Changes to Legislation effective 6 April 2015

During the course of 2014 and early 2015 we sent you Updates outlining proposed changes to legislation. These changes have now been enacted with effect 6 April 2015 and we felt we should write to you again to remind you of the changes which have taken place.

The main changes are:

1. For members who have not yet taken their Retirement Benefits.

From a certain minimum age (usually age 55) you can elect to apply your individual fund to pay 25% (this may be more for certain members with protected lump sums greater than this as at 5 April 2006) as a tax free lump sum with the balance forming a drawdown fund from which you can elect to draw income from time to time to time-subject to income tax which may take you into a higher income tax bracket. No maximum rate under this so-called “flexi access drawdown” applies-subject of course to the amount held in your individual fund.

Legislation also permits you to elect to take your individual fund as a so-called Uncrystallised Funds Pension Lump Sum. 25% of the value of your individual fund (subject to a maximum of 25% of the Lifetime Allowance-please note that this is inclusive of all pension arrangements you have) will be tax free and the balance will be taxed as income.

When an amount is paid from your flexi-access drawdown fund or an Uncrystallised Funds Pension Lump Sum is paid your annual allowance for tax relievable contributions to defined contribution funds reduces from £40,000 per annum to £10,000 per annum.

You can elect to “phase” the taking of your retirement benefits.

If you elect, a scheme pension and/or the purchase of a lifetime annuity can be paid instead of flexi-access drawdown or an Uncrystallised Fund Lump Sum.

2. For members who have already taken/“crystallised” their benefits before 06/04/2015 and are in a so-called “Capped Drawdown” arrangement.

You can continue in the capped drawdown arrangement and will be subject to a maximum permitted drawdown each pension year as in the past. Triennial (or annual from the age of 75) reviews of the maximum permitted drawdown will continue. As long as any drawdown pension payment does not exceed the maximum permitted for a pension year you will retain an annual allowance of £40,000 per annum. The “annual allowance” is the maximum amount, across all your pension arrangements that can be contributed (or accrued in the case of defined benefit funds) and receive tax relief.

If you do not want to remain in your existing capped drawdown arrangement you can elect to enter a flexi access drawdown arrangement and be entitled to draw as much income as you wish subject to a maximum of your individual fund, and income tax. As soon as an amount is paid from your flexi access drawdown arrangement the annual allowance for defined contribution pension schemes of which you are a member reduces to £10,000 per annum.

You retain the right to elect a scheme pension or the purchase of a lifetime annuity instead of capped drawdown or flexi-access drawdown pension.

3. Changes to the Taxation of Death Benefits

The Trustees will be guided by the member’s Expression of Wish/Nomination of Beneficiary Form but retain the discretion to pay the balance of the member’s individual fund at date of death as they decide to beneficiaries. Benefits can be paid in lump sum form, drawdown pension form, scheme pension form or by the purchase of an annuity, or by any combination of these forms of benefits.

The categories of person who can now potentially “inherit” a member’s individual fund

through payment of pension benefits have been extended. Before 6 April 2015 only a dependant/s’ pension on death could be paid (normally to a spouse or financially dependent child under 23). Following the changes, in addition to a dependant, a “nominee” or “successor” can now also “inherit” a member’s fund (but this is not currently applicable for members in receipt of a Scheme Pension at date of death).

A nominee can be anyone who has been nominated by you as a member, other than a dependant. If no nomination has been made, and there are no dependants the Trustees/Scheme Administrator can nominate an individual to become entitled.

A successor can be anyone nominated by the previous beneficiary, or if no nomination has been made by the beneficiary, by the Trustees/Scheme Administrator.

3.1 Benefits On death before age 75:

On death before attaining age 75, the death benefit/s (both lump sum payments to beneficiaries, and/or dependants’, nominees’ and successors’ drawdown pensions) are now tax free (including Inheritance Tax) up to the value of your Lifetime Allowance-but see the note below re members in a Scheme Pension arrangement. If you do not have Enhanced Protection, Primary Protection, Fixed Protection 2012 and Fixed Protection 2014 your Lifetime Allowance is the Standard Lifetime Allowance which is currently £1.25 million.

3.2 On death after age 75:

On death after age 75 lump sum death benefits will be taxed at 45% for payments made in the 2015/16 tax year. After 5 April 2016 it is proposed that the tax will be at the recipient/s’ income tax rate. If the Trustees direct that drawdown pensions are to be payable to beneficiaries (dependants, nominees and successors) these will be taxed at the recipients’ income tax rate.

3.3 Comment

It can be seen from the above that there may now be far greater advantages in retaining funds within the pension fund as these can be “passed on” in a tax efficient manner to nominated beneficiaries by creating flexi access drawdown funds for them with the amount of your individual fund held in the fund when you die. The funds left in the pension fund will also continue to receive a largely tax free build up. You should seek advice if you are unsure of your options. The legislation may of course change in future.

3.4 Members receiving a Scheme Pension

Only a dependant’s flexi access drawdown pension can be paid on death both before and after age 75-no flexi drawdown arrangements can be set up for a nominee or successor. Lump sums can be paid, at the Trustees’ discretion to beneficiaries.

4. Expression of Wish/Nomination of Beneficiary in the Event of Death

You should give thought to updating your Expression of Wish form, now known as a Nomination of Beneficiary form, which will guide the Trustees on how you wish funds held in the scheme at your date of death to be utilised. Please note that the Trustees cannot establish a nominee flexi access drawdown fund on your death for an individual who is not a dependant if a dependant (usually your spouse or children financially dependent on you aged 23 years or under) is still alive, unless you have nominated that individual.

5. Revised Rules

We believe that the new legislation may override the provisions of the scheme’s Rules. However, as in the past, you should give consideration to updating the Rules governing your scheme so that they mirror as close as possible the existing legislation. We can provide an updated set of Rules at a cost of £400 plus VAT.

6. Proposed Changes from 6 April 2016

6.1 Reduction in Lifetime Allowance to £1million.

The Lifetime Allowance is likely to be reduced to £1 million from 6 April 2016, and from 6 April 2018 it is proposed that it will increase annually in line with Consumer Price Index (CPI).

6.2 Members with Annuities.

It is proposed that if you have purchased a lifetime annuity that you will be able to
trade/assign this on the open market subject to the agreement of the annuity provider. The proceeds would be taxed as income.

Please do not hesitate in contacting your usual consultant if you have any queries, or wish to discuss the changes in more depth.

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.

In his last Budget before the election, Chancellor George Osborne has reduced the Lifetime Allowance (LTA) again and published a call for evidence on creating a secondary market for annuities.

With effect from 6 April 2016, the LTA is reduced from £1.25 million to £1 million. It will then increase annually in line with CPI from 6 April 2018. HMRC analysis shows that less than 4% of individuals currently approaching retirement have a pension pot worth more than £1 million, so the change will affect only the wealthiest pension savers. The Annual Allowance (AA) is unchanged.

A few days earlier, Ed Miliband pledged to reduce both the LTA and AA to fund lower tuition fees for university students. He said that Labour would also restrict tax relief on pension contributions for those earning more than £150,000 a year from 45% to 20%. This led to the Association of Consulting Actuaries (ACA) sending an open letter to all of the political parties calling for no “knee jerk” changes to an already complex system.

The government’s consultation on creating a secondary market for annuities aims to give people who have already bought an annuity the same flexibility in how they access the value of their savings as those taking their pension after April 2015.

From April 2016, people will be able to sell their annuity income to a third party, subject to the agreement of their annuity provider. The proceeds of the sale could then be taken directly or drawn down over a number of years, and would be taxed at their marginal rate. It is thought that purchasing the right to annuity payments could be attractive for a range of institutional investors.

Guide to retirement communications

The Pensions Regulator has published a draft guide for trustees, administrators and advisers of occupational pension schemes that provide flexible benefits (DC including AVCs and cash balance benefits) on changes to the disclosure regulations in relation to retirement communications.

From 6 April 2015, where the disclosure regulations apply, trustees must automatically tell affected members how to access the new government service Pension Wise. This must be at least four months before the member reaches their normal retirement date or, if the member is over or within four months of minimum pension age (currently 55), when there is contact with them about taking their flexible benefits. In addition to signposting Pension Wise, the member must also be given information about the options available to them within the scheme, and potentially from other pension providers if they were to transfer.

The guidance includes generic risk warnings on the four main retirement options (annuity, flexi-access drawdown, lump sums at different stages and cashing in the whole pot) which the regulator suggests should be sent at the point the member is required to make a final decision about how to take their retirement benefits (i.e. later than the initial information). The member should also be asked to confirm whether they have received Pension Wise guidance or regulated advice and that they have read the generic risk warnings.

Company news

The chairman of the consortium that has bought BHS for £1 has said that the retailer’s pension fund is the biggest challenge facing the company. The fund is reported to have a deficit “significantly higher than £100m” with the company currently paying contributions of £10m per year.

Unions at Tata Steel are to ballot workers on industrial action over plans to close the company’s final salary scheme and replace it with a defined contribution scheme. The move would affect around 17,000 workers.

The Pensions Regulator has banned two individuals and a trustee company, Avalon Pension Trustees Limited, from acting as pension trustees, following a pension scams investigation.

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.

Government unveils Pension wise

The government has unveiled the name and logo to be used for the new guidance service that Chancellor of the Exchequer George Osborne promised would accompany the pension freedoms coming into effect for defined contribution schemes in April 2015.

Pension wise (www.gov.uk/pensionwise) will provide free and impartial guidance for savers approaching retirement, either online, face to face or by telephone. The service will be delivered by the Citizens Advice organisations and The Pensions Advisory Service.

Economic Secretary to the Treasury Andrea Leadsom said “We want people to be empowered to make informed and confident choices. Pension wise is a distinctive brand, making it easy for consumers to know where to go for help and guidance.”

In order to protect consumers from imitators of the service and to ensure the guidance brand is trusted, the government will make the imitation of Pension wise illegal.

Consumers can now register to get early access to the service and give feedback about how the service could be improved.

Pensions Minister proposes further changes

Pensions Minister Steve Webb has floated the idea that existing pensioners should be able to cash in their annuities, in order to have the same flexibilities as will be available to new retirees after April 2015. The government has already announced that beneficiaries under a joint life annuity will be able to receive future payments tax free where the annuity holder dies before age 75, consistent with the treatment for post 2015 drawdown arrangements. Neither of these changes are likely to apply to defined benefit schemes.

ACA survey of smaller firms

The Association of Consulting Actuaries (ACA) has published a survey report into pension savings at smaller employers (those employing 1-249 employees). The report found that most employers were auto-enrolling employees that were not previously in pensions into a multi-employer scheme such as NEST with contributions at or close to the minimum rate of 1%. Most employers with pre-existing schemes have kept those arrangements for existing employees, although 15% have closed them in favour of new arrangements.

The report also calls on the government to review auto-enrolment policy after the election to avoid potential financial difficulties for smaller employers caused by the increases to minimum contributions scheduled for 2017 and 2018. A copy of the report is available at <ahref="http://www.aca.org.uk">www.aca.org.uk.

Company news

The trustees of the Nortel Networks UK Pension Plan, supported by the Pension Protection Fund, have secured £340m of funding from failed Canadian parent company Nortel Networks Limited (NNL) but have failed in their attempts to secure further funding based on the Financial Support Direction served by the Pensions Regulator on NNL (and other Nortel group companies) in 2010.

Tesco has announced plans to close its defined benefit scheme to new and existing members as part of a raft of measures aimed at savings the company £250m per year. The scheme has around 350,000 members, of which around 200,000 are current employees.

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.

FCA retirement income report published

The Financial Conduct Authority (FCA) has published an interim report on its retirement income market study which seeks to assess whether competition in the annuity market is working well for consumers. The market study follows a thematic review of annuities which the FCA completed earlier this year.

The provisional findings of the report are that the market is not working well and that many consumers are missing out on a higher income by not shopping around or by not purchasing the best annuity for their circumstances. The report proposes the following remedies:

• Requiring firms to make it clear to consumers how their quote compares to other providers on the open market;

• Recommending that firms take into account the effect of how options are presented on consumers’ decision-making;

• Working with Government to develop an alternative to the current “wake-up” pack and other at-retirement communications;

• In the longer term, recommending the development of a “Pensions Dashboard” which would enable consumers to view all their pension savings (including their state pension) in one place;

• Continuing to monitor the market using a combination of consumer research, market data and on-going sector supervision.

Critics accused the FCA of “sweeping past mis-selling under the carpet”. Although the annuity market is likely to be significantly affected by the Government’s reforms due to come into effect in April 2015, the FCA’s analysis shows that for people with average-sized pension pots, the right annuity purchased in the open market offers good value for money relative to alternative drawdown strategies.

40th NAPF Annual Survey

The National Association of Pension Funds (NAPF) has published its 40th Annual Survey, illustrating the huge changes that have taken place in the pensions landscape since its first survey in 1975.

For the first time, active membership of DC schemes now exceeds the active membership of private sector DB schemes. With the continued roll out of automatic enrolment, this trend is set to continue. However, once deferred and pensioner members are included, DB schemes remain the dominant force.

The average contribution rate for DC schemes is 11.7% (down from 12.5% in 2013). This consists of 7.6% from the employer and 4.1% from the employee. Many new automatic enrolment schemes have contributions at the minimum rate.

Automatic transfers to begin in 2016

Pensions Minister, Steve Webb, has announced that automatic transfers, or “pot follows member”, will begin in Autumn 2016. The policy aims to make it easier for people to keep their pension savings in one place when they change employers. The government will publish further information about the implementation model and timetable in early 2015, ahead of consulting on draft regulations.

Company news

Pilots at Monarch Airlines face losing £10m in benefits because of the effect of the Pension Protection Fund (PPF) compensation cap. Monarch’s pension fund transferred to the PPF as part of the sale of the airline to Greybull Capital. However, many of the pilots’ pensions are above the cap of £26,572 pa for retirement at age 55.

Legal & General have secured the buyout of 22,000 pensioners of the TRW Pension Scheme covering £2.5 billion of liabilities. The buyout is the largest such transaction in the UK to date.

Hanover Pensions would like to wish all of its clients and contacts a merry Christmas and a prosperous New Year.

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.

DC governance and charge cap confirmed

The Department for Work and Pensions (DWP) has published a Command Paper “Better Workplace Pensions: putting savers’ interests first” which builds on its consultation in March 2014 and confirms that a charge cap of 0.75% of funds under management will be introduced on the default funds of qualifying workplace pension schemes from April 2015.

Member-borne payments for advice to employers – consultancy charges – will be banned from workplace personal pensions from April 2015 and from all schemes, along with commission payments and active member discounts, from April 2016. The level and scope of the charge cap will be reviewed in 2017.

The paper also confirms that the trustees of money purchase occupational schemes will have new duties to ensure that default arrangements are designed in members’ interests and kept under regular review, that core financial transactions are processed promptly and accurately and that they assess the value of transaction costs and charges borne by scheme members.

Providers of workplace personal pensions will need to establish Independent Governance Committees (IGCs) with similar duties and there will be new independence requirements for the trustees of multi-employer master trusts.

Separately, the government has announced that, for joiners from October 2015, short service refunds from money purchase occupational schemes will only be permitted for leavers within the first 30 days of membership rather than the current 2 years.

Regulator issues first AE fines

The Pensions Regulator’s latest automatic enrolment compliance and enforcement bulletin (www.thepensionsregulator.gov.uk/docs/automatic-enrolment-use-of-powers-september-2014.pdf) has shown that enforcement activity is increasing, with the first employers being fined for not meeting their duties. Three fixed penalty notices were issued and 163 compliance notices.

The period coincided with a significant rise in the number of employers reaching their deadline to complete their declaration of compliance, with thousands of medium sized employers (150-250 employees) reaching their staging date in April 2014.

New appointments

Lesley Titcomb has been announced as the new Chief Executive of the Pensions Regulator with effect from 2 March 2015. Ms Titcomb is currently Chief Operating Officer and Board member of the Financial Conduct Authority (FCA). She originally qualified as a Chartered Accountant with Ernst and Young.

Otto Thoresen has been appointed as the next Chair of the National Employment Savings Trust (NEST) Corporation commencing on 1 February 2015. Mr Thoresen is currently Director General at the Association of British Insurers (ABI).

Company news

Following the recent settlement in the case of the Lehman Brothers UK pension scheme, a similar deal has been reached for the MG Rover Group senior pension scheme which is now expected to avoid entry into the Pension Protection Fund (PPF).

Airline group, Monarch, has been sold to turnaround specialist Greybull Capital for a nominal sum, with the PPF taking over the pension liabilities in return for a 10% stake in the business. The estimated pension shortfall is £660m.

The Pensions Regulator has published “section 89” reports on the Kodak Pension Plan which has so far (mainly) avoided entry to the PPF and the UK Coal pension schemes (which haven’t).

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.

Chancellor abolishes 55% ‘death tax’

In his speech to the Conservative party conference, Chancellor George Osborne announced that the current 55% tax on defined contribution pension funds passed on at death will be abolished.

From April 2015, individuals with a drawdown arrangement or with uncrystallised funds will be able to nominate a beneficiary to pass their pension to when they die. If the individual dies before they reach the age of 75, the beneficiary will pay no tax, whether it is taken as a lump sum or as drawdown. If the individual dies after age 75, tax will be at the beneficiary’s marginal rate, or at 45% if it is taken as a lump sum. From 2016-17, the Government also intends to replace the 45% with the beneficiary’s marginal rate.

Currently, if the individual is under 75 and has uncrystallised funds, there is no tax payable (subject to the lifetime allowance). After age 75 or once benefits have started to be taken, an individual’s spouse or dependant can receive a pension or drawdown, taxed at their marginal rate, but any other beneficiary (apart from a charity) is taxed at 55%.

The policy is expected to cost around £150 million per annum. Mr Osborne said: “People who have worked and saved all their lives will be able to pass on their hard-earned pensions to their families tax free. The children and grandchildren and others who benefit will get the same tax treatment on this income as on any other, but only when they choose to draw it down.”

PPF levy proposals to go ahead

The Pension Protection Fund (PPF) has announced that its proposals for the 2015/16 levy (see the June 2014 issue of Update) are to go ahead largely as planned. The PPF has also set the levy estimate for 2015/16 at £635m, nearly 10% lower than the 2014/15 estimate (although this reduction is not due to the new rules – it is the same amount the PPF would have expected to collect if it had made no changes).

Changes that have been made since the consultation include:

• Reducing ‘scorecard arbitrage’ by limiting the ‘consolidated’ scorecard to genuinely large or complex companies. However, companies filing abbreviated accounts at Companies House will be able to voluntarily share full accounts with Experian;

• Mortgages that are not relevant to insolvency risk will be excluded;

• Asset backed contributions involving assets other than UK property will be recognised, although only to the extent they are worth in the event of insolvency.

Trustees and employers are urged to check their data and scores at www.ppfscore.co.uk before they start to be used from 31 October 2014.

Auto-enrolment research published

Research published by the Pensions Regulator shows that 20% of small and almost half of micro employers do not know their staging date for automatic enrolment. This is despite other data released by NEST suggesting that the majority of these employers support the idea of workers having access to a workplace pension. www.thepensionsregulator.gov.uk/docs/employer-automatic-enrolment-research-spring-2014.pdf

Company news

The Wedgwood Collection of art, ceramics and paintings has been saved by public donations. The collection faced being broken up to meet the deficit in the Waterford Wedgwood pension scheme, which arose when the rest of the employers in the scheme went into administration in 2009. The museum remained solvent and became the “last man standing”.

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.

NEST restrictions to be lifted

Restrictions on the annual amount of contributions and on transfers to and from the National Employment Savings Trust (NEST) are to be lifted.

From 1 April 2017, members will be able to contribute (or have contributions paid on their behalf) of more than £4,600 per annum. The government has the option of permitting transfers from 1 October 2015 to coincide with the introduction of automatic pension transfers on changing jobs.

The restrictions were originally imposed to minimise any competitive advantage gained by NEST through its state aid. The European Commission has confirmed that it will not oppose the move.

Minister for Pensions, Steve Webb, said: “This is a common sense decision which will help people save and give certainty and confidence to employers choosing to use NEST. By convincing Europe to support us on this, we’ve achieved a victory for consumers.”

There are currently more than 1.5 million workers who save into workplace pensions through NEST, with that figure expected to rise to up to 4 million over the next 3 years.

New criteria for scheme administrators

From 1 September 2014, HM Revenue and Customs (HMRC) have new powers to refuse to register a new pension scheme or de-register an existing registered pension scheme where they believe that the scheme administrator (in the HMRC sense) is not a fit and proper person. The change is in response to concerns over pension liberation.

Schemes that are de-registered will be subject to a 40% tax charge on the aggregate value of the assets held within the scheme. Guidance on the new criteria may be found at www.hmrc.gov.uk/pensionschemes/fitproper-guidance.pdf.

VAT on investment services

Decisions made recently by the Court of Justice of the European Union (CJEU) have raised a number of questions relating to the VAT treatment of services provided to pension funds, in particular investment management services. The cases of PPG Holdings, a Dutch company (C-26/12) and ATP Pension Services, a Danish company (C-464/12) seem to conflict with the earlier UK case of Wheels Common Investment Fund Trustees and Others (C-424/11).

Wheels and PPG involved defined benefit schemes whereas ATP involved a defined contribution scheme. In ATP the CJEU held that some of the services supplied could qualify for exemption on the basis that the scheme in that case was a ‘special investment fund’. Clients are therefore advised to contact their investment managers who may in turn wish to make a protective claim as VAT can only be recovered retrospectively for a maximum of four years. HMRC will be issuing further guidance on this matter in the autumn.

Company news

The People’s Pension has become the first ‘master trust’ to receive independent assurance of compliance with the regulator’s ‘quality features’ for defined contribution (DC) schemes under the voluntary framework developed by the Institute of Chartered Accountants of England and Wales (ICAEW).

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.

Draft Taxation of Pensions Bill

HM Revenue and Customs have published a draft Taxation of Pensions Bill dealing with the tax changes required for the new flexible access for defined contribution pension pots. Other aspects, such as the associated guidance guarantee, are being introduced via amendments to the Pension Schemes Bill which is already working its way through Parliament.

The HM Revenue and Customs consultation may be found at www.gov.uk/government/publications/draft-legislation-the-taxation-of-pensions-bill.

Auto-enrolment compliance update

Figures published by the Pensions Regulator in its monthly ‘declaration of compliance (registration) report’ show that more than four million workers have now been automatically enrolled into a workplace pension.

Its first quarterly ‘compliance and enforcement bulletin’ also shows that the regulator used its powers (to ensure employers comply with their automatic enrolment duties) on twenty three occasions up to the end of June this year.

Both documents, along with other reports on the impact of automatic enrolment may be found at www.thepensionsregulator.gov.uk/doc-library/research-analysis.aspx.

Settlement reached in Lehman Brothers case

A settlement has been reached in the case of the Lehman Brothers UK pension scheme which will allow the full retirement benefits of members to be bought out, thus avoiding the scheme’s entry into the Pension Protection Fund (PPF). The settlement figure (the estimated buy-out shortfall) is expected to be £184 million, the largest sum paid to a scheme as a result of the regulator’s actions so far.

Lehman Brothers became insolvent in September 2008. Two years later, the Pensions Regulator imposed Financial Support Directions (FSDs) on various companies within the group. In July 2013, the Supreme Court ruled that FSDs were effective against insolvent targets, and later that year the High Court ruled that the regulator was not limited to the shortfall amount when imposing FSDs on multiple targets.

Interim chief executive of the Pensions Regulator, Stephen Soper, said: “This is a pleasing and appropriate settlement for the 2,466 members in the Lehman Brothers pension scheme, and shows we will not hesitate to pursue regulatory action to protect members’ benefits and PPF levy payers where we believe it is appropriate.”

Details of the case and the settlement are available at www.thepensionsregulator.gov.uk/docs/section-89-lehman-brothers.pdf.

Company news

The trustees of the PGL (Phoenix Group, formerly Pearl Group) Pension Scheme have entered into a £900m longevity swap with Phoenix Life Limited. This follows transactions for BT and Aviva which also involved an insurance vehicle associated with the scheme sponsor.

Rothesay Life has completed the £500m buy-out of the Western United Group Pension Scheme, a scheme for current and former employees of the Vestey Group. The scheme has around 14,000 members.

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.

Pensions ‘freedom and choice’ to proceed

The government has decided to proceed with the changes, announced in the Budget, to how people can access their pension savings at retirement. In its response to the consultation, the government has confirmed:

• A permissive statutory override will be introduced to ensure that all defined contribution schemes are able to offer the increased flexibility if desired, without the need for an immediate change to the scheme’s legal documents (although communication to members will need to be carefully considered);

• Transfers from private sector defined benefit schemes (and funded public sector schemes) will continue to be allowed, subject to the member having taken advice from an independent financial adviser. The government also intends to consult on allowing defined benefit members to access their savings directly rather than having to transfer to a defined contribution scheme first;

• The annual allowance for further tax-relieved pension savings for those who choose to draw down more than their tax-free lump sum will be reduced to £10,000. This aims to prevent the ‘recycling’ of pension contributions in order to obtain multiple tax relief;

• The minimum age at which people can access their savings will increase from 55 to 57 in 2028 and remain 10 years below state pension age thereafter. The minimum age for trivial commutation will be lowered from the current age of 60.

The much debated ‘guidance guarantee’ remains, although it will now be provided by independent organisations such as the Pensions Advisory Service (TPAS) and the Money Advice Service (MAS). The Financial Conduct Authority (FCA) will be responsible for setting standards for this guidance. Given the importance of the above changes, please contact your consultant to discuss them further.

NEST reaches one million members

The National Employment Savings Trust (NEST) has published its latest annual report which shows the extent of the impact of auto-enrolment. NEST now has over one million members, compared with 80,000 at the same time last year, and is working with some 4,700 employers compared with 347 last year.

Smaller employers now need to get to grips with their auto-enrolment duties which are approaching rapidly. Interestingly the level of employee ‘opt outs’ is somewhat lower than expected. Employers clearly need to factor these costs and future increases in their contributions into their remuneration package and financial plans. Again please contact your consultant if you wish to discuss these

New government appointments

The Department for Work and Pensions (DWP) has announced that David Harker CBE will be the new Chair of the Pensions Advisory Service (see item overleaf on the government’s ‘guidance guarantee’). Mr Harker has been a member of the Financial Conduct Authority Board since 2013 and was previously the chief executive of Citizens Advice.

The DWP has also appointed Dr Ros Altmann CBE as Business Champion for Older Workers. Her appointment marks the latest step in the government’s drive to support over-50s in the UK labour market.

Company news

The BT pension scheme has put in place a longevity swap covering £16 billion of the scheme’s liabilities using an insurance company created by itself and Prudential Insurance Co of America. The arrangement is the biggest of its kind in Britain.

Auto-enrolment provider NOW: Pensions has announced changes to its lifestyle investment strategy in light of the new pension flexibilities being introduced by the government. Previously, members’ funds were switched into a fund targeting annuity purchase as the member approached retirement. Going forward, they will be transferred to a cash fund.

This Update should not be relied upon or taken as an authoritative statement of the law. For more information, please contact us using the details shown.

Regulator finalises DB code of practice

The Pensions Regulator has published the final version of its code of practice on defined benefit (DB) funding. Key changes to the code following the consultation (see the December 2013 issue of Update) include:

• Changing the emphasis from repaying deficits as quickly as reasonably affordable to considering the appropriate period in which to do so;

• Accepting that there can be potential rewards from upside risk;
• Ensuring that proportionality is properly referenced throughout;

• Renaming the ‘Balanced Funding Outcome’ the ‘Funding Risk Indicator’;

• Making clear that the regulator will continue to engage with some small schemes.

The regulator has also published its third annual funding statement which provides market commentary and direction for schemes with valuation dates between 22 September 2013 and 22 September 2014. The statement recognises that with interest rates continuing to be low, some schemes may find themselves in “challenging” positions.

Finally, there is an ‘essential guide’ to the DB code which provides an overview of the fundamental principles and the risk themes of funding, employer covenant and investment. www.thepensionsregulator.gov.uk/docs/essential-guide-db-code-trustees.pdf

PPF consults on next triennium

The Pension Protection Fund (PPF) has launched a consultation on its plans for the levy over the next triennium (2015/16 to 2017/18). The key change is the introduction of a new, PPF-specific insolvency risk model developed by Experian. This model results in a significant redistribution of the levy of around £230 million, with more levy payers seeing a fall in their levy than an increase. The consultation seeks views on whether schemes facing a significant increase should be given some form of transitional protection (which would be paid for by an increase in the scheme-based levy multiplier).

The consultation also proposes new approaches for the treatment of asset backed contributions, parental guarantees and associated last man standing schemes.

Queen’s Speech 2014

The Queen’s Speech on 4 June included two Pensions Bills, one to give effect to the changes to the pension tax rules announced in the Budget and the other to enable ‘defined ambition’ schemes, that share more of the risk between parties.

In particular, the Bill would enable ‘collective’ schemes that pool risk between members, potentially giving greater stability around pension outcomes – although it is fair to say that the initial reaction was lukewarm!

Meanwhile, the Pensions Act 2014, which will bring into force the single tier state pension, abolish salary-related contracting-out and enable a framework for state pension age to be reviewed in future, has received Royal Assent. The Act also introduces the Pensions Regulator’s new statutory objective to minimise any adverse impact on the sustainable growth of an employer when applying its scheme funding powers.

Company news

Pension Insurance Corporation (PIC) has concluded a pension insurance buy-in with the Trustee of the Total UK Pension Plan. The transaction covers £1.6 billion of pensioner liabilities, representing 60% of the plan’s total liabilities.

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