Developments in Employee Benefits law and practice

22 January 2018

Weekly update on new developments in the pension industry for week ending 22 January 2018: BT loses ‘RPI to CPI’ case | Pensioners warned about decumulation risks | Pensions and Automatic Enrolment: 2010 onwards | Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2018 | Employment Rights Act 1996 and Pension Schemes Act 1993 (Amendment) Regulations 2017 | The Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling and Compensation Cap) Order | Financial Guidance and Claims Bill | DWP plans for next four years

BT loses ‘RPI to CPI’ case

In British Telecommunications plc v BT Pension Scheme Trustees Ltd and another [2018] EWHC 69 (Ch),  BT lost its court battle to change its measure for price inflation from the Retail Price Index (RPI) to the Consumer Price Index (CPI). The High Court held that BT cannot swap the index used to increase pensions for ‘Section C’ members of the BT Pension scheme.

A JLT Alert on the case will be issued later this week.

Pensioners warned about decumulation risks

A research report published by Royal London warns pensioners about taking too little risk or taking the wrong risk with their savings in retirement in a world of ‘pension freedoms’. The report also identifies an investment strategy to overcome both of these dangers.

According to Royal London, the two dangers for savers in retirement are:

  • taking ‘too little’ risk – the ‘risk averse’ retiree;
  • taking ‘the wrong sort’ of risk – the ‘reckless’ retiree.

Each of these approaches increases the danger of a saver either running out of money during their retirement or having to face a reduced standard of living.

An example of taking ‘too little’ risk is the saver who takes their tax-free cash at retirement and invests the rest in an ultra-low risk investment such as a cash ISA, believing this to be the safe approach. The paper points out that ‘investing in retirement is still long-term investing’ and shows that decades of low-return saving can seriously damage the living standards of retirees.

Conversely, in an era of low interest rates, retired people may be tempted to seek out more unusual forms of investment with apparently high rates of return but accompanied by much greater risk to their capital. Examples could include peer-to-peer lending, investment in aircraft leasing or even cryptocurrencies such as Bitcoin. Concentrated exposure to a single, potentially volatile, investment can produce very poor outcomes, particularly if bad returns come early in retirement.

Rather than invest in an ultra-low risk way or chase individual high-risk investments, the paper identifies a ‘third way’ of spreading risk across a range of assets, including company shares, bonds and property, both at home and abroad. This multi-asset approach can be expected to provide better returns over retirement than cautious investing in cash but also helps to smooth the ups and downs of individual investments.

Pensions and Automatic Enrolment: 2010 onwards

The House of Commons Library has published a briefing paper looking at pensions - automatic enrolment since 2010 to date.

Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2018

Under this draft statutory instrument, effect is given to the annual re-rating of various National Insurance contributions (NICs) rates, limits and thresholds for the purposes of calculating Class 1, Class 2, Class 3 and Class 4 NICs liability for the tax year beginning 6 April 2018. The amendments have effect from 6 April 2018.

The Regulations amend the Social Security Contributions and Benefits Act 1992 and corresponding provisions in the Social Security Contributions and Benefits (Northern Ireland) Act 1992, and the Social Security (Contributions) Regulations 2001 SI 2001/1004.

Employment Rights Act 1996 and Pension Schemes Act 1993 (Amendment) Regulations 2017

Sections 166 and 182 of ERA 1996 provide for payment to employees of certain sums due to them from their employer in circumstances where the employer becomes insolvent. Section 123 of the PSA 1993 provides for payment to pension schemes of relevant outstanding employee and employer contributions. All three sections define when an employer becomes insolvent for the purposes of the Acts. These definitions do not encompass all employers that become insolvent, but only those insolvent employers who are companies, limited liability partnerships (in the case of ERA 1996) or individuals; nor do they cover some types of collective insolvency proceeding in Member States (which are broadly analogous to the UK’s administration procedure).

Following a review conducted by the Redundancy Payments Service, which administers such payments on behalf of the National Insurance Fund to employees, it was concluded that the definition of an insolvent employer should be expanded to include all insolvent employers in the situations required to be covered under the Directive.

These Regulations (SI 2017/1205) achieve that objective.

The Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling and Compensation Cap) Order

This SI (2018/39) increases the levy ceiling and compensation cap used by the PPF to ensure that rises in average earnings are taken into account in setting these two amounts so that they maintain their value.

Financial Guidance and Claims Bill

Ahead of its second reading, scheduled to take place on 22 January 2018, the House of Commons has published this library note which sets out the main provisions of the Bill, including details of Committee amendments. The Bill includes measures for the new single advice body, replacing Pensions Wise.

DWP plans for next four years

The Department for Work and Pensions has laid out its single departmental plan for the next four years, setting out the following objectives –

  1. Support economic growth and improved productivity by ensuring work always pays and people are supported to find and progress in work
  2. Help reduce the disadvantages faced by disabled people and people with health conditions through the welfare system and labour market 
  3. Increase saving for, and financial security in, later life 
  4. Maximise the number of children benefiting from an effective child maintenance arrangement, encourage family based arrangements where appropriate and reduce parental conflict in families 
  5. Transform the way we deliver our services to improve quality and reduce costs

Contact:

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

Stephen Williams, Senior Research Consultant | Email: stephen_williams@jltgroup.com