Developments in Employee Benefits law and practice

03 April 2018

Weekly update on new developments in the pension industry for week commencing 03 April 2018

FCA rules on pension transfer advice

The Financial Conduct Authority (FCA) has published new rules on pension transfer advice and is seeking views on additional changes, including adviser charging structures.

The new rules framework is meant to improve the quality of pension transfer advice to help consumers make informed decisions based on their individual circumstances.

The new rules include requiring transfer advice to be provided as a personal recommendation that takes account of a consumer’s individual circumstances. The rules also replace the current transfer value analysis with a requirement to undertake a personalised analysis of the consumer’s options and a comparison to show the value of the benefits being given up.

The FCA has also started a new consultation - Improving the quality of pension transfer advice - on further changes to its rules and guidance. This includes requiring advisers undertaking pension transfer advice to have the same qualifications as investment advisers.

FTSE 100 deficit falls 32%

The total estimated deficit across FTSE 100 DB pension schemes fell 32% to £46bn over the year to June 30 2017, helped by favourable market conditions and significant sponsor contributions, according to the latest quarterly report by JLT Employee Benefits.

In aggregate, FTSE 100 scheme portfolios fared better against a rising market backdrop, particularly those continuing to run very large mismatched equity positions. Given the bond-like nature of pension liabilities, schemes’ allocation to bonds provide a useful proxy for the level of mismatching currently at play in portfolios. The average scheme asset allocation to bonds rose to 63% from 61% the previous year, indication that investment mismatching persists across some of the UK’s largest schemes.

UK blue chip sponsors continued to pay significant contributions to offset their pension scheme deficits; more than half reported significant deficit funding contributions in their most recent annual report and accounts. Total contributions during the period increased 65% to £10.8bn, up from £6.4bn the previous year, but this increase was largely attributable to activity by a small number of schemes.

Despite some progress in the aggregate funding position, total disclosed pension liabilities rose 21% to £710bn, from £586bn, over the 12-month period. Low interest rates, increasing life expectancy and aggressive regulation have contributed to spiralling pension liabilities over recent years, prompting successive sponsors to withdraw defined benefit provision and close schemes to future accrual. Fewer than one fifth of FTSE 100 companies (19) are still providing DB benefits to a significant number of employees.

The distribution of liabilities across index constituents remains uneven; at one end of the scale, 17 companies – large, legacy businesses – have disclosed pension liabilities of more than £10bn, while at the other end, 9 companies – typically more recent additions to the index – are free of DB obligations, reporting no liabilities.

Total deficit contributions continued to be dwarfed by dividends declared across the index; 42 companies could have settled their pension deficits in full, with a payment of up to one year’s dividend.

The tension inherent between fund scheme deficits, delivering shareholder value and holistic covenant strength has been brought into sharp focus over recent months by the high-profile collapse of Carillion and BHS. According to JLT Employee Benefits, the high ratio of total dividends paid versus the total disclosed scheme deficit – £73bn of dividends relative to a deficit of £43bn, a ratio of 1.7x – highlights the missed opportunity for sponsors to substantially pay down their deficit and contribute towards further de-risking measures.

Master Trust code published for consultation

The Pensions Regulator (TPR) has published for consultation its draft code of practice for authorising and supervising master trusts.

From October this year, master trusts will have to apply to TPR for authorisation to operate in the market.

The code outlines how master trusts will be expected to meet the new authorisation criteria and what they will need to evidence for TPR to grant authorisation and to continue to operate in the market.

More than half of people who have been automatically enrolled into a workplace pension scheme by their employer are saving into a master trust scheme. The size of the market has grown since the launch of automatic enrolment – from 270,000 members in 2010 to nearly 10 million people today with £16 billion of savings.

Workplace pensions coverage hits 73%

According to latest data from the ONS, nearly three-quarters of workers were saving into a workplace pension scheme as of April last year. The ONS Annual Survey of Earnings and Pensions Bulletin is available here.

Aegon / CBI workplace pensions survey

In a new survey of businesses of all sizes, the CBI and Aegon argue that a ‘quiet pensions revolution’ is taking place with auto-enrolment at the forefront of private pensions investment. Businesses are investing heavily – 92% of firms surveyed were contributing above the statutory minimum level requirement for auto-enrolment (AE) schemes, currently 1% for employers, rising to 3% by 2019, with estimates that £133bn will be paid into workplace pensions in the 2019/2020 tax-year – but much more can be done by firms that will ultimately help them to realise their business value and also recruit and retain staff:

  • Many workers also recognise the value of saving into a workplace pension – across two-thirds of businesses only 5% or less of eligible workers have opted out of AE and 69% say a firm’s pension scheme is an important factor when looking for a new job.
  • But although nearly half of businesses (47%) believe that recent pension freedoms have led to employees being more engaged, there remain major gaps by age, income and employment status/length of service: those aged 50+ are almost twice as likely as (87%) those under 34 (48%) to be engaged with their pension.
  • Those workers on a higher wage are significantly more engaged (87% of those earning £45-75k are engaged) than those on lower wages (only 33% of those earning less than £13k are engaged) and 7 in 10 of employees of more than 10 years are engaged with their pension, while younger people with other financial priorities are engaged far less.

S179 assumptions updated for bridging pensions

The PPF has published updated valuation assumptions for calculations carried out under section 179 of the Pensions Act 2004. The guidance takes account of the Pension Protection Fund (Compensation) (Amendment) Regulations 2018 (SI 2018/95), which came into force on 24 February 2018 in relation to bridging pensions.

Overseas transfers regulations

The Government has published its response to the call for evidence on the advice requirement and overseas pension transfers, which ran from 30 September to 23 December 2016. Having considered the responses to the call for evidence Government considers that the advice requirement as applied to overseas transfers is largely working and does not require an easement.

Financial Guidance and Claims Management Bill Update

The Treasury Select Committee has published the text of a letter sent to HMT with regard to the creation of the Single Financial Guidance Body. It raises concerns over the Government's intention for this entity to be sponsored by DWP and proposes that it should be aligned to HMT/FCA instead. The Committee also requests the publication of a Memorandum of Understanding between HMT and DWP setting out their respective responsibilities in this area.

Insolvency and Corporate Governance consultation

The Department for Business, Energy and Industrial Strategy have published a consultation paper on Insolvency and Corporate Governance. The paper sets out ways to mitigate the risk that suppliers and other claimants – including pension funds – face when a company goes out of business.

Pensions Newsletter 97

HMRC has published pension schemes newsletter 97, which covers -

1. Relief at source for Scottish Income Tax
2. Relief at source – excess relief
3. Form APSS262 – reporting overseas transfers
4. New pensions online service newsletter
5. Finance Act 2018
6. Annual allowance
7. Outstanding accounting for tax (AFT) charges

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