This week's edition covers: No change to pension tax reliefs in Budget 2016 | Latest legislation and updates on new State pension, State pension age and contracting-out abolition | PTM updates | Morrisons loses pension equalisation case | Women have barely half the savings of men | Audited Accounts and Auditor’s Statement Regulations | Independent Review of Retirement Income report published | Social Security Benefits Uprating 2016 | Public service pensions to be fully indexed under new State pension | Workplace pension scheme membership increases again|
No change to pension tax reliefs in Budget 2016
After all the predictions of a fundamental reform of UK pension tax reliefs, with the current system being replaced by a single rate of relief or an ‘ISA’ style model, latest reports over the weekend indicate that no change will be announced, at least not on 16 March.
It is also suggested that the months of speculation have cost the government around £1.5 billion, as a result of individuals rushing to pay extra contributions before the removal of upfront tax relief on their payments.
Consumer panel calls for new standard for pension fund costs
The FSCP has published a Discussion Paper entitled ‘Investment costs and charges – where are we now?’, which sets out a new standard of cost reporting that would make pension funds costs and charges more transparent.
The proposed standard would improve the transparency of pension funds, by surfacing the readily available underlying asset management and other provider costs. The standard would provide trustees and independent governance committees – responsible for assessing value for money for scheme members - with clearer sight of the charges the schemes are paying.
The standard is based on research by Dr Christopher Sier. In his paper he explains how the standard could work in practice and provides examples of various pension schemes’ experiences with collecting costs and charges.
The FSCP believes it is now imperative that those governing pension schemes have clearer sight of the charges they are paying to give them a basis for negotiating savings for their members. It therefore proposes that the Financial Conduct Authority, the Department for Work and Pensions and the Pensions Regulator, along with the relevant professional and trade bodies, define and implement a new standard for data collection of costs and charges on UK pension funds.
Latest legislation and updates on new State pension, State pension age and contracting-out abolition
The Department for Work and Pensions has published a response to a public consultation on draft legislation and has also laid before Parliament secondary legislation, namely:
- The Pensions Act 2014 (Abolition of Contracting-out for Salary Related Pension Schemes) (Consequential Amendments) Order 2016 (S.I. 2016/200)
- The Occupational and Personal Pension Schemes (Modification of Schemes – Miscellaneous Amendments) Regulations 2016 (S.I. 2016/231)
This legislation serves a number of purposes:
- It will enable employer sponsors of schemes which were previously contracted-out to continue to run and administer these schemes without disruption. All rights accrued by employees through contracted-out defined benefit (DB) schemes before the abolition of contracting-out are fully protected.
- It will enable trustees of schemes to make certain changes to their scheme rules to take advantage of changes in the Pensions Act 2014 concerning the revaluation of GMPs for early leavers following the abolition of contracting out.
The legislation comes into force on 6 April 2016 and will benefit:
- Employers who sponsor schemes which were previously contracted-out, enabling them to continue with the running and administration of these schemes without disruption.
- Members with rights accrued through contracted-out defined benefit schemes before the abolition of contracting-out will be fully protected.
- Trustees of schemes will be able to make certain changes to their scheme rules to take advantage of changes in the Pensions Act 2014 concerning the revaluation of GMPs for early leavers following the abolition of contracting out.
- Administrators/scheme professionals who will be able to continue their administrative functions following the abolition of contracting out.
The Pensions Act 2014 (Contributions Equivalent Premium) (Consequential Provision) and (Savings) (Amendment) Order 2016 (SI 2016/252) comes into force on 6 April 2016 and makes provision for the payment of contributions equivalent premiums (CEP) following the ending of contracting-out. Certain savings provisions are also made subsequent to this.
Under the State Pension and Occupational Pension Schemes (Miscellaneous Amendments) Regulations 2016 (SI 2016/199) detailed features of the new state pension scheme are provided for, including how the pension increase earned through deferring is to be calculated and transitional arrangements for inheriting graduated retirement benefit. They also make amendments dealing with contracted-out occupational pensions schemes to provide for survivor benefits.
Finally, John Cridland CBE has been appointed as independent reviewer of State Pension age, Minister for Pensions Ros Altmann has announced. The Pensions Act 2014 requires the State Pension age to be reviewed during each Parliament, and the review will consider changes in life expectancy and wider changes in society to help ensure the State Pension remains sustainable for generations to come.
HMRC has published updates to its Pensions Tax Manual (PTM). The updates include new material about the annual allowance that reflects measures enacted in the Finance (No. 2) Act 2015 –
- The transitional rules for pension input periods and pension input amounts that apply for the 2015/16 tax year
- The annual allowance taper coming into effect in the 2016/17 tax year.
Morrisons loses pension equalisation case
The High Court has made a ruling against the Safeway Pension Scheme, which has left supermarket Morrisons facing additional pension scheme liabilities of around £100m.
The Court ruled in Safeway Ltd v Newton and another that equalisation of normal pension age (NPA) at age 65 for men and women in the Safeway Pension Scheme was effective from the date of execution of the definitive trust deed, and not from the date an announcement was issued to members.
The Court rejected Safeway’s application that NPA in its DB scheme was equalised by virtue of announcements to members made in September and December 1991. A formal rule amendment was not made until a new definitive deed was executed on 2 May 1996, but equalisation was expressed to have taken effect from 1 December 1991.
Women have barely half the savings of men
According to a new report from the Pensions Policy Institute, women have barely half the pension savings of men. The findings show -
- Women – As well as having barely half the pension savings of men, women also receive a far smaller state pension. Women receive 13% (£1,092) a year less than the average state pension and 25% (£2,548) a year less than men get from their state pensions.
- Carers – Carers typically have just £5,800 in savings in defined contribution schemes – 44.8% below average. And carers have only £6,000 amassed in defined benefit schemes – a massive 86.2% below average.
- BME workers – An Indian worker typically has less than half (£22,100) the defined benefit pension savings of a white worker (£45,500). Black pensioners receive 16% (£1,404) less than the average for all pensioners and 20% (£1,820) less than white pensioners in State Pension.
- Self-employed – Self-employed workers typically have 4.8% less in defined contribution savings and 12.7% in defined benefit savings than average pensioners.
The Under-pensioned 2016 report says reasons for the disparities include workplace discrimination, job segregation and the lack of flexible working.
The report warns that despite recent changes to state and workplace pensions, these stark divisions will remain unless the government takes further action. It states that workers from under-pensioned groups are less likely to be eligible for automatic enrolment into workplace pensions than the wider population, typically because their wages are too low.
It explores the potential impact on under-pensioned individuals of lowering the £10,000 earnings trigger for auto enrolment, increasing contribution rates and dropping the system of banding that restricts the income on which pension contributions are based.
The TUC believes that these are key policies that the government should consider when it comes to review auto enrolment in 2017.
Audited Accounts and Auditor’s Statement Regulations
Having considered responses to its earlier consultation on proposals to update the regulatory requirements for investment disclosure and to remove the requirement to obtain an auditor’s statement about contributions from large multi-employer pension schemes, the government has decided to proceed with its proposed approach. In consequence, the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) (Amendment) Regulations 2016 (SI 2016/229) have been made and laid in both Houses of Parliament.
The government will respond to the reducing regulatory burdens and investment disclosure aspects of the wider consultation in due course.
Independent Review of Retirement Income report published
On 29 May 2014, Rachel Reeves MP, then Shadow Work and Pensions Secretary, launched an Independent Review of Retirement Income (IRRI) to look at how to boost defined contribution (DC) savers’ retirement income following the introduction of the Coalition Government’s ‘freedom and choice’ pension reforms announced in the 2014 Budget. She invited Professor David Blake, Director of the Pensions Institute at Cass Business School, to lead the review, with Professor Debbie Harrison of the Pensions Institute as a senior consultant.
The IRRI has now published the findings of its two year study and makes key recommendations on how best to boost DC savers’ retirement incomes, as follows.
Pension savers need significantly more help
While the government’s reforms introduced in April 2015 have been widely welcomed, the report concludes that most pension savers need much more help than they are currently getting in order to make sure that the reforms are a real success.
This is because there are significant risks involved in the generation of retirement income from pension savings, such as investment risk, inflation risk and longevity risk. Following ‘freedom and choice’, these risks are borne directly by DC scheme members. Unfortunately, many people do not understand these risks, even with improved financial education. Some risks have to be experienced before they can be genuinely understood, by which point it may be too late to reverse the damage caused by poorly informed decisions.
Auto-enrolment inertia v decumulation choice
The overarching question that the report seeks to address is this: What is the best way for the private-sector DC pension system to reconcile the fundamental principle of auto-enrolment during accumulation – the success of which is predicated on member inertia – with ‘freedom and choice’ during decumulation – the success of which is predicated on the ability of members to make informed decisions?
If a large group of people cannot understand the risks they face, they should not be expected to manage these themselves. Instead, if there are well designed and regulated schemes which use retirement income products that manage these risks in the most efficient and cost-effective way, it might be possible to nudge or default savers towards one of these schemes. Can we build on the lessons of auto-enrolment by having a well-designed default decumulation process at retirement?
Appropriate products need to be developed
A good product for delivering retirement income needs to offer a combination of features, including: accessibility (the flexibility to withdraw funds when needed); inflation protection either directly or via investment performance, with minimal involvement by individuals who do not want to manage investment risk; and longevity insurance. No single product meets all these requirements, but a combination of drawdown and a deferred (inflation-linked) annuity does, for example. So a well-designed retirement income programme will have to involve a combination of products.
If any product satisfies these conditions as part of a hybrid solution, it might be considered a safe harbour product. Any adviser recommending such a product, having assessed its suitability for the customer, could not subsequently be sued for poor advice. Unfortunately, the Financial Conduct Authority has refused to grant safe harbour status to any UK investments.
The arrangement through which retirement income products are delivered is also important, and the report considers the merits of large-scale decumulation schemes versus individual retail products. The former have the potential to be much cheaper and deliver more consistent results than conventional individual drawdown and annuity products, due to: economies of scale, trustee oversight, the use of a well-designed institutionally managed fund, and the potential for the bulk purchase of members’ annuities. This strategy is a natural extension of the default fund used by successful modern multi-trust, multi-employer schemes for the auto-enrolment accumulation stage.
There is a need for ‘safe harbour retirement income plans’
One of the report’s key recommendations is that a ‘safe harbour retirement income plan’ is introduced. This would involve a simple decision tree with a limited set of pathways. This would allow people to get the best combination of retirement income products for them, given their assets, liabilities, health status, family circumstances, tax position, and risk appetite and capacity. The plan would be self-started following a guidance or advice surgery, and the plan member has the right to opt out until the point at which the longevity insurance kicks in. The plan would also deal with one of the important lessons from behavioural economics which is that too much choice is a bad thing. There are now far too many poorly designed and expensive choices of product available at retirement.
We need a ‘national narrative’
Making decisions about retirement income are the hardest financial decisions people ever have to make, because the risks in pensions are so poorly understood. Getting it right requires a national narrative about what pensions are for. Everyone in Parliament, whatever their political affiliation, and industry has to sign up to this narrative – just as they did with auto-enrolment. This is why the report also recommends that the government establishes a permanent independent Pensions, Care and Savings Commission which reports to Parliament to ensure that there is cross-party consensus for all future pension reforms. It is also clear that we are not saving enough for our retirement, so another recommendation is that the government adopts a national retirement savings target of 15% of lifetime earnings, achieved through auto-escalation, to avoid future pensioner poverty.
Making your money last
The unifying thread that runs through a funded pension scheme is the requirement to annuitise enough pension wealth, at the appropriate age, to provide an adequate lifelong income in retirement when combined with the state pension – which is the rationale for establishing a private-sector pension scheme in the first place. It is this requirement which makes a funded pension scheme different from any other type of savings scheme.
When annuitisation becomes optional, that unifying thread is no longer present and there is a real danger that the pension system begins to unravel. At best, it just becomes a tax-favoured arrangement for operating a multi-purpose spending pot – once the money has been spent for one purpose, it cannot be spent on another. At worst, it becomes a honey pot for thieves and other opportunists.
Lying between these extremes are millions of people now in control of their pension pot and who will be trying to do the best for themselves and their families. But for anyone who understands the risks involved in retirement income provision, it is clear that many of these people will find themselves in the same kind of control as a yachtsman in the middle of the Atlantic in a force nine gale.
Social Security Benefits Uprating 2016
Under this Order (SI 2016/23000 certain benefits specified in the Social Security Contributions and Benefits Act 1992 (SSCBA 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.
Public service pensions to be fully indexed under new State pension
In response to the introduction of the new State Pension in April 2016, the government has announced it will continue to price protect the Guaranteed Minimum Pension of public sector workers. This means that those who reach State Pension Age on or after 6 April 2016 and before 6 December 2018 – when the State Pension Age equalises – will receive a fully indexed public service pension for their whole life, and will ensure public service pension payments to these individuals continue to be equal between men and women.
The government is expected to launch a consultation this year on how to address this issue in the longer term, recognising the increased value of the new State Pension, and seeking to balance simplicity, fairness and cost for members, public service pension schemes and the taxpayer.
Workplace pension scheme membership increases again
Latest research from the Office for National Statistics shows that workplace pension scheme membership has increased to 64% in 2015, from 59% in 2014. Main findings are –
- Workplace pension scheme membership has increased to 64% in 2015, from 59% in 2014, caused by increases in membership of occupational defined contribution and group personal and group stakeholder schemes.
- In 2015, 87% of employees in the public sector had a workplace pension compared with 55% of private sector employees.
- Occupational defined benefit pensions schemes represented less than half (45%) of total workplace pension membership in 2015, down from a high of 83% in 1997.
- Pension membership increased in most age groups in 2015 compared with 2014, with the largest increase (7 percentage points, to 61%) in the age group 22 to 29.
- In the private sector, 40% of employees with workplace pensions made contributions of greater than zero but under 2% of pensionable earnings in 2015, compared with 33% of employees in 2014. The increase is likely to be driven by current minimum contribution levels for automatic enrolment.
50% of employees in the private sector received employer contributions of greater than zero and under 4% of pensionable earnings in 2015, compared with 43% in 2014. The increase may be explained by new members who have been automatically enrolled into a workplace pension with lower initial employer contributions until the phasing of contributions is completed in 2019.