Developments in Employee Benefits law and practice

25 April 2016

Week ending 24 April 2016. Stories covered are: Public sector pensions ‘debt time bomb’ | Regulator highlights scheme return changes| ABI guide to make pensions language simple| Details of secondary market for pension annuities published

Public sector pensions ‘debt time bomb’

The government’s total liabilities, better understood as debts waiting to happen, are even larger than its mammoth public debt at £1.85 trillion, according to a new investigative paper from the Adam Smith Institute.

The report exposes the true state of affairs. Government has consistently disguised the true size of the monolithic debt the UK’s young must pay, with the total cost standing at a staggering £3.45 trillion, more than double the national debt figure. The total cost of these liabilities, on top of the national debt, to every man, woman and child in the UK is a massive £53,822 each.

Public liabilities can be considered inevitable debt as they refer to inexorable costs and losses to the public purse such as student loans that will never be repaid and public sector pensions, as well as expensive current obligations such as Network Rail, whose £38 billion debt has just been incorporated into the public purse, and RBS shareholdings, which based on current share prices rack up another £22 billion loss to the taxpayer.

The paper, which critically analyses the Whole of Government Accounts published by the government, applies best practice auditing standards to the government’s own assets and liabilities, concluding that the majority of UK national liability is made up of £1.3 trillion in public sector pensions. These public pensions will severely impair the financial prospects of future generations and are yet to be addressed in any meaningful way by the current government despite their proclamations of being in a time of austerity.

An eye-wateringly high 93% of public sector pensions are currently unfunded, meaning that the government is yet to put any money aside to pay for them, choosing instead to bury their head in the sand safe in the knowledge that they’ll not be in office when it’s time to cough up the cash.

In order to deliver on its public sector pensions promises the government will have to raise £1.3 trillion through increased taxation and further cuts to public spending, on top of the cuts already being made to tackle the more widely publicised £1.6 trillion public debt.

Regulator highlights scheme return changes

In a change from 2015, schemes are now required to give information about how they comply with the requirements brought in by 2015 legislation. These include charge controls and scheme governance.

The Pensions Regulator (tPR) said new data had shown scheme return completion rates had fallen for the second year running, down 18% from January 2014 to January 2016.

tPR said it has started advising DC schemes trustees about a number of changes to the scheme return so they can plan in advance, with the regulator sending out revised scheme returns from July 2016.

The regulator is also sending letters to trustees who are in breach of the law to warn them to complete their 2015 scheme return or risk facing a fine.

A checklist guide for trustees about the new scheme return can be found here.   

ABI guide to make pensions language simple

A consultation seeking stakeholders’ views on a draft guide to simplifying language on retirement choices has been published by the Association of British Insurers. The ‘Making Retirement Choices Clear’ guide aims to make pensions language simple, clear and consistent, in order to help customers better understand their options at retirement.

The ABI formed a Pensions Language Steering Group, involving industry, government, regulators and consumer groups, to develop simple and consistent language. The ‘Making Retirement Choices Clear’ guide proposes the new retirement options be explained as:

  • You can keep your pension savings where they are.
  • You can take your whole pension pot in one go.
  • You can take your pension pot as a number of lump sums.
  • You can get a flexible retirement income.
  • You can get a guaranteed income for life.
  • You can choose more than one option and you can mix them.

For the guide and the language to be consistently applied across the sector, the ABI is consulting more widely to gather views, including from media and consumer organisations

Details of secondary market for pension annuities published

HMRC consults on secondary market for pension annuities

Proposals from HM Revenue & Customs (HMRC) for a secondary market for pension annuities are intended to extend greater flexibility and freedom to those who had little choice but to buy an annuity with their pension pot. HMRC's consultation sets out the proposed detail of the tax framework for the secondary market for annuities. The deadline for responses is 15 June 2016.

The government is seeking views on the proposed detail of the tax framework for the secondary market for annuities. The proposals include:

  • unauthorised payments will not arise where individuals assign or surrender rights to payments under annuities payable to them that were purchased with sums and assets from a registered pension scheme, including ‘deferred’ annuities that have yet to come into payment
  • individuals will be permitted to assign or surrender annuities payable to them that were purchased in respect of money purchase or defined benefit arrangements, regardless of whether they are:
    • treated under the current tax rules as a lifetime annuity or a scheme pension
    • represent rights in respect of a beneficiary under an annuity that is a dependants’ annuity, a nominees’ annuity, a successors’ annuity or a dependant’s scheme pension
  • the annuities capable of being assigned or surrendered will include annuities that were purchased as replacements for the annuities described above that were originally purchased with sums and assets from a registered pension scheme (e.g. following the transfer of an annuity from one provider to another).

HMRC expects 300,000 people to take up the option from 2017, out of five million annuity holders.

FCA sets out advice requirement for second-hand annuity sales

The government has confirmed that buyers and brokers in this market will need to be authorised by the Financial Conduct Authority (FCA).

The FCA’s proposed rules and guidance for a future secondary annuity market aim to balance the need to support this new market with protecting consumers. The proposals include:

  • brokers must set out their charges upfront and agree them with the consumer selling their annuity, rather than being paid by commission from firms acting as buyers;
  • in order to help consumers judge the value of their annuity income, buyers and brokers making an offer for a seller’s annuity income will be required to present their offer alongside the ‘replacement cost’ of the annuity income, if it were to be bought new on the open market;
  • firms will be required, at the earliest opportunity, to give those considering the sale of their annuity specific risk warnings and to recommend that they seek regulated financial advice or guidance from Pension Wise;
  • firms will be required to recommend that sellers shop around;
  • annuity providers will only be able to recover reasonable costs when charging to facilitate annuity income sales;
  • the sale of the annuity will fall within the scope of both the Financial Ombudsman Service and the Financial Services Compensation Scheme.

The consultation also reminds firms of their existing responsibilities to treat appropriately those consumers who may not have full mental capacity.

Draft legislation published on secondary market for annuities

Views are sought on draft secondary legislation to create three new specified activities in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, SI 2001/544. The changes would apply to any person wishing to operate in the new secondary market for annuities.

The government intends to restrict buyers in the secondary annuities market to FCA authorised buyers. To facilitate this, the government has decided to make amendments to SI 2001/544 to create a new specific regulated activity for purchasing rights under an annuity on the secondary market. In addition, the government proposes to:

  • create a new specified activity for firms intending to act as intermediaries in the secondary market
  • create a new specified activity for annuity providers who are intending to buy back annuities they have issued
  • amend the Appointed Representatives Regulations 2001, SI 2001/1217, to allow appointed representatives to be exempt from the requirement to be authorised to act as intermediaries in the secondary market and for the buying back of annuities
  • amend the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, SI 2005/1529, to ensure that unauthorised persons are prevented from engaging in financial promotions in relation to investment activity on the secondary annuities market
  • to amend the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001, SI 2001/1177, to make clear that those buying rights to annuity income streams in this market will always be deemed to be doing so by way of business and will therefore always be subject to the requirement to be authorised or exempt under the relevant legislation

Media response

The Daily Telegraph, 22 April 2016, reports that, based on warnings from pension experts, pensioners could face charges of more than 20% of the value of their annuity if they try to sell them. They say pensioners are likely to be disappointed by poor value from an ‘uncompetitive’ second-hand annuity market, with major insurers declining to take part.

According to the paper, draft rules published on 21 April 2016 say that from March 2017, when the scheme begins, all pensioners trying to sell policies must be told to take financial advice—which typically costs more than £1,000.

Pensioners will also be presented with upfront fees which could amount to at least a fifth of the value of the pension cash they receive, according to one expert.


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

Julian Rowe, Head of Technical | Email: