Developments in Employee Benefits law and practice

25 January 2016

Week ending 24 Jan: Single rate of tax relief expected to be announced in Budget 2016| Excessive charges for accessing pension pots to be abolished| Trustee boards prone to ‘group think’ and more...

State Pension Amendment Regulations

Under this draft statutory instrument, the full rate of the new state pension is set at £155.65 per week from 6 April 2016.

Single rate of tax relief expected to be announced in Budget 2016

According to press reports, George Osborne is expected to announce in this year’s Budget (16 March) that the current pensions tax relief system will be overhauled. Currently, pension savers get marginal rate relief on their contributions. It is predicated that this will be replaced by a flat rate relief system, with tax relief at between 25% and 33%. Alternatively pensions could become taxed like ‘ISAs’ where there is no relief on contributions but benefits are tax free. However, at the moment, the flat rate relief proposal looks more likely.

Reactions to the press reports include –

  • Senior Conservatives warning the chancellor that he faces a backbench revolt over plans to introduce a flat rate of pension tax relief.
  • David Gauke, Financial Secretary to the Treasury saying that reform to pensions tax relief will “encourage saving”.
  • Speculation that changes in pension tax relief could potentially release funding for health and social care.

Excessive charges for accessing pension pots to be abolished

The Chancellor has announced an end to prohibitive charges faced by people looking to access their pension pot, as he outlined proposals to place a duty on the Financial Conduct Authority (FCA) to cap excessive early exit charges for those eligible to access the pension freedoms.

Speaking at Treasury Oral questions in the House of Commons, the Chancellor George Osborne said:

“The pension freedoms we’ve introduced have been widely welcomed, but we know that nearly 700,000 people who are eligible face some sort of early exit charge. The government isn’t prepared to stand by and see people either ripped off or blocked from accessing their own money by excessive charges.

“We’ve listened to the concerns and the newspaper campaigns that have been run and today we’re announcing that we will change the law to place a duty on the Financial Conduct Authority to cap excessive early exit charges for pension savers.

“We’re determined that people who’ve done the right thing and saved responsibly are able to access their pensions fairly.”

The new duty, introduced through legislation, will form part of the response to the government’s Pension Transfers and Exit Charges consultation, and will help people take full advantage of the new flexibilities.

FCA data collected through the consultation showed that nearly 700,000 (16%) customers in contract-based schemes who are able to flexibly access their pension could face some sort of early exit charge, including a significant minority who faced charges that were high enough that the government consider that they effectively put them off accessing their pension flexibly.

The independent FCA will be responsible for setting the level of the cap and will consult fully on this in due course.

The government will shortly publish its formal response to the Pension Transfers and Exit Charges consultation, which also looks at ways of making the process for transferring pensions from one scheme to another quicker and smoother.

FCA investigations have shown that 670,000 consumer aged 55 or over faced an early exit charge. Of these, 358,000 faced charges between 0-2%; 165,000 faced charges between 2-5%; 81,000 faced charges between 5-10%; and 66,000 faced charges above 10%.

Pensions Minister Ros Altmann has confirmed there will also be a cap on early exit charges for both trust-based and contract-based schemes.

Trustee boards prone to ‘group think’

A new study sponsored by SEI’s (NASDAQ: SEIC) Institutional Group, in conjunction with IFF Research and Dr. Iain Clacher, Associate Professor in Accounting at Leeds University, reveals that trustees may be held back by the traditional pension scheme governance model. The study demonstrates that ‘groupthink’ is prevalent on DB scheme trustee boards, which results in over reliance on unaccountable investment consultants and may lead to increased demand on employers. The research identified four key findings related to groupthink:

  1. 1.There is evidence of groupthink in trustee bodies
  2. 2.Groupthink may hinder decision making processes
  3. 3.Trustees are reticent to challenge their investment consultant
  4. 4.Groupthink may lead to increased demand on employers

Groupthink is a scientific theory defined as a phenomenon developed in groups and marked by consensus of opinion without critical reasoning or evaluation of alternatives. A documented outcome of groupthink is the tendency to rely heavily on the most vocal participants of a group.

Over half of the trustees polled consider other trustees’ views as ‘extremely or very important’ when making their own investment decisions. Out of the 100 trustees surveyed, only one said they ‘reach their own decisions.’ Forty-two percent of trustees have never challenged the advice of their investment consultants, and less than a quarter (22 percent) of boards appoint a devil’s advocate to argue the alternative perspective to the board. The results of these issues are also demonstrated by the survey - only 49 percent of trustees rate their board’s ability to make decisions as ‘very good’ with just 36 percent rating their scheme’s ability to respond quickly to new situations or opportunities as ‘very good.’

The research revealed that the impact of group think on trustee boards may have led to an increased burden on employers. Findings confirm that in the last five years, 41 percent of schemes have increased employer contributions as a result of underperforming against their benchmark, with the average increase being 22 percent.  When asked what barriers exist to improving performance, trustees cited a number of different challenges with 28 percent concluding that poor processes exacerbated poor performance against their benchmark, and 19 percent citing inadequate resources as a reason.

The results of groupthink are exacerbated in a model where advisers work in separate silos and are unaccountable for the advice they provide. As well as revealing that a significant proportion of trustees do not feel comfortable challenging the advice of their investment consultant, the results also found that a majority - 59 percent - do not frequently consider alternatives to the investment consultant’s recommendations. In the traditional pension scheme governance model, investment consultants operate on an hourly billing model rather than a fee based on results and they are not directly accountable for the advice they provide. It can be argued that this structure means the objectives of the scheme and the investment consultant are not aligned.

Pensions Act 2014 (Pension Sharing on Divorce etc) (Transitional Provision) Order 2016

Under this instrument (SI 2016/39), transitional measures are introduced to take account of the continuation of state pension sharing after either the divorce or annulment of either a marriage or a civil partnership. The changes apply from 6 April 2016. Applications made prior to this date will operate under the exiting legislation instead.

Refreshed PPF guidance for insolvency practitioners

The Pension Protection Fund (PPF) has published its refreshed General Guidance for Restructuring & Insolvency Professionals, which explains the PPF’s approach to key insolvency areas.

The guide sets out the criteria that should be incorporated in any proposals made in respect of an insolvent employer. The PPF is not obliged to consider a restructuring proposal, and to do so, the criteria must be met. The guide also provides information on the roles and responsibilities of insolvency practitioners throughout the PPF assessment process.

NEST starts consultation on rule changes

NEST (National Employment Savings Trust) has issued a consultation on proposed changes to its scheme rules, which bring aspects of the scheme into line with changes to pension legislation and take account of the lifting of the restrictions on contributions and transfers on NEST from April 2017. Responses should be submitted by 21 March 2016.

The consultation covers various technical items pertaining to NEST’s rules. These include:

  • Updates to NEST’s rules to allow lump sums and partial lump sums to be paid as benefits as provided for by the ‘freedom and choice’ changes introduced in April 2015.
  • Changes which reflect amendments Parliament made to the NEST order in 2015 to lift NEST’s restrictions on contributions and transfers from April 2017. NEST is now proposing to amend the rules to reflect those changes and complete the picture, in terms of Trustee powers, on transfers and the annual contribution limit.
  • ‘Tidying up’ changes, for example to bring the rules into line with recent legislative changes such as the change to pension input periods.

Equitable Life update

The Treasury has issued a press release which confirms that the Equitable Life Payment Scheme will close to all correspondence on 29 February 2016, except for complaints relating to payments received after 29 January. These policyholders will have one month from the date of their payment letter to lodge a complaint. It is further noted that all claims begun by 31 December 2015will still be processed, and the annual payments to with-profits annuitants will continue unaffected.

LGPS (Scotland) Amendment Regulations

Under this Scottish Statutory Instrument (SSI 2016/32), a number of changes are made to public sector pension schemes covering cost capping of employer contributions and the requirement to have a scheme actuary, along with consequential amendments. These changes will enter into force on 1 April 2016.

Guidance on GMP reconciliation

The Pensions Administration Standards Association (PASA) has released its first tranche of guidance for schemes on guaranteed minimum pension (GMP) reconciliation. The guidance is part of PASA's work to support administrators in understanding what is required for GMPs following the cessation of contracting-out in April 2016. The first tranche sets out ten reasons why schemes should reconcile their membership and GMP data with HMRC, as well as initial next steps. The second tranche of guidance will be published during February 2016 covering GMP rectification.

Success of pension freedoms depends on ‘bold policy and innovation’

According to a new KPMG report based on research supported by the ABI, unless the UK’s savings gap is addressed, there are some for whom the new pension freedoms will offer little freedom at all. The report urges industry stakeholders to come up with a clear strategy to address ‘pitifully low’ levels of retirement income.

According to KPMG, there are two key policy levers; auto enrolment and tax incentives. While auto enrolment is welcomed, its success will not be ensured until contribution levels are consistent with the retirement income people aspire to. Interventions could include extending its coverage to the self-employed and the low and variable paid, auto-escalation, increased contributions or even compulsion.

Alongside a more prescriptive auto enrolment system, the report calls for improving the effectiveness of the current incentives for pension accumulation.

Drawing on interviews with more than 40 industry figures and policymakers, the report also warns that most consumers are neither sufficiently engaged nor capable of taking responsibility for making pension freedom decisions.

The report identifies low levels of financial literacy and “decades of a paternalistic pensions culture” as barriers to raising capability and engagement, and it warns that shifting responsibility from the state to savers is “unlikely to take less than a generation”.

However, new disruptive technologies are identified as ways to engage consumers. Face-to-face and bespoke advice will continue to be delivered, but increasingly through digital channels, which will be so commonplace that people will no longer refer to ‘robo advice’ – it will be thought of simply as ‘advice.

While pension freedom has “made life more complicated for retirees”, according to the report this is “doubly true for pension firms”.

Technological and policy disruption is being compounded by a convergence between retail and wholesale value chains, as corporates – as well as individuals – increasingly require advice. Above all else, the report suggests “customer centricity” will decide the winners during this period of transition.


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

Julian Rowe, Head of Technical | Email: