Employee Benefits Updates | Pension Trends and Regulations

08 December 2014

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Week ending 7 Dec: Autumn Statement 2014|Third reading for Taxation of Pensions Bill|Draft regulations to simplify AE

Autumn Statement 2014

The Chancellor of the Exchequer delivered his Autumn Statement on 3 December, announcing that, from April 2015, beneficiaries of individuals who die under the age of 75 with a joint life or guaranteed term annuity will be able to receive any future payments from such policies tax free. Also, the tax rules will be changed to allow joint life annuities to be passed on to any beneficiary. The government has decided not to make any changes to the age limit at which tax relief can be claimed on pension contributions and so this will remain at age 75.

The Autumn Statement confirms that the basic State Pension will be increased by the triple lock – the highest of average growth in earnings, inflation or 2.5%. This means in April 2015 the basic State Pension will rise by 2.5%. This is a cash increase of £2.85 per week for the full basic State Pension, which will rise to £115.95 per week. The benefits of the triple lock uprating will also be passed on to the poorest pensioners through an increase in the standard minimum income guarantee in Pension Credit to match the cash rise in the basic State Pension. This will partly be paid for through a rise in the Savings Credit threshold by 5.1%. As a consequence of the increase in the Pension Credit standard minimum income guarantee, the full new State Pension will rise to at least £151.25 per week. The actual amount will be set in autumn 2015.

To assess means-tested benefits for those over the pension credit qualifying age, the government will change the notional income rules applied to pension pots which have not been accessed, or have been accessed flexibly, from 150% to 100% of the income an equivalent annuity would offer, or the actual income taken if higher.

With regard to employee benefits and expenses, from 6 April 2015, a statutory exemption will be introduced for trivial benefits in kind costing less than £50 and, from 6 April 2016, the £8,500 benefits in kind threshold for lower paid employment (and form P9D) will be abolished. A statutory framework for voluntary payrolling will be introduced together with the exemption of certain reimbursed expenses.
The Government intends to deny tax and NIC relief on reimbursed business expenses paid in conjunction with a salary sacrifice scheme, and it appears that this will be implemented with effect from 6 April 2016.

Third reading for Taxation of Pensions Bill

On 3 December 2014, the report stage and third reading of the Taxation of Pensions Bill took place in the House of Commons. Financial Secretary to the Treasury David Gauke introduced amendments to the information members have to provide to schemes when accessing their DC benefits flexibly. The government is increasing the notification period from 31 to 91 days and limiting the requirement so that it only applies to schemes to which a member is currently contributing, as well as any schemes to which they contribute in the future. 

A 31-day deadline still applies to the requirement on scheme administrators to give members a statement confirming they have flexi-accessed their pension rights and that any further contributions may be subject to the £10,000 money purchase annual allowance among other things.

Draft regulations to simplify auto-enrolment process

The DWP is seeking views on draft regulations aimed at simplifying the process for automatic enrolment into workplace pension schemes. The measure aim to help reduce the burden on employers. If passed, the regulations will:
  • introduce an alternative quality requirement for defined benefits pension schemes
  • simplify the requirements on employers regarding the provision of information about automatic enrolment to their employees
  • create exceptions to the employer duties so an employer is not required to enrol an employee into a workplace pension in certain situations.

Pension Trends, Chapter 8: Pension contributions, 2014 edition

  • In 2013, according to results from the Occupational Pension Schemes Survey, the average employee in a private sector Defined Benefit scheme contributed 5.2% of pensionable earnings. For Defined Contribution schemes the average employee contributed a much smaller percentage, 2.9% in 2013. 
  • The proportion of active members of private sector Defined Contribution schemes with employer contribution rates of under 4% increased from around 11% in 2012 to almost 22% in 2013. By contrast, 4% of such members received employer contributions of 15% and over in 2013.
  • Her Majesty’s Revenue and Customs data shows that, in 2012/13, the total number of individuals making contributions to personal pensions was 5.5 million. There were 5.3 million people contributing in 2011/12. The average contribution per person to a personal pension was lower in 2012/13 (£3,510) than in 2011/12 (£3,690). 

Public service pensions: actuarial valuations and the employer cost cap mechanism

The Public Service Pensions Act provides the legal framework for regular actuarial valuations of the public service pension schemes to measure the costs of the benefits being provided. These valuations will inform the future contribution rates to be paid into the schemes by employers. The Act also provides for the establishment of an employer cost cap mechanism to ensure that the costs of the pension schemes remain sustainable in future. This note provides further details on the Treasury’s policy with regard to valuations and the cost cap, and on the Directions and Regulations, made under this Act, which implement this policy.

Public Service Pensions (Record Keeping and Miscellaneous Amendments) Regulations 2014

Under these regulations, the records which scheme managers of public service pension schemes covered by the Public Service Pensions Act 2013 (PSPA 2013) are required to keep from 1 April 2015, are set out. Also, the Occupational Pension Schemes (Scheme Administration) Regulations 1996, SI 1996/1715, are amended to remove an exemption to the requirement to report the late payment of contributions for those occupational public service pension schemes covered by PSPA 2013.
Active membership of DC pension schemes now more than that of private sector DB schemes 

Key findings from the 40th annual workplace pension survey from the National Association of Pension Funds:

Defined benefit (DB) schemes
  • The survey showed 50% of DB schemes are open to future accrual among private and other public sector schemes, this rises to 53% when only private sector schemes are taken into account.
  • Only 8% of private sector DB schemes were still open to new members this year compared to 12% in 2013.
  • 39% of DB schemes are fully closed compared to 34% last year.
  • Active DB membership has fallen from 3.5 million in 1975 to 1.1 million in 2014.
  • The average pension paid to DB scheme members by respondents was £8,071, up slightly on 2013 from £8,010.
  • The overall percentage of DB scheme assets invested in equities continued to decrease in 2014.

Defined contribution (DC) schemes
  • The average contribution rate continued its slow downward trend to 11.7% (12.5% in 2013). This consisted of 7.6% coming from the employer and 4.1% from the employee. The NAPF says this apparent fall in contributions is due to the sheer volume of new savers joining schemes as a result of automatic enrolment, where their contributions are currently running at the minimum rate.
  • 67% of schemes responding to the survey operate on a matching contribution basis.
  • 33% of employees received the minimum employer contribution and 43% of employees received the maximum employer contribution.
  • For the first time, active membership of DC schemes now outstrips the active membership of private sector DB schemes. On average, trust-based DC schemes who responded to the survey had 15,000 active members, compared to just 4,500 active members in the average DB scheme.

Automatic enrolment

  • 95% of respondents are already automatically enrolling eligible staff (excluding the LGPS).
  • Most respondents (83%) planned to use, or were already using, a DC scheme for automatic enrolment.

Pension schemes could face £500bn black hole in the index-linked gilt market

According to a new report - ‘Who carries the risk? Asset-allocation challenges for defined-benefit pension schemes’ - co-published by Fathom Consulting, an independent economics and financial markets consultancy, and Pension Insurance Corporation, a specialist insurer of UK defined benefit (DB) pension funds:

  • Using the Office for Budget Responsibility’s latest forecasts, DB scheme finances will improve significantly, with more than half reaching a buyout level of funding within the next ten years.
  • Rising yields and a projected turnaround in the public finances mean that the market value of all gilts is likely to peak, just as the demand for inflation protection starts to build.
  • A shortage of index-linked gilts would have major implications for schemes, for their sponsors, for the Pension Protection Fund (PPF), and potentially for members.
  • The proportion of gilts that are index-linked would need to rise from 25% to 75% in order to meet the needs of DB schemes over the next ten years.
  • Outstanding DB commitments are so large that the level of pension payments will be as high 40 years from now as they are today, even after allowing for the effects of inflation.
  • It is likely that the amount corporate sponsors have paid to date to reduce pension scheme deficits, equating to 1%-2% of GDP each year, has dragged down UK business investment, contributing to the UK’s poor productivity since the great recession took hold in 2008.
  • More than £1 billion a year of pension scheme liabilities is predicted to fall into the PPF over the next five years.