Developments in Employee Benefits law and practice

03 May 2016

Week ending 1 May 2016: FCA publishes final pension reform rules and guidance| tPR to list GPPs available to all employers for auto-enrolment| Fewer than 1 in 5 are likely to cash in their annuity| 232,000 savers take advantage of pension freedoms| Employers warned not to ignore A-E penalty notices| FB 2016 enactment likely to be delayed| One in seven to retire without pension in 2016| PS16/14: Financial Services Compensation Scheme – Changes to the Compensation sourcebook: feedback on CP15/40 and final rules|

FCA publishes final pension reform rules and guidance

Rules and guidance which will affect consumers who have or will have contract-based defined contribution pension funds, or who will look to access their pension savings from a defined contribution fund (including by transferring into a contract-based pension), have been published by the Financial Conduct Authority, following a consultation.

In PS16/12, the FCA has announced that firms delivering retirement risk warnings will be permitted to -

  • start asking the consumer questions before the consumer has decided how to access their pension savings (although firms will still be required to deliver the risk warnings after the consumer has made their access decision); and
  • delay implementation of the new rules and guidance for up to one year (instead of only having six months as originally proposed); they would however, encourage (and FCA rules will allow) firms to adopt these changes as soon as possible.

 

tPR to list GPPs available to all employers for auto-enrolment

The Pensions Regulator is to publish on its website a list of group personal pensions (GPPs) open to any employers seeking to comply with their automatic enrolment duties. A list of independently reviewed master trusts, which are open to all employers, is already available.

The criteria for GPPs to appear on the list are:

  • Providers will be regulated by the Financial Conduct Authority (and Prudential Regulation Authority where applicable) for GPP provision.
  • Inclusion on the list will be voluntary.
  • The provider will confirm that their GPP is open to all employers who wish to use it to comply with their automatic enrolment duties.
  • All charges imposed on members in a default fund will be within the charge cap.
  • Providers will need to confirm that their independent governance committee (IGC) or governance advisory arrangement (GAA) has assessed the GPP (or relevant GPP product series) under offer.
  • Confirmation that the most recent IGC/GAA statement(s) can be easily obtained by employers considering using the GPP.
  • Member communications must include clear description of how tax relief is delivered.

Fewer than 1 in 5 are likely to cash in their annuity

According to a YouGov survey commissioned by the Institute and Faculty of Actuaries, 68% of UK pensioners are unlikely to cash in their annuity for a lump sum and only 18% are likely to do so. Respondents said being able to sell their annuity was a good idea in general, but not necessarily a good idea for them.

The survey, conducted with people aged over 55 with an annuity, found a general high level of awareness of the government’s plans for a secondary annuity market, with 66% of respondents claiming to be aware of the proposals.

The likelihood of selling an annuity is higher amongst the younger age groups (34% for those 55-59 years old) and the less financially secure (28%).

If it were possible to sell their annuity product, 55% indicated they ‘don’t know’ what they would do with the lump sum received.

Respondents would seek to receive on average 94% of the value of their annuity as a cash lump sum if they were to sell their policy. This amount could be significantly in excess of the offers made by potential buyers. Market pricing has, though, yet to be established.

Many respondents recognised the need for independent financial advice in order to help them make an informed decision, with a small majority (54%) indicating they would seek this. However the amount willing to be spent on independent financial advice, at an average of £162, could be well below the cost of such advice.

232,000 savers take advantage of pension freedoms

Figures from HMRC show that since the pension flexibility rules took effect:

  • 232,000 individuals have accessed their money flexibly;
  • people have flexibly accessed over £4.3 billion of their own money through 516,000 payments;
  • in the most recent quarter, 74,000 individuals withdrew £820 million. In the previous quarter, 67,000 individuals withdrew £800 million.

Pension Wise, the government’s free and impartial pension’s guidance service, has had over 2.2 million visits to its website and nearly 55,000 appointments to date.

Employers warned not to ignore A-E penalty notices

According to the Pensions Regulator, more than 95% of the first small employers required to put their staff into a workplace pension have now complied with the law. However, some employers need a ‘nudge’ to encourage them to meet their duties, and as expected the regulator has seen an increase in the number of compliance notices it has had to issue. A minority still do not comply after receiving such a notice, but many do after receiving a fixed penalty of £400.

Where an employer fails to take the steps necessary to comply with automatic enrolment duties, despite having been issued with a fixed penalty, the regulator may issue a further penalty to deter or discourage continuing non-compliance by the employer. This is known as an escalating penalty notice (EPN). It specifies the date by which the employer must comply with certain actions or be subject to a fine which builds up at a daily rate.

The fine for small employers with 1 to 4 staff who fail to comply with an EPN is £50 per day and for those with 5 to 49 it is £500 per day.

The regulator’s latest compliance and enforcement bulletin for the period 1 January to 31 March 2016 shows that while compliance rates remain high, the number of EPNs it issues is on the rise. Headline figures from the report are:

  • 3,057 compliance notices issued in first three months of 2016, bringing the total number issued to date to 7,834.
  • 806 fixed penalty notices issued in first three months of 2016, bringing the total number issued since 2012 to 2,234.
  • 96 EPNs issued in this quarter, bringing the total number issued to 127.

The bulletin also details the case of an employer in the restaurant industry which was fined £400, but still failed to provide evidence of compliance and so was issued an EPN. The employer avoided building up daily penalties by contacting the regulator and complying with their duties during the warning period.

FB 2016 enactment likely to be delayed

The Finance Act usually receives Royal Assent before Parliament rises for the summer recess, which commences on 21 July 2016. However, it is understood that, for 2016, Royal Assent may not occur until after Parliament re-convenes on 5 September 2016 (because of an additional parliamentary recess from 15 to 27 June to allow for campaigning in the referendum on the UK’s membership of the EU).

One in seven to retire without pension in 2016

According to Prudential’s latest research, at least one in every seven people retiring this year has made no provision for their retirement and will be either totally or heavily reliant on the State Pension to provide a regular income when they retire.

The results of Prudential’s research also highlight the value of the State Pension to all of this year’s retirees – even those with retirement savings of their own. On average, members of the Class of 2016 estimate that the State Pension will account for 35 per cent of their income in retirement.

Women planning to retire in 2016 are far more reliant on the State Pension than their male counterparts. Female members of the Class of 2016 estimate they will receive on average 41 per cent of their retirement income from the State Pension – compared with 31 per cent for men. Meanwhile, women retirees are three times as likely as men to have made no pension provision – 22 per cent compared with seven per cent.

PS16/14: Financial Services Compensation Scheme – Changes to the Compensation sourcebook: feedback on CP15/40 and final rules

The FCA is to proceed with its earlier proposal to amend its rules so that trustees of occupational pension schemes sponsored by large employers will be eligible to claim on the FSCS where the benefits are money purchase benefits.

The change would mean that consumers have the same protection in respect of defined contribution (DC) schemes, irrespective of the size of the sponsoring employer.

Contact:

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

Julian Rowe, Head of Technical | Email: julian_rowe@jltgroup.com