Week ending 30 Nov: NEST consultation launch|Revaluation Order laid before Parliament| Pension Schemes Bill completes HoC stages
NEST launches consultation on future of retirement and investment
In a new consultation, NEST says defined contribution (DC) savings, alongside the State pension, will become the primary source of income for millions of retirees in future, replacing defined benefit savings and compensating for lower levels of housing and other wealth. Coupled with the end of compulsory annuitisation this creates an unprecedented landscape in which there are currently no suitable solutions for the vast majority of savers on moderate earnings.
NEST’s consultation paper - ‘The future of retirement: a consultation on investing for NEST’s members in a new regulatory environment’ - is calling on experts to help it examine the evidence on what consumers want and need, and find innovative ways to secure a better deal for the generation of 'DC dependents' who will begin reaching retirement in the next few years.
The consultation document draws together evidence of the challenges the industry faces and some of the developing thinking about new product design. Key points are:
- DC pension savings, which are currently not the primary source of income in retirement for most people, will become a key pillar of retirement wealth within 20 years
- the nature of retirement is changing, shifting from a one-off event to more of a gradual journey alongside later working
- consumers welcome the new freedom and choice they have but are unsure about the choices they’ll need to make and say they’ll want help
- consumers don’t understand that annuities are insurance policies but also don’t understand major aspects of traditional draw down products, including that their pot is invested and isn’t ‘guaranteed’
- consumers say the most important aspects of any retirement product are protection from inflation, a guaranteed income until death and protection from market volatility, although they don’t always make choices that reflect this
- people in general ‘want it all’ - guaranteed and consistent income punctuated by ‘bonus’ style lump sums from time to time - but many are unlikely to be able to afford this
- consumers are likely to be tempted by products that offer them more up front but could leave them vulnerable in later years
- on average people start thinking about planning for retirement far later than DC schemes have started de-risking their pots and evidence from the UK and around the world suggests many won’t engage at all
- financial planning in later life becomes problematic as cognitive functioning declines with age.
The consultation also looks at the opportunities and constraints of retirement products on the market currently, including whether there is a role for increased risk sharing amongst NEST members.
Revaluation Order laid before Parliament
The Occupational Pensions (Revaluation) Order 2014 (SI 2014/3078) comes into force on 1 January 2015. It specifies the revaluation percentages required for deferred members of occupational schemes who reach their scheme's normal pension age (NPA) in 2015. The appropriate revaluation percentage for a member depends on the number of complete calendar years between the date the member left pensionable service and the date on which he reaches NPA. There are different revaluation provisions for Guaranteed Minimum Pensions.
Pension Schemes Bill completes House of Commons stages
The Pension Schemes Bill 2014 has completed all its stages in the House of Commons and will now go to the House of Lords for consideration.
A large number of government amendments were introduced, affecting risking sharing (defined ambition) and collective benefit schemes and transfers from both DB and DC schemes.
A government impact assessment estimates that the number of transfers from defined benefit (DB) to defined contribution (DC) schemes operated by the same employer will rise from 5,983 in 2012/13 to 8,676 in 2015/16 as a result of the new DC flexibilities announced in the 2014 Budget. Transfers as part of a transfer exercise are predicted to rise from 3,828 to 5,551 while the number of employee-initiated transfers out will grow from 10,188 in 2012/13 to 14,773 in 2015/16.
The impact assessment estimates that from 2015/16 the total yearly cost to employers operating DB schemes and to scheme members will be £3.85 million, of which £2.11 million will fall on businesses.
The Bill is due to have its second reading in the House of Lords on 16 December 2014.
On a related note, in connection with the new money purchase £10,000 annual allowance, the government has eased requirements in the Taxation of Pensions Bill obliging any individual who accesses their defined contribution pension rights under the new flexibilities to inform every other registered pension scheme of which they are member.
Also, HMRC has clarified that a “stand-alone lump sum” will trigger the money purchase annual allowance rules only if it is paid from a money purchase arrangement where the member has primary protection but not enhanced protection and protected lump sum rights exceeding £375,000.
State Pension Regulations 2015
In recently published draft regulations, provisions are made to support the introduction of the new State pension in 2016. The minimum number of years of National Insurance contributions (NICs) a person will need to qualify for any new State pension is specified. The rate at which a person who defers claiming their pension will accrue and increase is specified. Provision is also made in relation to State pension and prisoners, the inheriting of deferred old State pension and the sharing of State pension.
Pension Liberation Report on Lincoln Umbrella Pension Trust
The Pensions Regulator has issued a section 89 report in relation to the LPA Umbrella Trust, LPA Umbrella Trust 2, LPA Umbrella Trust 3, LPA Umbrella Trust 4 and The Palace Pension Fund. In it, the Regulator explains that the defendants in legal proceedings in relation to the Lincoln Umbrella Pension Trust and four related arrangements have agreed to discontinue the schemes by a deed of dissolution.
The schemes operated according to complex arrangements that purportedly enabled funds to be ‘lent’ to the member via a company under the member’s control, which would become their employer under one of the schemes. The member could then use the money as they wished.
The schemes sought to allow members to access their pension funds as cash through a supposed legal ‘loophole’. In May 2014, the High Court ruled that this supposed gap in the law did not exist, finding in the Regulator’s favour on three preliminary legal issues.
Guidance Guarantee standards set by FCA
Standards for partners delivering the pension Guidance Guarantee have been set out by the Financial Conduct Authority (FCA). Respondents to the recent consultation were broadly supportive of the proposed changes, but the FCA reports is has made several amendments to aid clarity, including to address concerns the information to be given by providers to customers approaching retirement was too broad.
The FCA notes the policy statement and the near final instruments in it have been prepared on the basis the Pension Schemes Bill will be passed by Parliament and given Royal Assent in its current form.
In the first half of 2015, the FCA will also:
Consult on its policy for making recommendations to designated guidance providers and HM Treasury as part of its monitoring approach
Develop its monitoring approach in liaison with HM Treasury and designated guidance providers
Conduct a wider review of its rules in the pensions and retirement area.
Pensions Institute consults on future of retirement incomes from DC pension schemes
On 29 May 2014, Rachel Reeves MP, the Shadow Work and Pensions Secretary, launched an Independent Review of Retirement Income to look at how to boost defined contribution (DC) savers’ retirement income. She invited Professor David Blake, Director of the Pensions Institute, to lead the review, with Professor Debbie Harrison of the Pensions Institute as a senior consultant.
The review will examine how savers in DC schemes can achieve not only the maximum possible income in retirement, but also an income that is more predictable than that provided by existing schemes. See –
Retirees could be at risk of making poor decisions with their defined contribution savings
The Pensions Policy Institute (PPI) has published ‘How complex are the decisions that pension savers need to make at retirement?’, a report that explores the range of potential decisions people have approaching, at the point of, and during retirement, and how these are likely to change once the new flexibilities for savers with Defined Contribution (DC) pensions are introduced in April 2015.
PPI segmentation analysis explores the characteristics of different groups and identifies which groups could be at greatest risk of making poor decisions when they reach SPA if they are not offered adequate support, either through guidance and advice or through the provision of suitable defaults.
The research finds that people reaching SPA over the next ten to fifteen years vary considerably in their pension and non-pension savings and asset portfolios. Within this population, there are segments who are likely to require greater support because they will be more reliant on their DC savings to supplement their state pension and secure an adequate income throughout their retirement, with riskier portfolios, lower levels of financial capability and numeracy to make decisions, and pension pot sizes that mean they may not be actively targeted by the advice industry.
The PPI segmentation analysis finds that around 12% of the population analysed (just under 700,000 people reaching SPA in England over the next 10-15 years) will be at “high-risk” of making poor decisions when they reach SPA if they are not offered support through either guidance and advice or suitable defaults. These are groups with a significant level of DC savings (between £19,400 and £51,300 at retirement) who have no additional DB pension to fall back on. A further 29% of people (or 1.6 million over the next 10-15 years) aged 50-SPA in 2014 will be at “medium risk” of making poor decisions. These are groups with over £6,300 in DC savings and who have either little or no additional DB pension.
Automatic enrolment evaluation report 2014
A report evaluating the implementation of automatic enrolment into workplace pensions has been published by the Department for Work and Pensions. It brings together the latest evidence to show what has happened since automatic enrolment began and updates the indicators the DWP will use to monitor progress throughout implementation. Key findings are:
Increasing the number of savers
- Up to the end of September 2014, more than 4.7 million workers have been automatically enrolled into workplace pensions by nearly 34,000 employers.
- Current National Employment Savings Trust (NEST) membership stands at 1.5 million members with around 9,000 employers.
Increasing the amount of savings
- In 2013, the annual total amount saved in workplace pensions was £77.6 billion, an increase of £4.3 billion from 2012.
- In the public sector this has increased by £2 billion to £37.9 billion, and in the private sector this has increased by £2.3 billion to £39.7 billion. Across both sectors, contributions by employees accounted for 29 per cent of saving, with employer contributions accounting for 61 per cent.
Opt out rates
- The Employers’ Pension Provision Survey 2013 found that the proportion of employees who had opted out of, or left, a scheme after being automatically enrolled was between nine and ten per cent.
- DWP qualitative research with 50 employers who staged between January 2014 and July 2014 showed an average opt out rate of 12 per cent, with the opt out rate for most individual employers ranging between five and 15 per cent.
- The average ceasing active membership rate over the two to three months following the closure of the opt out period was two per cent.
- Within the employers who took part in the research it is estimated that, as a result of automatic enrolment, the overall participation in a workplace pension increased from 44 per cent to 76 per cent.
Impact on employers
- Qualitative research with employers who staged between January 2014 and July 2014 found that they rarely incurred substantial ad hoc costs as a result of implementing automatic enrolment, with the average implementation cost being between £200 and £700.
- Many of these employers were comfortable with the administrative costs of implementation, as they had tended to be low. Generally employers stated that their most significant cost had been in the time taken to complete tasks.
- Contribution costs were a key factor for employers, particularly affecting employers who were automatically enrolling a large proportion of their workforce. Employers who had existing pension provision tended to offer contribution rates above the statutory minimum, whereas employers who offered no previous schemes or stakeholder schemes tended to offer the statutory minimum contribution. In some cases, employers did offer more than the minimum employer contribution in exchange for increased contributions from workers.
- Lessons for smaller employers were to start preparing early, between six and nine months in advance.
Data published by the Pension Regulator shows the majority of employers (72 per cent) enrolled eligible workers into Defined Contribution (DC) schemes, representing 82 per cent of those enrolled.
Of those employers who automatically enrolled their workers into a DC scheme, around 28 per cent chose to use a master trust, which equates to around a fifth (20 per cent) of all employers and a quarter (25 per cent) of all automatically enrolled workers.
Section 75 debt can be assigned - Trustee of the Singer & Friedlander Ltd Pension and Assurance Scheme v Corbett
In the course of the administration of a bank, which ran a defined benefit pension scheme, the claimant trustee sought a declaration that a debt owed to the pension scheme was assignable.
The Chancery Division considered whether the trustee of a pension scheme was able to assign the debt owed to the pension scheme which was created by s 75 of the Pensions Act 1995.
The court held that the debt created by s75 of the 1995 Act could be assigned by the trustees. Further, a declaration would be made to the effect that the assignment was something which a reasonable and properly advised trustee could enter into in the exercise of its powers.
HMRC publishes updates on PPG and APT ‘VAT cases’
In two new Revenue & Customs Briefs (numbers 43 and 44), HMRC has confirmed that:
- employers could potentially deduct, as input tax, VAT on the administration and investment management costs of running their pension schemes. HMRC now accepts that administration costs (for which employers have obtained input tax deduction) and investment management services (where no such deduction has been allowed) should not be treated differently. However, input tax deduction will only be available if the employer is the recipient of the supply (the PPG case)
- defined contribution pension schemes with specified characteristics will be regarded as special investment funds for the purposes of the fund management VAT exemption (the ATP case).
Longevity trends for DB pension scheme members
According to new research published by the National Association of Pension Funds and Club Vita Longevity, trends for defined benefit (DB) pension scheme pensioners are different to those experienced by the England and Wales population (the basis for most longevity projections). Also, the pace of longevity increases varies significantly within DB schemes and for different groups of DB pension scheme members.
Equitable Life Payments Scheme update
The government’s Equitable Life Payments Scheme (ELPS) has now issued over £990.5 million worth of payments.
Since July 2014, the scheme has issued payments to a further 10,000 policy holders, meaning that over 887,000 (out of 1 million) eligible policyholders have now had payments issued to them. The figures are broken down as follows:
- 409,221 payments to individual investors have been issued totalling £555.2 million
- 37,732 initial payments to With-Profits Annuitants (WPAs) or their estates have been issued by the Scheme, totalling £82 million. Subsequent annual payments totalling £187.5 million have also been issued to annuitants
- 440,108 payments totalling £165.8 million have been issued to those who bought their policy through their company pension scheme.