10 Jan 2017

Pensions snapshot - January 2017

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This edition of snapshot summarises some of the key legal and regulatory developments that occurred up to the end of December 2016 in relation to occupational pension schemes. The topics covered in this edition are:

 

New Year's (pensions) resolutions

It's that time of year again, when resolutions are being made and hopes are high that they'll be kept (at least until March).  A number of resolutions are being made in pensions world too – the only difference being that many of them may actually still be with us come 2018!

Pensions Resolutions to watch in 2017 include:

  1. We're going to get organised... Autumn Budget 2017 will be the first autumn Budget. There will then be a Spring Statement 2018 and Autumn Budget each year.

  2. We're going to keep up-to-date with current events…  The Pension Schemes Bill 2016/17, setting out the requirements for the master trust regulatory regime, will finish going through Parliament but may not come into force until 2018. The green paper on the future of defined benefits is also planned for 2017. This will, among other things such as considering investment methods and price inflation indices used by schemes, consider the recommendations of the Work and Pensions Committee (see article below).

  3. Maybe we'll move somewhere exotic and sunny and retire early… John Cridland CBE's review of the State Pension age is due in January. The Government then has until 7 May 2017 to issue a report on whether and how state pension age should increase after 2028.

  4. Of course, then we'll need to figure out our taxes…  HMRC extended the transitional period relating to VAT treatment for DB schemes and deduction of VAT by an employer in connection with the administration and management of pension fund assets to 31 December 2017. But will Brexit result in a further extension?

  5. Or we could perhaps spend more time with our partners… we are (and have, for some time) been expecting legislation and guidance on GMP equalisation. Consultation closes in January but don’t expect too much to follow in 2017. And while on the subject of GMPs, trustees should consider whether, following the abolition of contracting-out, they need to make a resolution before 6 April 2017 (retrospective to 6 April 2016) to allow fixed rate revaluation of GMPs to operate from the date of leaving pensionable service rather than 6 April 2016.

  6. We should really give back though and do some volunteer work with The Pensions Advisory Service…  The pension scams consultation which closes on 13 February 2017 has been issued. It covers banning pensions-related cold-calling and introduces wider powers to block suspicious transfers (see following article for more information).

  7. We should definitely eat healthier this year and put a cap on the number of coffees drunk in a day… and, from October 2017, a cap of 1% (for existing arrangements) on early exit charges from trust-based schemes where members access the new pensions freedoms before normal pension age. Oh, and a cap on the money purchase annual allowance of £4,000 where individuals have accessed their money purchase benefits flexibly. Meanwhile, the PPF compensation cap will be increased for individuals with more than 20 years' service with an employer.

  8. Perhaps we'll just try and learn something new instead… The General Data Protection Regulations are expected to come into effect in May 2018. Before then, trustees and sponsors should be considering whether they need to take any action to ensure compliance.

  9. That sure sounds like a lot, so maybe we'll just start by planning a holiday.  I've always wanted to see more of the Continent… The Prime Minister has announced her intention to trigger Article 50 of the Treaty of the European Union by the end of March 2017. This will then start the formal Brexit withdrawal process. As the UK's approach to negotiations becomes clearer, we may start to see whether the pensions investment and funding landscape starts to change.

Should be an interesting New Year - particularly if we do stick to those Resolutions!

 

HM Treasury and DWP consults on package of measures to tackle pension scams

On 5 December, HM Treasury and the DWP published a consultation paper which sets out a package of measures aimed at tackling three different areas of pensions scams:

  1. a ban on cold calling in relation to pensions to help stop fraudsters contacting individuals. It is hoped that this ban will cut off a key source of pension scams whilst also sending a clear message to consumers that they should hang-up if they are cold-called about their pension. The sorts of phone conversations that fall within the scope of the ban include offers of a ‘free pension review’ and inducements to hold certain investments within a pensions tax wrapper. The ban would be enforced by the Information Commissioner's Office.

  2. limiting the statutory right to transfer to another occupational pension scheme so that it will be possible for pension schemes to block pension transfer requests based on clear, objective criteria. The current legislation gives schemes limited scope to refuse a transfer where there are concerns regarding the legitimacy of the receiving scheme. To help address this, it is proposed that members would only have a statutory right to transfer where one of the following conditions applies:

    *  the receiving scheme is a personal pension scheme operated by an FCA-authorised firm or entity; 

    *  a genuine employment link to the receiving scheme can be demonstrated, e.g. evidence of regular earnings from that employment and confirmation that the employer has agreed to participate in the receiving scheme (this could prove difficult for those who are self-employed or on zero hours contracts); or

    *  the receiving occupational pension scheme is an authorised master trust.

    The consultation paper proposes an alternative to limiting an individual's statutory right to transfer whereby a member who wishes to continue with a transfer, despite being warned of the risks, must sign a declaration. The member would sign this to confirm that he/she understood the scam warnings and the nature of the risks that the member may be exposed to. The declaration could also be used to limit any recourse an individual has to the transferring scheme in the event that the receiving scheme is a scam; and

  3. changing the HMRC pension scheme registration process so that all new registrations must be made through active (i.e. non-dormant) companies. Registration with HMRC is only relevant for tax purposes, but evidence suggests that individuals see registration as implying a scheme is "approved" and that its investments will be appropriately regulated. The consultation paper states that there are many reasons why a company may be dormant but there appear to be few legitimate circumstances in which a dormant company might wish to register a new pension scheme.

It is not clear from the consultation paper when the measures are likely to be implemented once the consultation closes on 13 February 2017.

 

Work and Pensions Committee recommends nuclear deterrence

The Commons' Work and Pensions Committee provided an early Christmas present in the form of its report on defined benefit (DB) pension schemes. The report stems from an inquiry that probed the pensions fallout from BHS but has now morphed in to a much broader review of the flaws with DB pension schemes and their regulation. 

The report contains around 21 recommendations for the Government to take into account for the purposes of its forthcoming Green Paper on DB pensions (due in early 2017). We have digested the key recommendations below.

  1. Nuclear enhancement to the Regulator's anti-avoidance arsenal

    To encourage clearance applications and a more responsible approach to tackling DB scheme deficits, the Committee suggested adding a "nuclear deterrent" to the Regulator's moral hazard powers - enabling the Regulator to impose fines of up to three times the amount of any contribution notice or financial support direction.

    The Committee also recommended that the Government consults on proposals to require regulatory clearance for certain transactions – perhaps in situations where the size of the DB scheme deficit is higher than a fixed proportion of the value of the company.

  2. Information seeking powers

    The Committee suggested that trustees should be given a statutory right to demand timely information from sponsors.

  3. Valuations

    Various recommendations pinpointed changes to the scheme funding regime, including:

    *  a scheme-specific approach to the frequency of valuations, meaning that high risk schemes would provide valuations more frequently than low risk schemes;

    *  cutting the deadline for completing a full scheme valuation from 15 months to 9 months; and

    *  allowing recovery plans in excess of ten years as an exception rather than as the norm.

  4. Board of the Pension Protection Fund (PPF)

    A few of the recommendations related to the PPF, including:

    *  establishment of an "aggregator fund" as an option for schemes to be transferred into, which could be managed by the PPF and would reduce the obligations on scheme employers once transferred; and

    *  adjustments to the PPF levy framework to include a levy discount for meeting certain good governance behaviours (with consideration being given to ensuring the levy rules do not adversely affect SMEs and mutual societies).

  5. Improved options for distressed employers and their DB schemes

    The Committee considered that the regulated apportionment arrangement regime could be relaxed in certain areas to make it easier for scheme sponsors in genuine distress to agree approaches with the Regulator and the PPF which might deliver better outcomes than PPF compensation alone. 

    On the less fraught end of the scale, the Committee suggested that trustees should be given a statutory power to change their scheme's pension increase rules in certain circumstances so that they refer to CPI rather than RPI.

Conclusion

The report abounds with ideas. All are well-intentioned, many are good but some of the headline grabbing suggestions are disappointingly thin on practical detail.

For example, the idea of a PPF-governed aggregator fund for DB schemes papers over some considerable practical cracks, such as how you reasonably reconcile the inevitable differences in funding positions and benefit structure idiosyncrasies. In addition, despite positive noises from the Regulator and the Committee about a compulsory clearance regime, there are no concrete suggestions about the circumstances when, or thresholds at which, such a regime would bite.

We will have to wait until the Government's Green Paper on DB Pensions to see whether any of the Committee's recommendations gain traction and, if so, the all-important supporting detail about how they will be implemented.

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