Developments in Employee Benefits law and practice

23 July 2018

WPC report on CDC

The Work and Pensions Committee calls on Government to move quickly to enable the creation of the UK’s first Collective Defined Contribution (CDC) pension scheme, following the ground breaking agreement between Royal Mail and the Communication Workers Union.

Rt Hon Frank Field MP, Chair of the Committee, said:

“The idea of a ‘new Beveridge’ has been overused and under-delivered during most of the welfare state’s life. But the report published today by the Select Committee offers that opportunity for pensions: how to combine decades of individual pension ownership and provision with collective security. The report centres on collective defined contribution schemes specifically in relation to the breakthrough at Royal Mail.”

https://www.parliament.uk/business/committees/committees-a-z/commons-select/work-and-pensions-committee/news-parliament-2017/collective-defined-contribution-pensions-report-published17-19-/

https://publications.parliament.uk/pa/cm201719/cmselect/cmworpen/580/58002.htm

New consultation on pensions cold calling

Pension scams can cost people their life savings, and leave people facing retirement with limited income, and little or no opportunity to build their pension savings back up. The government is committed to protecting people from pension scams; and pursuing those who perpetuate pension scams wherever possible. The government is implementing a ban on pensions cold calling because cold calling is the most common method used to initiate pensions scams. Following a previous consultation on the policy, this consultation seeks technical views on draft regulations to ban pensions cold calling to ensure rel="noopener noreferrer" the regulations are robust and effective.

https://www.gov.uk/government/consultations/ban-on-cold-calling-in-relation-to-pensions

PPF report and accounts

Despite taking on pension schemes from employers including Carillion, Toys R Us and Hoover, with deficits totalling £1.2 billion - the highest total value to date, the PPF’s funding position has strengthened.

The PPF has reported a continued growth in its reserves to £6.7 billion and an increase in its funding ratio to 122.8 per cent. It has also reported a strong investment performance ahead of target with a 2.8 per cent investment contribution despite significant market volatility.

The PPF reported that despite the risks it faces, its probability of success remained ahead of target at 91 per cent.

The PPF’s Annual Report also highlights innovative developments in its services to members including the launch of ‘Retire rel="noopener noreferrer" Now’, a digital tool that allows members to retire online.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/724880/pension-protection-fund-annual-report-and-accounts-2017-to-2018.pdf

Chief Exec of Single Financial Guidance Body appointed

The Department for Work and Pensions has appointed John Govett as the first Chief Executive Officer of the new Single Financial Guidance Body (SFGB).

Mr Govett is vastly experienced, having worked in leadership roles across the public, private and charitable sectors including as Group Chief Executive at Ixion Holdings, a not-for-profit skills and employment group of companies, Managing Director of Surrey County Council, Shaw Trust Charity Board Executive and P&O Ferries Commercial Board Director. He has a strong track record of driving transformational change, delivering outstanding services and leading successful growth.

A deputy chairman of Basildon and Thurrock University Hospitals NHS Foundation Trust, he will take up his new post in October 2018. His appointment, for a four-and-a-half year term, follows an open and competitive recruitment process overseen by the Office for the Commissioner for Public Appointments.

The government is bringing together 3 well known and respected organisations, the Money Advice Service, Pension Wise and the Pensions Advisory Service to create a new Single Financial rel="noopener noreferrer" Guidance Body offering UK-wide guidance on pensions and money, and debt advice in England.

https://www.gov.uk/government/news/chief-executive-officer-of-the-single-financial-guidance-body-appointed?utm_source=2325eb6f-e5d2-4981-a68c-44110af6aacf&utm_medium=email&utm_campaign=govuk-notifications&utm_content=daily

OBR warns of tax rises unless preventative measures taken

The Government has issued its response to the Fiscal Risks Report. Key messages around health and retirement include:

  • In 1948, when the modern State Pension was introduced, a 65-year-old could expect to live for a further 13.5 years. Due to the success of medical advances, today this has increased to 21.8 years, and by 2066, it is projected to be 26.6 years. The number of people claiming the State Pension is projected to increase from 13 million in 2016-17 to almost 17 million in 2067-68.
  • The Old Age Dependency Ratio (OADR), defined as the number of people of pensionable age for every 1,000 people of working age, is projected to rise from 296 to 360 over the next 20 years if the State Pension age (SPa) were to increase according to the currently legislated timetable. This means that a smaller working population will need to support a significantly larger number of State Pension claims. Increases in life expectancy are to be celebrated. Increasing longevity does however present a challenge for the public finances, and there is a balance to be struck between securing the State Pension for years to come and ensuring fairness for future generations of taxpayers. The 2018 FSR forecasts that State Pension spending will have increased from 5.0% of GDP in 2022-23 to 6.9% of GDP in 2067-68. These increases are driven by both demographic trends and individual entitlements.
  • In the 2018 ‘Fiscal sustainability report’ (FSR), the OBR project that demographic change will put upwards pressure on public spending over the medium and longer term, principally in health, social care, and state pensions. The OBR’s latest projections suggest that the primary deficit will rise to 8.6% of GDP and public sector net debt to 282.8% of GDP by 2067-68, assuming policy remains unchanged. These areas of public spending are also substantially impacted by non-demographic factors. As the OBR note, there is significant uncertainty around this long-term projection, and it does not account for the impact of any possible action to address projected cost pressures in future Parliaments. However, the OBR’s underlying conclusion is clear: over the long-term, fiscal rel="noopener noreferrer" sustainability is likely to come under increasing pressure from an ageing population, alongside other factors.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/725913/Managing_Fiscal_Risks_web.pdf

Intergenerational challenges: “What Mike and the Mechanics can teach us about pensions”

The text of a speech by Christopher Woolard, Executive Director of Strategy and Competition at the FCA, has been published. In this speech, Mr Woolard discusses aspects of FCA’s work intended to ensure that consumers have the best rel="noopener noreferrer" outcomes possible in retirement, referencing the FCA asset management market study, its retirement outcomes review and the platforms market study.

https://www.fca.org.uk/news/speeches/intergenerational-challenges-pensions

Minister questioned on DB pensions White Paper

The Work and Pensions Committee continues its inquiry on the defined benefit pensions White Paper, which sets out the Government’s plans for the future of DB pensions in the UK.

Its latest witnesses include Guy Opperman MP, Minister for Pensions and Financial Inclusion, DWP and Ronan O’Connor, Deputy Director, Private Pensions Policy, DWP.

Questions cover TPR’s rel="noopener noreferrer" efforts to toughen its approach whether the regulatory framework is ready for a new breed of commercial DB consolidators (sometimes known as ‘superfunds’).

http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/work-and-pensions-committee/defined-benefit-pensions-white-paper/oral/86926.pdf

CMA report in investment consultants

The UK's Competition and Markets Authority has published its 330 page provisional decision on the market for Investment Consulting and Fiduciary Management services. The report observes that, while there are a number of consulting firms available to choose from, there are competition issues within both the investment consultancy and fiduciary management markets - particularly the latter. The provisional decision rel="noopener noreferrer" proposes the introduction of mandatory tendering for fiduciary management mandates, and a requirement for pension trustees to set and monitor objectives relating to investment consulting services.

https://assets.publishing.service.gov.uk/media/5b4e19cbe5274a732b817d73/investment_consultants_market_investigation_provisional_decision_report.pdf

How the UK saves: Member experience from NEST

This publication examines the enrolment, savings and investment activity of workers using data from the National Employment Savings Trust (NEST). With membership exceeding six million across more than 600,000 employers, NEST is one of the UK’s largest multi-employer pension plans.

Contributions

As at 31 January 2018, 93% of employers had enrolled workers at the then-statutory minimum 2% total contribution rate. Small and micro employers dominate the 7% of companies enrolling workers at a higher rate. Members who have remained with NEST for the full 12-month period to 31 January 2018 have a median total contribution, net of fees, of £300 and an average of £394. As annual mandatory minimum contribution rates increase, these numbers are likely to rise.

Account balances

Median and average balances are £200 and £450 respectively. Balances are expectedly higher amongst active members, at £278 and £563 respectively. Predictably, balances rise with income and scheme tenure, while workers aged 55 to 64 have balances nearly three times greater than their counterparts below the age of 25.

Gender and income differences

The median balance for females (£174) is 76% of the median balance for males (£228), driven by female average earnings being lower than males in aggregate. However, after adjusting for earnings, women have higher median contributions and higher median account balances in all but the highest earnings band, where the difference was negligible. For workers earning between £10,000 and £14,999 annually, female median contributions and account balances were 26% and 20% greater than males respectively. Thus, after controlling for earnings, women are found to be better retirement savers than men within the NEST arrangement.

Adequacy

Since auto enrolment is in its infancy, current contributions and account balances are insufficient guides to future retirement income adequacy. Our projections suggest that, through participating in NEST, a typical low-income 22-year-old might generate annual retirement income of £3,000 in today’s money, amounting to a replacement rate of 15%. Combined with the State Pension, this represents a projected total income replacement rate of approximately 55%. This projected NEST retirement income compares to the average payment to pensioner beneficiaries of the Pension Protection Fund (PPF) of £4,309. This suggests considerable progress on the challenge of retirement adequacy, while also highlighting that further progress is needed on minimum contribution rates in years to come.

Assets under management and investment returns

Assets invested through NEST total £2.6 billion. These assets are allocated 49% to equities, 24% to investment-grade bonds, 13% to property, 8% to growth credit and 6% to short-term reserves. Three-year annualised returns for both the default NEST Retirement Date Funds and other investment options are generally well above their benchmarks, reflecting strong performance from some asset classes.

Member asset allocations and investment choices

Ninety-nine per cent of members are invested in NEST’s default investment strategy, a range of retirement-date funds that are designed to change members’ asset allocations as they progress through working life to retirement. As expected, switching activity is low, with fewer than 1% of members changing their investment options in 2017.

Transfers

The overwhelming majority of NEST members are in the accumulation phase of retirement savings. Of the 1% that have retired, two-thirds have withdrawn money from their accounts. Finally, since 2017 NEST has allowed members rel="noopener noreferrer" to transfer pension savings from other UK-based registered schemes. In the first ten months of this option being available, nearly 1,000 members transferred assets into NEST, representing over £7 million in assets.

https://www.vanguard.co.uk/documents/adv/literature/brochure-how-uk-saves.pdf

Saving for a comfortable retirement

A new study by Schroders explores people’s expected finances in retirement, and how this compares with the experiences of those who have already retired. The results show that the majority of retired people globally consider their income sufficient. However, it is less than what those who are yet to retire expect to need to live comfortably.

  • People aged 55+ expect to need more income to live comfortably in retirement than retirees actually receive.
  • The cost of living in retirement takes up more income than expected.
  • The majority of retired people consider their income to be sufficient, but most could do with more.
  • On retirement, people allocated more of their financial resources to investments than non-retired people expect to.
  • Expectations for financial allocation at retirement matures as people approach the age of retirement.
  • Globally, people feel they should be saving more of their income for retirement.
  • The level of investment knowledge people feel they have correlates with particular rel="noopener noreferrer" retirement expectations and behaviours.
  • People’s top two sources of information when making decisions about investments for retirement are their own research from independent sources and insight from financial advisers.

https://www.schroders.com/en/sysglobalassets/global-assets/gis2018/gis-full-report-pdfs/global_investor_study_2018_retirement_report_english_180622.pdf

Civil standard of proof for TPR’s power to prohibit trustee

In this case, McLarry and another v Pensions Regulator, the Upper Tribunal (Tax and Chancery Chamber) held that, in references concerning a decision by the Pensions Regulator to prohibit an individual from acting as a trustee under the Pensions Act 1995, the usual standard of proof to be applied in civil cases would apply. So, the standard was ‘whether it was more likely than not’ that the behaviour concerned had occurred (as opposed to the criminal ‘beyond reasonable doubt’ standard).

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