Developments in Employee Benefits law and practice

03 January 2017

Weekly update on new developments in the pension industry for week ending 3 January 2017. Average wages £1,473 lower in 2015 due to plugging final salary pension deficits | HoC paper published on pension scheme charges | Recast Directive on IORPs published in the Official Journal | Key pension developments in December

Average wages £1,473 lower in 2015 due to plugging final salary pension deficits

A new think tank report finds that, if between 2000 and 2015 the money that was used to plug private defined benefit pension deficits had instead been redirected towards wages, average salaries would be £1,473 higher.

‘The End of the Beginning? Private defined benefit pensions and the new normal’, a report by the International Longevity Centre – UK (ILC-UK) to be published in January also reveals:

  • Since the year 2000, pension contributions have accounted for an increasingly large proportion of total employee compensation. Where wages once accounted for more than 87% of total compensation, they now account for around 83%.
  • While some of those pension contributions will be for current employees, and therefore represents deferred consumption, around half has been for servicing the deficits of DB pensions which have since closed to new members.
  • The number of retirees receiving a DB pension will remain in the millions well into the latter half of this century – 3 million by 2060 and 1 million by 2070.

The collapse of BHS and concerns over the future of Tata Steel have put the sustainability of private sector defined benefit (DB) pension schemes firmly into the spotlight. These types of DB schemes promise a set payment to their members in retirement based on salary and years of service, but there are growing concerns that many such schemes and their sponsors will be unable to fulfil their promises at a time of rising life expectancy and falling interest rates.

Through new analysis of the Office for National Statistics’ National Accounts, the report finds that if the resources used to plug rising DB deficits had been directed towards boosting the pay of current workers, wages may have been, on average, as much as 6% higher (£1,473) in 2015.

While around half of all DB schemes are now closed to new members, the number of retirees receiving a DB pension will remain in the millions well into the latter half of this century – 3 million by 2060 and 1 million by 2070.

House of Commons paper published on pension scheme charges

A new House of Commons library note considers the impact of pension scheme charges on pension savings and the steps being taken to cap charges and to improve transparency.

Recast Directive on IORPs published in the Official Journal

Towards the end of December 2016, Directive (EU) 2016/2341 of the European Parliament and of the Council of 14 December 2016, on the activities and supervision of institutions for occupational retirement provision (IORPs), was published in the EU Official Journal.

Key pension developments in December

  • GMP equalisation and former COSR schemes. The DWP published a consultation paper setting out a proposed new methodology for equalising guaranteed minimum pensions (GMPs) and converting them to scheme benefits.
  • Pension scams. HM Treasury and the DWP published a joint consultation paper setting out proposals for further measures to tackle pension “scams”. The plans include limiting members' statutory transfer rights, and banning so-called “cold calling”.
  • Finance Bill 2017. Draft clauses for the Finance Bill 2017 were published on 5 December 2016. Pensions-related provisions include a new income tax exemption to cover the first £500 worth of pensions advice provided to employees in any tax year; and amendments to existing legislation concerning the tax treatment of foreign pensions.
  • Work and Pensions committee: DB pensions report. The House of Commons Work and Pensions Committee published a report about DB pension schemes, putting forward a range of proposals for improving the regulation of DB schemes.
  • DC bulk transfers without consent. The DWP published a consultation paper seeking views on whether changes should be made to the current legislative requirements governing bulk transfers between DC schemes where member consent is not obtained.
  • PPF levy determination 2017/18. On 15 December 2016, the PPF published its planned levy rules for 2017/18.
  • Pension Schemes Bill 2016/17. The Bill completed its committee stage in the House of Lords. Third reading in the Lords is scheduled for 16 January 2017.
  • Auto-enrolment review 2017. The DWP announced it will conduct a review of the pensions auto-enrolment regime.

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