Week ending 8 March: Pension Schemes Bill becomes Act|Latest FCA Consultation Papers and Policy Statements for April '15 reforms
Pension Schemes Bill becomes an Act
The Pensions Schemes Bill has received Royal Assent, a month before the new ‘pension freedoms’ go live. Key provisions of the new Act are set out below.
Risk sharing pension schemes
The Pension Schemes Act 2015 sets out a new legislative framework for private pensions which aims to make greater risk sharing between employers, individual members and third parties easier.
The Act is intended to encourage and enable ‘shared risk’ pension schemes and ‘collective benefits’. In consequence, it provides for three definitions, or categories, of scheme –
- Defined Benefit. These schemes offer a full promise while members are saving for their pension about what their income will be from that pension.
- Shared Risk (also known as Defined Ambition). These schemes offer a promise while members are saving for their pension about some of the outcome from the scheme, but not all.
- Defined Contribution. These schemes don’t offer a promise while members are saving for their pension about what their income will be from that pension.
The Act includes measures that will enable workplace and personal pension schemes to provide ‘collective benefits’. These are provided by allowing schemes to be run in a way that shares risks among members by pooling their assets. This means that when a member retires, they can receive an income from the shared assets of the scheme.
Freedom and Choice for DC savers’
The Pension Schemes Act, along with the Taxation of Pensions Act, will mean that, from 6 April 2015, individuals from the age of 55 will be able to access their pension benefits flexibility if they wish.
With effect from 6 April 2015, guidance will be offered to DC members as they approach retirement. The guidance service, called Pension Wise, will be provided free of charge by independent organisations, namely the Citizens Advice Bureau (for face-to-face guidance) and the Pensions Advisory Service (for telephone guidance). An online service will also be designed as part of the guidance service.
New safeguards for private DB to DC transfers
Two new safeguards will be put in place with effect from 6 April 2015 to ensure that members of private sector Defined Benefit (DB) schemes who wish to transfer to a DC scheme so as to take advantage of the new pensions flexibilities do not do so at their detriment:
(1) the DB member must have taken advice from a professional independent financial adviser beforehand (unless the value of their DB funds is below £30,000), and
(2) trustees will benefit from new guidance (to be introduced in collaboration with the Pensions Regulator) on the availability and use of their existing powers to delay transfer payments and take account of funding levels when deciding on transfer values.
Final regulations for abolition of contracting-out published
Following a consultation on changes resulting from the introduction of the new flat-rate State pension and the abolition of all contracting-out in occupational pension schemes, the Department for Work and Pensions has published the government response to comments received on the draft Occupational Pension Schemes (Power to Amend Schemes to Reflect Abolition of Contracting-out) Regulations. The regulations (SI 2015/118) were published on 4 March 2015 and come into force on 6 April 2015.
A JLT Client Alert on the issues will be available next week.
Final governance and charge cap regulations
The draft Occupational Pensions Schemes (Charges and Governance) Regulations 2015, which contain the DC governance and charge cap requirements from 6 April 2015, were approved on 4 February.
Separately, DWP has published guidance on the charge cap of 0.75% which will apply from 6 April 2015 to occupational pension schemes that are used for automatic enrolment. It explains how the charge cap works, with particular emphasis on identifying the default arrangement and how to assess charges.
Latest FCA Consultation Papers and Policy Statements for April 2015 reforms
PS15/4: Retirement reforms and the guidance guarantee
New rules published by the Financial Conduct Authority will help to protect consumers wanting to access their pension savings from 6 April 2015 by requiring firms involved in the sale of retirement income products to give additional warnings tailored to them.
Firms should consider a number of issues when designing appropriate risk warnings, for example:
- the state of a consumer’s health;
- tax implications;
- the impact on means-tested benefits; and;
- investment scams.
Firms will need to keep records to show that consumers have received relevant warnings and whether they have taken regulated advice or guidance from Pension Wise.
Whilst the FCA is introducing the rules without consultation, it has confirmed that it will undertake a review of ‘at-retirement’ rules in the summer of 2015 and will consult at that time on whether any changes need to be made to the rules.
FCA publishes final rules for charges in workplace personal pension schemes (PS15/5)
The Financial Conduct Authority has confirmed final rules which, from 6 April 2015, will require firms providing contract-based workplace personal pension schemes used by employers for automatic enrolment to cap the charges within default funds to 0.75% per year of funds under management.
Under the new rules firms will also be prevented from paying or receiving consultancy charges and paying commission for advice not expressly agreed by scheme members. Firms will also be prevented from charging active and deferred members of schemes differently based on whether they are contributing to the scheme or not.
These measures apply to qualifying schemes only. A qualifying scheme is defined in the rules as “a personal pension scheme or stakeholder pension scheme, which provides money purchase benefits, used by an employer or employers to comply with duties imposed in Part 1, Chapter 1 of the Pensions Act 2008, which are in summary, to take necessary steps in relation to particular employees, by a particular time, to make those employees members of a pension scheme which meets the criteria set out in that Act and in regulations made under that Act”.
The FCA has been working closely with the Department for Work and Pensions (DWP) to ensure that all members benefit from the same good quality standards regardless of type of workplace scheme. Similar regulations will be introduced with effect from 6 April 2015 by the DWP to ensure value for money in relevant occupational (commonly trust-based) pension schemes for which The Pensions Regulator will be responsible (see above).
The Financial Conduct Authority (FCA) has published a consultation paper on proposed changes to its pension transfer rules, designed to reflect the government’s new flexible pensions regime which will bring advice on transfers from defined benefit schemes to occupational defined contribution schemes into the FCA’s remit. The FCA proposes to:
- amend its rules to incorporate the new specified activity of advising on conversions or transfers of safeguarded benefits to flexible benefits, and
- require that all advice on DB to DC pension transfers be provided or checked by a Pension Transfer Specialist.
Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (Pensions Guidance Exclusions) Order 2015
Under the Order, provision is made in connection with the implementation of the pensions guidance service, Pension Wise, to ensure people providing the service are not carrying out an activity regulated by the Financial Conduct Authority (FCA). It is coming into force on 26 March 2015.
The Order specifies that people providing pensions guidance under arrangements with HM Treasury are not carrying out certain FCA regulated activities. The activities this order excludes are:
- arranging deals in investments
- providing basic advice on stakeholder products
- advising on investments
- advising on regulated mortgage contracts
- advising on regulated home reversion plans, regulated home purchase plans and regulated sale and rent back agreements.
FRC amends FRS 102 relating to pension obligations
The Financial Reporting Council has issued ‘Amendments to FRS 102 – Pension obligations’ to clarify aspects of the accounting for defined benefit pension plans by UK and Irish entities. The amendments have the same effective date as FRS 102, and are applicable to accounting periods beginning on or after 1 January 2015.
The amendments to FRS 102 (the Financial Reporting Standard applicable in the UK and Republic of Ireland) relate to defined benefit pension plans where the employer has recognised its share of the scheme’s underlying assets and liabilities and do not relate to multi-employer plans accounted for as defined contribution plans. They enable sponsoring employers reporting under UK and Irish GAAP to continue with current practice in accounting for defined benefit pension schemes.
DWP consults on changes to the law on investments in occupational pension schemes
Following recommendations made by the Law Commission on the law governing investments in occupational pension schemes, the Department for Work and Pensions has published a consultation on potential changes to the Occupational Pension Schemes (Investment) Regulations 2005 (SI 2005/3378). Responses are requested by 24 April 2015.
The consultation seeks views on recommendations made by the Law Commission which cover two main themes:
- the difference between financial and non-financial factors when taking decisions about investments;
- the role that a ‘stewardship’ approach can play when taking decisions about investments.
DWP and FCA consult on transaction costs disclosure for workplace pension schemes
A call for evidence on improving the disclosure of information about transaction costs in occupational and workplace personal pension schemes has been jointly published by the Financial Conduct Authority and the Department for Work and Pensions. The joint call for evidence between the DWP and the FCA explores:
- how to improve transparency in reporting information about the transaction costs and charges for members of workplace pension schemes;
- what costs to include;
- how to capture and report costs;
- whether to provide information on other factors that influence investment returns;
- how IGCs and trustees will receive costs information and whether additional disclosure requirements on other parties are necessary to enable this; and
- when, how, to whom and in what format to provide information.
Gov.UK guide on effect of pension options on Housing Benefit
This circular tells pensions savers about their options to access the whole of their defined contribution pension pot without any restrictions from the age of 55 years, from 6 April 2015 and the potential impact on Housing Benefit. Read the circular
Regulations for new pension flexibilities published
The new pension flexibilities announced at Budget 2014 will allow individuals aged 55 and over greater choice around how they access their pension savings.
To ensure that the flexibilities operate as intended from 6 April 2015, amendments are required to occupational pension schemes regulations.
These amendments will:
- ensure that the transfer process continues to operate smoothly
- ensure that trustees and managers give scheme members information about their retirement options and the new pensions guidance service from April 2015
- require scheme members who wish to exchange safeguarded benefits for flexible benefits to take ‘appropriate independent advice’ before trustees can deal with their request
- require employers to pay for advice that they have encouraged a scheme member to take up
To allow the pensions industry sufficient time to plan for these changes, DWP have published draft versions of the amendment regulations. These are still subject to final legal checks and Parliamentary approval in early March 2015, so they should not be treated as finalised. Click here for more information
77% of people approaching retirement have not taken professional pension advice
According to a new YouGov survey, conducted on behalf of Old Mutual Wealth, 77% of people approaching retirement have never sought professional financial advice in relation to their pension. However, only 17% say they understand pension income drawdown, which is set to become a more mainstream source of retirement income when the new pension freedoms come into effect in April.
Encouragingly, 40% of 45-65 year olds have already heard of the Government’s new ‘Pension Wise’ guidance service even though it is yet to launch in full. Pension Wise seeks to help those approaching retirement to understand the new rules around accessing pension savings that come into force on 6 April 2015. The service will play an important role in signposting retirees to regulated financial advice where appropriate.
Employee attitudes to pay and pensions
According to CIPD’s research into pay and pensions, only one in ten people (13%) are worried that they'll never be able to afford to leave paid employment. The research also shows that the majority of UK workers think they should double their pension contributions. Read more here
Latest research and stats from NEST
Pension saving is becoming a national priority for UK consumers, according to the recent NEST insight 2015 report. Support for auto enrolment continues to grow, with 77 per cent of consumers agreeing it's a good thing, up from 68 per cent in 2013. Even people who've opted out so far are warming to the idea - 41 per cent now say they'll stay in when re-enrolled, compared with just 19 per cent in 2013.
From April, NEST will be offering all members the option to take their retirement pots as cash from the age of 55. This is the first step in a response to the new freedoms put forward in the 2014 Budget. These are significant changes, which is why NEST is consulting on the most appropriate longer-term solutions for members.
In the immediate future, NEST Retirement Date funds maturing up to 2017 are currently targeting cash as most members' pots sizes at maturity remain small and NEST expect most will be taken as cash. From April, any member aged over 55 will be able to take their entire pot as cash and still keep saving into a pension scheme tax-efficiently.
Those who want to buy an annuity can use NEST’s online retirement tool and buy one on the open market. NEST have updated communications to point members to sources of further guidance, in particular the new Pension Wise service.
NEST also continue to signpost members to information on sources of independent financial advice.
NEST in numbers
As at 13 February 2015:
• NEST have got around 1.9 million members
• There are over 11,900 employers using NEST, plus over 1,000 self-employed members
• NEST looks after over £364 million on behalf of members
How to communicate with your members about their new retirement options
A draft essential guide to communicating with members of occupational pension schemes about pension flexibilities has been published by The Pensions Regulator to help pension scheme trustees communicate with their members about the impact and possible risks of their defined contribution retirement choices.
The guide specifies that trustees must tell members how to access Pension Wise – the government’s new free and impartial guidance service – as they approach retirement.
The guide also includes the regulator’s good practice recommendations for communicating with members about these changes. In addition, it includes some suggested wording on generic ‘risk warnings’ to help members make informed choices by alerting them to the benefits and risks of different options. It also recommends asking members to make a declaration to trustees that they have accessed Pension Wise or taken financial advice, and have read the generic risk warnings, before making their decision.
The regulator’s final guide will be published after the amended regulations come into force, expected to be 6 April 2015.
Regulator drops plans to publish a list of pension schemes available to small employers for auto enrolment
The Pensions Regulator has issued its response to consultation feedback received on proposals to publish a list of pension schemes available to all small employers for automatic enrolment. In light of the feedback, the regulator will not be pursuing its proposal for a list at this time.
Final AE threshold Order published
Under SI 2015/465:
- The earnings trigger for auto-enrolment stays at £10,000
- The lower amount in the earnings band increases from £5,772 to £5,824
- The upper amount in the earnings band increases from £41,865 to £42,385.
The amounts for periods other than one year are shown below.
|| 1 week
|| 4 weeks
|| 1 month
|| 3 months
|| 6 months
|Sections 3(6B) and 5(7B)
|Section 13(2) (referring to section 13(1)(a))
|Section 13(2) (referring to section 13(1)(b))
John W Wilson LLB(Hons) FPMI ACII, Head of Technical, JLT Benefit Solutions| Email: email@example.com