Developments in Employee Benefits law and practice

01 February 2016

Social Security Benefits Up-rating Order 2016| EIOPA announces results of first EU stress test for occupational pensions| Further AE simplification regulations published| Member-borne commissions ban confirmed| Real test for AE ‘still to come’| Thousands of employers still to complete AE duties| DWP guidance on pension benefits with a guarantee| HMRC publish pension administrator regulations| PLSA research into pension freedoms| National Minimum Wage and Living Wage Regulations| TPR ‘Innovation Plan’| Latest tPR DC research| PPF briefing on assessing guarantor strength

Social Security Benefits Up-rating Order 2016

This draft Statutory Instrument makes provision for certain benefits, specified in the Social Security Contributions and Benefits Act 1992, are increased, including the amount of the basic pensions in Category A and B retirement pensions and the amount of the standard minimum guarantee in state pension credit.

The government has given a ‘triple lock’ commitment to the basic state pension. This will increase the rate of the full basic pension in a Category A and Category B retirement pension from £115.95 to £119.30 a week. The lower rate of Category B basic pension payable in certain circumstances to a married person or civil partner is similarly increased by 2.9% from £69.50 to £71.50 a week.

The standard minimum guarantee element of pension credit is increased by 2.9%, in line with the statutory minimum of growth in earnings.

The higher rate of widow’s pension and the widower’s pension in industrial death benefit will increase from £115.95 to £119.30 a week.

EIOPA announces results of first EU stress test for occupational pensions

The European Insurance and Occupational Pensions Authority (EIOPA) has announced the results of the first European Union stress test for occupational pensions. The stress test aims to produce a comprehensive picture of the diverse European occupational pensions’ landscape, and test pension schemes against adverse market and pension-specific shocks.

Seventeen European Economic Area countries participated in the exercise. The threshold for participation was a material occupational pensions sector with over EUR 500 million in assets.

The objectives of the stress test were:

  • to produce a comprehensive picture of the heterogeneous European occupational pensions’ landscape;
  • to test the resilience of defined benefit (DB) and hybrid pension schemes against adverse market scenarios and increased life expectancy;
  • to identify potential vulnerabilities of defined contribution (DC) schemes; and
  • to reveal areas that require further supervisory focus.

In order to compare diversified stress test results, EIOPA developed a Common Methodology using market-consistent valuation for assets and liabilities. Simultaneously, EIOPA conducted an assessment based on the National Balance Sheets (NBS).

Key conclusions for DB and hybrid schemes are:

  • DB and hybrid schemes demonstrated relative resilience to a permanent decrease of 20% in mortality rates.
  • At the same time they appeared to be more sensitive to an abrupt drop in interest rates and an increase in inflation rates (under the Common Methodology) and to a severe drop in assets prices (under NBS).

And for DC schemes:

  • The impact on the pensions' level strongly depends on the time which DC plan members have before retirement.
  • Eldest plan members have the highest pension wealth and the least time to recover from price falls of assets.
  • Youngest plan members are most heavily impacted by long-term low return on assets.
  • Low interest rates make it more expensive to convert accumulated pensions wealth into annuities.

EIOPA says there is a need to:

  • further develop a deeper understanding of the impact of the pressures in the pensions sector on financial markets and the real economy;
  • continue working on a common market-sensitive methodology towards the valuation of assets and liabilities for the purposes of stress testing; and
  • continue providing an up-to-date picture of the European Union pensions landscape, including the different prudential mechanisms used to deal with the identified risks and vulnerabilities.

Further AE simplification regulations published

Proposals to further simplify the automatic enrolment regime have been published by the Department for Work and Pensions. DWP is now seeking views on the following:

  • a simpler process for the re-declaration of compliance;
  • a simpler process to make it easier for employers to bring their staging date forward; and
  • further exceptions to the employer duties in certain circumstances.

The DWP also wants to ensure that those who will benefit most from pension saving continue to be automatically enrolled and that there are no unintended consequences for individual savers.

The consultation period begins on 26 January 2016 and runs until 16 February 2016.

The DWP will publish a response to the consultation in early March 2016 with a view to making the regulations in the same month. The regulations would come into force in April 2016 and would amend the existing Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations 2010 (SI 2010/772), the Employers’ Duties (Implementation) Regulations 2010 (SI 2010/4) and the Employers’ Duties (Registration and Compliance) Regulations 2010 (SI 2010/5).

Member-borne commissions ban confirmed

The Government has now published its response to the consultation ‘Better workplace pensions: Banning member-borne commission in occupational pension schemes’. This also includes a consultation on draft regulations.

The Government’s response confirms that service providers will be responsible for preventing and removing charges on members used to recover the costs of commission paid to advisers. Trustees will also be responsible for informing their service provider whether a scheme is being used for automatic enrolment. The consultation response also confirms the intention that the ban will be implemented in two stages: a ban on new commission arrangements from April 2016 and a ban on existing commission arrangements later. Members will be able to opt-in to advice and services. The regulations will be enforced by The Pensions Regulator.

Real test for AE ‘still to come’

In a report on automatic enrolment to workplace pensions, the House of Commons Public Accounts committee says that the Department for Work & Pensions has successfully implemented auto-enrolment for larger employers, but “the real test is still to come” with smaller employers starting to enrol staff between now and 2018.

The report says they will need to monitor the experiences of small businesses—including 900,000 employers with only 1 or 2 employees—and minimise administrative burdens, while also ensuring that increased enrolment translates into adequate incomes in retirement.

The Committee is concerned the Pensions Regulator cannot yet access real-time information that would aid this roll-out, and highlights the “potential burden” on smaller employers. The report says: “Smaller employers have fewer resources to administer automatic enrolment and simplifying the process will be critical to the success of the programme”.

The Committee also found that the DWP has still to resolve important questions affecting the value of workplace pensions and that “there is a risk that people will be disappointed with their pension if they continue to pay minimum contribution rates”.

It is also concerned the National Employment Savings Trust (NEST) does not know when it will repay the loan used for its establishment—standing at £387 million at 31 March 2015—or how much this will eventually cost the taxpayer.

The report calls on the DWP to write to the Committee in 12 months, updating it on progress.

Thousands of employers still to complete AE duties

According to a Pensions Regulator bulletin, around 12,000 small and micro employers became subject to the automatic enrolment duties last summer. The majority have put eligible staff into a pension without the Regulator having to use its powers although, as expected, a number needed the additional nudge of enforcement action.

The bulletin shows that between October and December 2015, there was a sharp rise in the number of statutory notices issued by the Regulator. This reflects the rise in the numbers of employers with automatic enrolment duties and the changing employer type.

Research shows that smaller employers are more likely to leave things until the last minute and this means they are more likely to receive a compliance notice, which acts as a warning and gives employers a deadline to meet their duties and avoid a fine.

The bulletin shows that since the start of automatic enrolment:

  • 4,818 compliance notices have been issued;
  • around half of these (2,596) were issued between October and December last year;
  • a total of 1,594 £400 Fixed Penalty Notice fines have now been issued to employers;
  • 1,013 Fixed Penalty Notices were issued in the last quarter of 2015.

The Regulator has again warned employers to start planning in good time. The majority of compliance notices were issued because employers had left their preparations too late. Employers and their advisers should also be aware that an employer issued with a fine will still be required to pay it, even when they complied with their duties.

The Regulator has also warned that employers can become non-compliant by failing to complete their declaration of compliance because they wrongly assumed their business adviser was doing this for them. Employers and their advisers should be clear who is completing what automatic enrolment task.

DWP guidance on pension benefits with a guarantee

The DWP has published a factsheet which is intended to help pension scheme providers determine:

  • whether certain types of pension benefits which contain a promise, including those with a GAR, are safeguarded benefits for the purposes of the new advice requirement; and
  • when the exception to the requirement to take independent advice for those with safeguarded benefits worth £30,000 or less applies.

The DWP says the factsheet is not intended as a substitute for legal advice.

Also, between 23 November 2015 and 15 January 2016, the government held a call for evidence on the valuation process for pensions with a GAR for the purposes of the advice requirement.

This call for evidence was held in response to concerns that pension providers and pension scheme members were finding it difficult to understand when members were required to take advice before transferring such benefits, or accessing them flexibly.

The majority of consultation respondents were in favour of a change to the current valuation method.

The government says it is now considering how best to simplify the current valuation process, and is planning to consult on draft regulations later in 2016.

HMRC publish pension administrator regulations

HMRC has published draft regulations and an explanatory memorandum for technical consultation which make changes to the information requirements for scheme administrators of a registered pension scheme. The changes are a result of the tapered reduction in the annual allowance for individuals with income over £150,000 from 6 April 2016.

According to commentary from Aries pensions system –

“If and when these draft regs come into force, in assessing to whom who you need to send a Reg 14A (10) AA statement, a scheme administrator will not necessarily need to determine whether a member has actually exceeded their AA or not (or is subject to the MPAA).

A new alternative criterion has been introduced: any member whose pensionable earnings for that tax year exceed £110,000 will be due a statement.  A definition of “pensionable earnings” for this purpose is also included in the draft regs:

““pensionable earnings” means the member’s salary, wages or fee in respect of the employment to which the public service pension scheme or occupational pension scheme relates;”.

The draft regs also clarify what information the scheme administrator is required to provide to a member in relation to 2015/16.”

PLSA research into pension freedoms

‘Pension Freedoms: no more normal’ is the third report in the PLSA’s Understanding Retirement research series. It is the first major market-wide survey of who did what and why in the first six months of the pension freedoms, and was conducted using research to map the decision-making process for over four million individuals aged 55-70.

Of these four million people 2.8 million have at least one defined contribution (DC) pot not yet in payment; 1.8 million have at least one defined benefit (DB) pot not yet in payment; and, 0.5 million have both DB and DC pots not yet in payment. The research focused on the 2.8 million with at least one DC pot not yet in payment – the first cohort, or pioneers, of the pension freedoms.

The research among this first cohort identified three clear groups of people:

  • Actioners – early adopters, a distinct and affluent group, many with experience of self-invested personal pensions (SIPPs) or income drawdown
  • Investigators – assessing their options, the largest group, limited experience of drawdown, limited DC savings but largely reliant on DC and other savings for an income in retirement
  • Inactives – the most vulnerable group, many still working, this group is the most reliant on their DC savings to provide an income in retirement but have the lowest levels of financial confidence

The research shows that there is very little evidence of reckless spending or stripping of pension pots. The vast majority of people have not taken the money and most still want to realise a steady income in retirement with their pension wealth.

The findings clearly warn against placing too much weight on the experiences of the actioners as it’s clear they are by no means representative of the 2.8 million with at least one DC pot not yet in payment, nor of the longer term challenging trends that could emerge. It is the inactives that speak most clearly of the longer term challenges created by low levels of retirement savings married with the lowest levels of financial confidence.

The PLSA says the research underlines the importance and value of its proposal of quality assured products, a Retirement Quality Mark, combined with strong signposting by trustees and providers to help savers spot reliable products that are likely to work for them – effectively providing a map that clearly shows the various routes available to them.

It also believes that Pension Wise can play an important role going forward and, with continued support from government, industry and pension schemes, it can become normal for people to use the service.

Latest figures from HMRC reveal that 188,000 people have accessed around £3.5bn since freedom and choice came into effect last April but figures tailed off at the end of 2015.

National Minimum Wage and Living Wage Regulations

Under this instrument, SI 2016/68, the new National Living Wage (NLW) is introduced as the new single hourly rate for adults aged 25 years or older. Provision is made for the NLW to be calculated by adding together the living wage premium and the main national minimum wage (NMW) rate. The living wage premium is also set at 50 pence. This comes into force on 1 April 2016.

The Regulations:

  • amend NMWA 1998, s 19A(5A), which provides that a notice of underpayment must require an employer to pay a financial penalty to the Secretary of State calculated as a percentage of the amount by which a worker has been paid below the NMW in each pay reference period. The amendment increases the percentage figure from 100% to 200%
  • include transitional provision that the increased percentage of 200% is not to apply in respect of pay reference periods which begin before 1 April 2016
  • substitute new regulations in SI 2015/621 to make provision for the single hourly rate of the NMW, provision for other hourly rates of the NMW, and provision for determining the applicable national minimum wage for a pay reference period.

TPR ‘Innovation Plan’

The Pensions Regulator is consulting on a draft Innovation Plan, which will set out ways in which it will explore technology to help retirement savers.

Specific plans include development of the website, such as a facility for carrying out online transactions and a vehicle for interactive communication with stakeholders.

Latest tPR DC research

According to new research from the Pensions Regulator into DC schemes –

  • The total number of DC schemes has reduced by 40% since we took ownership of the pensions register.
  • The total number of DC schemes with 12 or more members has also reduced by 40%.
  • However, the number of schemes with 5,000 or more members has increased by 50%.
  • For the first time since the statistics have been produced the majority of DC schemes with 12 or more members are not open to new members.
  • The number of members has again increased significantly, with 2.3 million new members. Of the 6.9 million DC members of occupational schemes around 70% (4.7 million) have joined since automatic enrolment began.
  • DC schemes with 12 or more members account for 8% of the total universe of DC trust schemes, but more than 98% of the memberships.
  • The vast majority of members (circa 95%) are in schemes being used for automatic enrolment.
  • Of those members in schemes being used for automatic enrolment 80% are in master trusts.
  • The value of assets has increased more this year than in previous years. The total value of reported assets is now £33.5 billion.
  • Total contributions are higher this year than they have been previously, at £3.6 billion, an increase of 32% since last year.
  • In addition to these contributions a further £860 million has been transferred in from another pension scheme.
  • Over £1.4 billion has left schemes, more than two thirds of which has been transferred to another pension scheme.

The table below represents the private pension landscape in the UK, showing at a high level the different forms of employer-sponsored provision available within the private sector, and giving an overview of the size of each type of provision.

DB

Hybrid: mixed benefit

Hybrid: dual-section

DC (trust)

DC (workplace contract)

Schemes

5,240

240

980

34,730

2,500

Open schemes

800

30

470

27,000

2,270

Total memberships

7,492,000

83,000

5,455,000

5,695,000

N/A

Total active members

1,255,000

30,000

1,151,000

3,883,000

4,174,000

PPF briefing on assessing guarantor strength

The Pension Protection Fund has issued an updated version of its briefing note on assessing guarantor strength in relation to contingent assets.

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