Week ending 3 April: FRC on DB to DC transfers | PR publishes ‘pension freedoms’ report and more
FRC on DB to DC transfers
A review by the Joint Forum on Actuarial Regulation’s (JFAR) of transfers from Defined Benefit (DB) to Defined Contribution (DC) schemes found there has been an increase in DB transfer quote requests and a small increase in actual transfers but, overall, the numbers remain low. The review, published by the Financial Reporting Council (FRC) argues the initial increase may not have been as great as expected due to the nature of the transfer process, with the review highlighting:
- the availability of products and providers able to accept transferred funds scheme members’ understanding of the options
- the availability and cost of advice plus
- the FCA’s rules underlying that advice
The review also point to the value members of DB schemes place on their benefits, such as certainty and perceived security, as well as evidence that some trustees are not actively promoting transfers.
Where the review did find increases in transfer activity, it was mainly among the over 55s, for whom the new freedoms include the opportunity to cash in their funds (subject to a tax charge), and among those with large transfer values.
2017 changes to the higher rate tax threshold will not apply in Scotland
Income tax rates in Scotland will be frozen, with no increases in the basic, higher or additional rate, according to the Scottish First Minister. However, the tax cuts through increases to the higher rate threshold proposed by the UK Government will not be implemented in Scotland. The higher rate threshold will be frozen in real terms and increased only in line with CPI inflation in 2017-18 and by no more than inflation until 2021-22. So, in Scotland, the threshold for higher rate taxpayers for 2017-18 will go from £43,000 to £43,387 as opposed to £45,000 in the rest of the UK.
PA 2014 (Transitional and Transitory Provisions) Order 2016
Under this Order (SI 2016/408), transitional and transitory provisions are made in relation to the coming into force of certain parts of the Pensions Act 2014 which introduces the new State pensions. These changes come into effect on 6 April 2016. They ensure:
- individuals whose spouse or partner died between 6 April 2016 and the date PA 2014, Pt 5, comes into force get their inheritance amount, by providing that PA 2014, Sch 3, par 3, does not refer to bereavement support payment for these cases
- the inherited amount is calculated by reference to the rate of inherited old additional state pension applicable for a person who received the existing bereavement benefit
- the Social Security Contributions and Benefits Act 1992, s 36, is read as referring to new state pension for a transitory period, until PA 2014, Sch 16, para 8, repeals the section.
HMT Public Financial Guidance Review
In October 2015, the government launched the public financial guidance consultation to seek views on how publicly funded pensions guidance, debt advice and money guidance (including financial capability) could best be structured to help consumers make effective financial decisions.
A new consultation sets out a proposed new delivery model for public financial guidance, which is designed to better complement the financial guidance provided by the third sector and the industry and provide more targeted support for consumers.
The government is seeking views on how, within this model, to structure services to best meet consumer need.
The government will consider the responses to this consultation over the summer, and in parallel, work closely with the affected organisations to finalise the delivery structure. A detailed timetable will be set out with the final response to the public financial guidance review, which will be published in autumn 2016.
Scheme Administration Amendment Regulations
These Regulations make various amendments to the Occupational Pension Schemes (Scheme Administration) Regulations 1996/1715) and the Occupational Pension Schemes (Investment) Regulations 2005/3378). The regulations (SI 2016/427) provide that multi-employer group schemes are excluded from the additional governance requirements applying to commercial master trusts or industry-wide schemes. A statutory override is also being introduced to ensure that the statutory requirements on relevant multi-employer schemes to have at least three trustees and a majority of non-affiliated trustees take precedence over any conflicting provisions in schemes' trust deeds and rules. Additionally, a deputy chair or other person appointed by the trustees will be able to sign a scheme's annual governance statement if there is no chair in place.
TPR consultants on new compliance and enforcement strategy
The Pensions Regulator has published a consultation document on a revised compliance and enforcement policy for occupational defined contribution pension schemes.
The consultation seeks views on a draft compliance and enforcement policy which incorporates the new requirements imposed by the Occupational Pension Schemes (Charges and Governance) Regulations 2015.
HMRC Newsletter 77
HMRC’s latest pensions newsletter confirms, inter alia, that Individual Protection 2016 is not available to those who have IP 2014.
FB 2016 pension provisions
The Finance Bill 2016 was published on 24 March 2016. It includes provisions previously published in draft in December 2015 relating to the reduction of the lifetime allowance, fixed protection 2016 and individual protection 2016, bridging pensions, dependants' scheme pensions and draw-down funds and inheritance tax. The Bill also includes a number of technical amendments in connection with DC pension flexibility.
Pension Freedoms ‘settling down’
Latest data from the Association of British Insurers shows that one year since the introduction of the Freedom and Choice reforms, customers are taking a common sense approach with initial demand for cashing in pensions settling down.
The data also shows that annuities are starting to see a revival in popularity and the number sold outstripped income drawdown products for the first time in the most recent quarter (Q4 2015) with 21,200 sold, worth £1.1 billion, compared with 19,700 drawdown policies, worth £1.4 billion.
Overall, since the reforms came in in April 2015, the figures show for pay-outs:
- £3 billion has been paid out in 213,000 cash lump sum payments, with an average payment of £14,800.
- The amount of cash lump sum withdrawals is decreasing as the pent up demand following the reforms settles. Around £660m was withdrawn in cash in Q4 2015, compared to £1.3bn and £1.2bn in Q2 and Q3 respectively.
- £2.9 billion has been paid out via 835,900 income drawdown payments, with an average payment of £3,500.
Since the reforms came in, for funds invested in new products:
- £4.2 billion has been invested in 63,600 income drawdown products, with an average fund of £66,000.
- £3.3 billion has been invested in around 61,700 annuities, making the average fund invested nearly £53,000.
‘Workie’ helps employers engage with auto-enrolment
The Pensions Regulator's workplace pension advertising campaign is helping employers and intermediaries engage with automatic enrolment, with the latest research from the regulator showing that 79% of employers remember seeing or hearing at least one of the campaign adverts, while intermediaries who have seen the adverts found them relevant and memorable.
The research, based on surveys of employers and intermediaries carried out between November 2015 and January 2016, looked at the impact of the Pensions Regulator's workplace pension advertising campaign, which uses the eye-catching creature Workie. It found that:
- 24% of employers spontaneously recalled the key message that “all employers need to comply”.
- Campaign recall levels amongst intermediaries were between 90-94%.
- 91% of bookkeepers recalled the advert, a significant increase from 82% the year before.
Both surveys found an increased awareness of the Pensions Regulator, with almost all employers having some level of familiarity. There has been a continual increase since 2012 in the proportion of intermediaries who claim to ‘know a lot’ about the regulator.
Key findings from the employer survey are:
- Awareness of automatic enrolment remained similar to spring 2015 among small and micro employers (90% and 78%) while understanding increased significantly (68% among small employers, 56% among micros).
- Correspondence from the regulator was the main trigger for employers to take action to prepare for automatic enrolment (76%), followed by information from an adviser (43%), and then seeing or hearing advertising (23%).
- A majority of employers continue to agree that automatic enrolment is a good thing in principle for their employees (77% of small, 65% of micros).
Key findings from the intermediaries’ survey are:
- Bookkeepers and accountants saw significant increases in overall understanding of automatic enrolment compared to spring 2015, from 78% to 93% and 85% to 96% respectively.
- Knowledge of the need for employers to complete a declaration of compliance with the regulator increased significantly, from 79% to 94% amongst independent financial advisers (IFAs) and from 60% to 84% among accountants.
- Around half of accountants, bookkeepers and payroll administrators felt only partially able to answer clients’ queries. Confidence was higher amongst IFAs at 73%.
NLW comes into force
The new National Living Wage (NLW) of £7.20 has come into force for workers aged 25 and over. This translates into a £900 cash increase for a full-time worker on the current National Minimum Wage (NMW). HM Treasury expects that, by 2020, 2.9 million workers will benefit directly. The government expects the NLW to benefit women in particular.
Alongside the announcement, the Department for Business, Innovation and Skills has released guidance on how the revised scheme to name employers who break NMW law will operate.
The NLW will affect salary sacrifice schemes, as it will not be possible to sacrifice salary below the level of the NLW.
DB Auto-Enrolment Certification Guidance Updated
Guidance to help pension scheme professionals decide if a defined benefits or hybrid pension scheme is of sufficient quality to be used for an employer’s automatic enrolment duties has been issued by the Department for Work and Pensions. The guidance may also be helpful for employers who choose to apply the quality test themselves.
AE thresholds for 2016/17
The Secretary of State has decided the current automatic enrolment and re-enrolment earnings trigger of £10,000 remains at the right level and therefore will not change for 2016/17.
In relation to the lower limit of the qualifying earnings band, the Secretary of State has decided to retain the link with the NICs lower earnings limit at its 2016/17 value of £5,824, which is the same as for 2015/16. Further, the Secretary of State has also decided:
- mandatory employer contributions should continue to be capped
- the NICs upper earnings limit at its 2016/17 value is the factor that should determine the upper limit of the qualifying earnings band
This provides for the upper limit of the qualifying earnings band to be aligned with the upper earnings limit for 2016/17 at £43,000.
NAO report on State pension reform
According to a report by the National Audit Office, the impact of reforms to the state pension on individuals will depends on factors such as age, employment history, earnings and future inflation. The report raises concerns that the DWP has limited information, particularly with regard to the impact of the reforms on Guaranteed Minimum Pensions. Key Findings are -
- increases in the state pension age means that Guaranteed Minimum Pensions could lose more value before people draw their state pension
- Guaranteed Minimum Pensions will lose value under the new rules but people may be able to build up additional entitlement to new state pension—the amount by which individuals will be affected will depend on the time they were in a contracted-out scheme, the value of their new state pension, how the government decides to uprate the state pension and future inflation rates
- the impact of new state pension reforms on people with Guaranteed Minimum Pensions will vary widely.
TPR publishes ‘pension freedoms’ report
A new report by the Pensions Regulator report sets out how some occupational defined contribution (DC) pension schemes have approached the implementation of the new pension flexibilities. It is aimed at trustees, employers and the pensions industry in general, including financial advisers and scheme providers. The report is based on a series of interviews TPR undertook with trustees and sponsoring employers during the second half of 2015. TPR’s aim was to understand which flexibilities trustees and employers were offering, who made the decision to offer them and why, and whether there were any problems with the process.
Contracting-out countdown update
HMRC are unable to publish a Countdown Bulletin at the moment due to purdah restrictions. They have however issued an update to provide information about the new GMP Checker which should be used from 6 April 2016.
HMRC have recently received a number of calls from Pension Scheme Administrator’s (PSAs) requesting CA1629 - statements for individuals who reach State Pension age (SPa) on or after 6 April 2016. They are no longer issuing CA1629 statements to PSAs for individuals who reach SPa on or after 6 April 2016. To replace the CA1629 statement they have developed the GMP Checker.
The “Guaranteed Minimum Pension (GMP) Checker” formerly known as the GMP Micro Service is available from 06 April 2016
From the 6th April 2016 the GMP Checker will be available to all Pension Scheme Administrators via GOV.UK to obtain GMP calculations and contributions and earnings information in respect of individual members of their Pension Scheme.
The GMP Checker will continue to be developed after the 6th April and it is intended that a bulk facility to allow scheme administrators to obtain calculations in respect of multiple members of the scheme will follow.
Changes effective 6 April 2016
A number of important pension reforms take effect from 6 April including
- Abolition of DB contracting-out and the introduction of the new State pension
- Changes to Annual and Lifetime Allowances
- Auto-enrolment: thresholds and technical changes
- Governance and charges in DC schemes
- Pension Protection Fund (PPF) compensation cap and levy ceiling