Week ending 31 May: Queen's Speech|EIOPA: Occupational pensions stress test|Overview of pension reform issues|
The only significant reference to pensions in the Queen’s Speech was a promise to maintain, for the duration of the new Parliament the triple lock – increasing the basic State Pension annually by the highest of the growth in average earnings, prices inflation or 2.5%. However, speculation continues that reductions in tax relief on pension contributions for those earning over £150,000 a year may come into effect on Budget day (8 July 2015). Some commentators have even suggested that cuts to pensions tax reliefs could be more extensive.
Other measures announced include:
- Employment and Welfare Bill. The government has announced a freeze on the main rates of a number of working-age benefits, tax credits and Child Benefit, and a reduction in the level of the benefit cap to £23,000 per year. The Full Employment and Welfare Benefits Bill, as announced in the Queen's Speech, also creates duties for the government to report on progress towards its commitment to achieving full employment, on meeting its target of three million new apprenticeships and on the Troubled Families Initiative.
- Devolved administrations. The government will:
- bring forward legislation that will devolve further powers to the Scottish and Welsh Governments and take forward the 2014 agreement reached with Northern Ireland’s leaders
- work with the devolved administrations to agree a revised Memorandum of Understanding to govern relations between the UK government and the devolved administrations
- work with the Scottish Government to determine a new financial settlement for Scotland
- collaborate with colleagues in the devolved administrations
- English votes for English laws. Changes to the Standing Orders of the House of Commons will be brought forward to create fairer procedures to ensure that decisions affecting England, or England and Wales, can be taken only with the consent of the majority of Members of Parliament representing constituencies in those parts of the UK.
- Personal tax allowance. Legislation will be brought forward to ensure people working 30 hours a week on the National Minimum Wage (NMW) pay no income tax. The purpose of the legislation is to ensure future increases to the income tax personal allowance reflect changes to the NMW, so that individuals working 30 hours a week on the NMW do not pay income tax.
- Proposals for a Bill of Rights. The government will bring forward proposals for a Bill of Rights to replace the Human Rights Act. This aims to reform and modernise the UK’s human rights legal framework and protect existing rights, and better protect against abuse of the system and misuse of human rights laws.
- Tax-lock commitment–National Insurance Contributions Bill/Finance Bill. Legislation will be brought forward to:
- ensure there are no rises in income tax rates, VAT rates or National Insurance contributions (NICs) rates for individuals, employees and employers
- ensure the NICs upper earnings limit (the point at which the employee NICs rate reduces to 2%) is no higher than the income tax higher rate threshold (the point at which income tax increases to 40%)
- ensure there will be no extension of the scope of VAT
EIOPA: Occupational pensions stress test
EIOPA has published updated reporting templates and a DC module spreadsheet calculation tool for the occupational pensions stress test.
Stress tests are an important supervisory tool to examine the sensitivity of the occupational pensions sector to adverse market developments and to reach robust conclusions for the stability of the financial system as a whole and to enhance consumer protection.
The aim of the exercise in 2015 is to test the resilience of defined benefit (DB) and hybrid pension schemes against adverse market scenarios and increase in life expectancy as well as to identify potential vulnerabilities of defined contribution (DC) schemes.
An overview of pension reform issues at the start of the 2015 Parliament
Ten years ago, the Pensions Commission concluded that the ageing population left society and individuals with four options: pensioners could become relatively poorer; public spending on pensions could rise; people would need to save more; or people would need to work longer. As the first option (poorer pensioners) appeared unattractive, some mix of increased higher taxes/NI contributions, higher savings and later average retirement was likely to be needed. The 2015 Parliament will see the implementation of significant reforms to address these conclusions. Monitoring their implementation and deciding whether more is needed will be an issue for the current Parliament.
Requirements on employers to automatically enrol workers into a workplace pension and make minimum contributions started to be introduced in October 2012 and will be fully phased-in from October 2018. The policy was legislated for by the Labour Government. The Conservative Liberal Democrat Coalition Government decided to continue with it following a review, but thought further reforms were needed for it to succeed.
In particular, it believed the complexity of the state pension made it difficult for people to plan for retirement. It legislated to combine the existing two tiers of the state pension into a single tier for future pensioners from 6 April 2016. The new state pension may encourage individuals to save for retirement. This is because, although communicating its effects will be a challenge in the transition, in the longer term it should be clearer to individuals how much they can expect, which should simplify decisions about saving.
However, the reform will also increase the necessity for younger individuals to save privately if they are to achieve an adequate income in retirement because, according to the Institute for Fiscal Studies, in the longer term the new state pension will be less generous than the current system for most people. Although auto-enrolment has started to increase the number of pension savers, a potential downside of the policy is that people assume that contributing at the minimum rate is enough, only for some to find out too late that their savings are inadequate. Some commentators have therefore suggested a policy of ‘auto-escalation’, where contribution rates increase in line with earnings increases. However, it will be important to get the balance right, so that those who would benefit from saving are not prompted to opt out.
The vast majority of those auto-enrolled will be saving in defined contribution (DC) schemes which they have not chosen for themselves. This has focused attention on measures to improve the outcomes and value for money afforded by DC pensions, such as a cap on charges and stronger governance arrangements.
The 2015 Parliament will also see increases in the State Pension age (SPA) – to 65 for women by November 2018, from which point the SPA for men and women will start to rise to 66, which it will reach in October 2020. It will then rise to 67 between 2026 and 2028. A review in 2017 is to consider the SPA in the light of life expectancy and other factors.
A further issue will be how individuals and providers respond to the new choices about when and how people aged 55 and over draw their defined contribution pension savings from April 2015.
For further information on all of the above, see the new Parliament research paper.
Secured UURBS did not require shareholder approval
In this case, Granada Group Ltd v The Law Debenture Pension Trust Corporation Plc, the High Court held that an unapproved and unfunded top-up pension scheme for directors did not require prior shareholder approval in respect of the provision of security by the employer (Granada).
Granada brought a claim challenging the validity of arrangements made in 2000 that established a secured unfunded unapproved retirement benefits scheme for executive directors whose earnings exceeded the then pensionable earnings cap in the main approved company scheme.
Granada's objective was to recover gilts worth in excess of £40 million, which had been charged as security for its contractual obligations in respect of the top-up pensions. However, the court rejected the argument that the arrangements were voidable due to lack of prior shareholder approval under section 320 of the Companies Act 1985.
Updates to PPF levy appeal guidance
The Pension Protection Fund (PPF) has updated its FAQ answers to provide additional guidance for schemes who wish to appeal against their Experian insolvency score. The new FAQs cover:
How to appeal to Experian against a scheme's mean score, risk indicator, levy band and levy rate for the 2014/15 levy year.
The time period within which appeals must be brought.
What a scheme can do if it is not happy with the outcome of an Experian appeal.
The PPF has also updated the forms that need to be completed for the various appeals.
Key pension developments in May
- Pensions Regulator:
- 2015 scheme funding statement: new funding code key to managing deficits.
- New online automatic enrolment guide for business advisers
- High Court: BBC did not breach implied duties in imposing a cap on increases to pensionable salary (Bradbury v BBC  EWHC 1368)
- Budget 2015: The Chancellor of the Exchequer has announced that there will be a Stability Budget on Wednesday, 8 July.