 million were in the public sector and 4.9 million in the private sector.
  • The private sector has seen an increase in active members from 2.9 million in 2011 to 4.9 million in 2014. Automatic enrolment is likely to have contributed to this increase.
  • In 2014, 53% of total active membership was in the public sector and 47% in the private sector. In 2011, these figures were 65% and 35%, respectively. Automatic enrolment is thought to be the explanation for the changing proportions.
  • In 2014, 82% of active members of occupational defined contribution (DC) pensions were in schemes with 10,000 or more members, an increase from the 2011 proportion of 50%. Automatic enrolment started with the largest employers in 2012, which has mainly been delivered through large pension schemes.
  • The proportion of active members of occupational DC pensions with employer contribution rates of “Under 4%” increased from 22% in 2013 to almost 69% in 2014, explained by the increase in active members joining through automatic enrolment and the associated minimum contribution rates.
  • In 2014 in the private sector, 1% of active members of occupational DC schemes had employer contribution rates of “15% and over”, whilst for occupational defined benefit (DB) the figure was 57%.

New AE inquiry

The work and pensions select committee has launched a new inquiry into the implementation of auto-enrolment and the effect it has on small and micro employers. The Committee welcomes written submissions addressing the following points:

  • the effectiveness of the automatic enrolment process and lessons learnt so far
  • the impact of automatic enrolment on smaller employers and how they plan to mitigate any negative effects
  • Department for Work and Pensions support for small and micro employers in meeting their automatic enrolment obligations, and any recommendations for improvement
  • the suitability of the auto-enrolment earnings threshold and minimum contribution rates
  • the effect of the delays to the implementation of increases to minimum contributions announced in the Autumn Statement
  • the interaction between automatic-enrolment and other pensions reforms, including the new state pension and pension freedom

Submissions must be received by 3 February 2016.

1,000 DB schemes at risk of falling into PPF

According to research from the Pensions Institute, 1,000 DB schemes are at ‘serious risk’ of falling into the Pension Protection Fund.

The report highlights the acute pressure faced by many private-sector defined benefit schemes and their trustees as they strive to meet their long-term liabilities. It predicts that the businesses of hundreds of employers will become insolvent well before the end of their recovery plans, under which the trustees and sponsor agree contributions to make good the deficit over an agreed number of years. On insolvency, these schemes may have insufficient funds to pay members’ pensions in full.

The report argues that this worst-case scenario can be averted if the approach to managing pensions changes to one that is prepared for many more schemes to pay less than full benefits on a planned and co-ordinated basis, with all parties in agreement on how best this is achieved. Freeing an employer from the burden of its pension fund, whilst avoiding insolvency, can create extra value which can be shared with the members to achieve a better outcome.

HMRC Employer Bulletin includes SRIT update

HMRC has published the latest edition of its bi-monthly payroll news update for employers, which includes Autumn Statement 2015 announcements and an update with regard to the Scottish rate of income tax and the impact on payrolls and PAYE. Employers must ensure that their payroll software is able to apply the new ‘S’ codes for Scottish tax payers.

On a related note, the Scottish Government has confirmed that the Scottish rate of income tax will be set at 10%. So, there is no change in terms of rates of income tax payable by those identified as Scottish taxpayers – these will remain 20%, 40% and 45% respectively for 2016/17.

Pension Wise ‘visitor’ statistics

  • Website visits since launch : 1.94m
  • Cost per website visit : £0.28
  • Completed transactions : 40.6k
  • Cost per transaction : £496
  • Customer satisfaction (average score of user feedback responses) : 89%

The volume of transactions delivered by channel


Face to face


1 to 30 April 2015



1 to 31 May 2015



1 to 30 June 2015



1 to 31 July 2015



1 to 31 August 2015



1 to 30 September 2015



1 to 31 October 2015



1 to 30 November 2015



To read more, click here

Pension freedoms guidance and advice: Government response

The government has published its response to the Work and Pensions Committee’s report into pension freedoms guidance and advice, and has confirmed that statistics on Pension Wise and the advice and pensions markets will be made available.

Assessing pension freedom

The committee recommended that the government publish, or require its regulators to publish, statistics on Pension Wise and the advice and pensions markets on a quarterly basis.

The government says Pension Wise data will be available on the GOV.UK performance platform, from 17 December 2015, and will be updated on a monthly basis.

The committee recommended that the government initiate a rolling research programme to track the longer-term consequences of pension freedom decisions.

The government is procuring external research for Pension Wise in order to understand what users do following an appointment with the service, and how much the appointment improves their understanding. Findings will be published in 2017.

The government is also leading a data and monitoring working group to coordinate data collection following the pension freedoms, to ensure that key indicators are being captured and monitored. Mandatory reporting by providers from April 2016 of the number and value of money accessed through pension schemes to HMRC will further inform the government’s evidence base.


The committee recommended that the government urgently redouble its publicity efforts around pension scams. It also recommended that the FCA tighten its scam awareness and reporting requirements for regulated firms.

The government says its anti-scam strategy is focused on improving consumer awareness, to prevent people falling victim to scams in the first place. The FCA and The Pensions Regulator are both running consumer awareness campaigns to mitigate the risk of pension scams, and Pension Wise also specifically alerts its users to potential scams.

Pension Wise

The committee recommended the FCA strengthen its rules and guidance for pension providers regarding Pension Wise signposting and risk warnings; and assure compliance through mystery shopping exercises.

The government agrees that the effectiveness of provider signposting to Pension Wise is important. The FCA is currently consulting on whether changes are needed to the Retirement Risk Warnings, whilst for trust-based schemes, the Department for Work and Pensions and The Pensions Regulator are currently consulting on the best way to place a requirement on trustees to provide appropriate risk warnings for members of occupational schemes.

The committee recommended that the government work with the FCA and guidance providers to develop a more holistic Pension Wise service that offers more personalised support. It also recommended that the Financial Advice Market Review consider the case for offering two or more Pension Wise guidance sessions per customer.

The government has confirmed that work to meet these recommendations is already underway.

The committee recommended that the government ensure the Pension Wise website provides an indicative income calculator.

The government has confirmed that the service development plan for Pension Wise features changes to the website, including the introduction of calculators.

The advice market and regulatory clarity

The committee recommended that the government and the FCA, as part of the Financial Advice Market Review, clarify a) the distinction between guidance and advice, b) the definitions of safeguarded benefits, and c) protections in providing advice to insistent clients.

The government agrees that regulatory clarity is important for individuals, providers, and advisers, and the Financial Advice Market Review plans to explore

PPF Levy 2016/17

The Pension Protection Fund (PPF) has confirmed its final levy rules for 2016/17 and that the levy scaling factor and the scheme based levy multiplier will be 0.65 and 0.000021 respectively. Whilst the final levy rules remain largely unchanged for second year of the triennium, the PPF has made it easier to certify some mortgage exclusions and asset backed structures.

DC charges

DWP has published a report which summarises charges in defined contribution workplace pension schemes before the charges measures were introduced in April 2015. It will be used to inform the 2017 government review of the level of the charge cap. Key findings are

Ongoing charges paid by members

All of the members of the qualifying master trusts covered by the study already paid charges within the annual charge cap of 0.75 per cent (or an equivalent combination charge) before it was introduced. Similarly, 88 per cent of members of other qualifying trust-based schemes and 76 per cent of members of qualifying contract-based schemes paid charges within the cap already. The remainder will now see their charges lowered to comply with the cap if they are invested in the default arrangement.

Members of non-qualifying schemes were more likely than members of qualifying schemes to pay charges higher than the cap, which will not apply to these schemes. In non-qualifying contract-based schemes just 26 per cent of members paid charges within the cap, and one in ten faced charges higher than one per cent. In non-qualifying master trusts and other non-qualifying trust-based schemes, 51 per cent and 55 per cent of members respectively paid charges within the cap.

Members of contract- and trust-based schemes at smaller employers usually paid higher charges than members working for larger employers. Master trusts were typically different, since a single scheme covered multiple employers, and they did not usually set their charges according to employer size.

Other factors impacting the ongoing charge

Four of the 12 providers used active member discounts (AMDs) within qualifying contract-based schemes during the research period for a minority of members, with an average discount of 0.37 per cent. All confirmed that they were removing them in preparation for the April 2016 ban.

Consultancy charges and commission were relatively rare, and providers confirmed that they were also removing these in anticipation of the April 2016 ban.

Fund Manager Expense Charges (FMECs)

FMECs are charges that members investing in a particular fund may pay, over and above the ongoing charge, for example to reflect additional expenses incurred by the fund manager. The research study asked providers what proportion of members’ assets were invested in funds attracting FMECs. Nine of the 12 providers were able to provide this data.

The large majority of all members’ assets (74 per cent) were invested in funds attracting an additional fund-specific charge of 0.01 per cent or less. Providers confirmed that their default arrangements now primarily used such funds.

Beyond this, FMECs were typically low with only three per cent of funds under management attracting FMECs above 0.2 per cent.

Transaction costs

Only four providers could give data covering transaction costs for fund entry (buying the units of the fund). Three of these estimated that their members did not incur any fund entry transaction costs, or that fund entry transaction costs were close to zero. One confirmed that transaction costs for fund entry did apply to members, typically leading to a reduction of 0.05 to 0.40 per cent of the value of each member contribution invested.

Five providers could estimate the level of transaction costs incurred by fund managers while their assets remained invested in the pension (holding the units of the fund). One estimated they typically amounted to no more than 0.01 per cent of all members’ funds per annum; two reported that most assets faced transaction costs of between 0.5 per cent and one per cent per annum; and two reported that they typically equated to between zero and 0.75 per cent per annum.

The impact of the cap on the pension landscape

Most providers expressed their support for the charge cap as something that was in the interests of members, and which would help drive value for money. Most providers agreed that members of qualifying schemes would benefit, although it is clear from the research that large numbers of members of non-qualifying schemes may still face relatively high charges unless employers and trustees, with the input of intermediaries or members themselves, choose alternative provision.

Some providers were concerned that the cap would put further pressure on their profit margins. This, in addition to increasing competitive pressure between providers, led some to speculate that smaller schemes or providers may eventually be forced to merge or exit from workplace pension provision.

While some providers suggested that an excessive spotlight upon cost could mean that innovative products and actively managed funds might no longer be provided, others pointed out that a more streamlined and digital industry could emerge as a result.

Importance of ESG to pension funds

The Pensions and Lifetime Savings Association has published the 2015 edition of its annual Stewardship Survey looking at the ways in which pension funds engage with their investments in order to achieve the best possible returns. There is near universal agreement among respondents that pension funds have stewardship responsibilities.

A key finding is that 93% of respondents agreed that Environmental, Social and Governance (ESG) are material to investment returns, a slight increase from 90% in 2014 and significantly up from 81% in 2013, reflecting the heightened interest in stewardship and ESG issues amongst investment analysts and researchers, and investors in turn beginning to take heed of this evidence.

Guide to assessing ‘VFM’

The Pensions and Lifetime Savings Association has published a good practice guide to help trustees of defined contribution pension schemes offering money purchase benefits meet their requirement to assess and explain the extent to which costs and charges in their scheme represent good value for members.

The guide aims to assist trustees in undertaking this assessment, offering a 6 step plan and a guide to best practice in this evolving area.

Changes to the law on investments in OPSs

Further to the February 2015 consultation, DWP has published responses and noted that there was not a compelling case to amend the regulations. It adds that the Pensions Regulator is supporting trustees with regard to investment decisions and that the Pension Regulator’s own guidance has been updated to reflect the Law Commission’s findings.

Private pension wealth in GB, 2012 to 2014

Latest statistics from ONS reveal that -

  • In July 2012 to June 2014, 35% of adults aged 16 and over contributed to a private pension. The percentage varied by sex, with 37% of men making contributions compared with 32% of women.
  • In July 2012 to June 2014, a much higher proportion of employees in the public sector (84% with median wealth of £61,600) belonged to a current occupational pension scheme than their counterparts in the private sector (42% with median wealth of £24,000).
  • In July 2012 to June 2014, median wealth held in private pensions from which individuals had not yet drawn an income (that is, current and retained pensions) was much higher in defined benefit (DB) pensions (£63,400) than in defined contribution (DC) pensions (£15,000).
  • In July 2012 to June 2014, 19% of individuals aged 16 and over received income from a private pension. The median wealth held in pensions that were already being paid (pensions in payment) was £116,300. A higher proportion of men (22%) than women (17%) received such income. The median level of wealth held by men (£162,400) in pensions in payment was more than double that of women (£73,900).
  • In July 2012 to June 2014, around a quarter (24%) of all households in Great Britain had no private pension wealth, the same proportion as in July 2010 to June 2012.
  • Aggregate private pension wealth in Great Britain increased from £3.5 trillion in the period July 2010 to June 2012 to £4.5 trillion in the period July 2012 to June 2014 (figures not adjusted for inflation). This was mainly explained by an increase in pensions in payment pension wealth driven by changes in annuity rates used to value such wealth.
  • In July 2012 to June 2014, of those who had any private pension wealth, the 10% of households with the highest total pension wealth had almost half of the all pension wealth in Great Britain (47%). This was almost six times the total private pension wealth of the 50% of households that had the lowest (8%).


John W. Wilson LLB(Hons) FPMI ACII, Head of Research| Email:

Julian Rowe, Head of Technical | Email: