current i s s u e s i n pensions

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1 health wealth career current i s s u e s i n pensions trustee edition november 2015 health wealth career 1

2 in this edition COURT OF APPEAL DECISION ON SAME-SEX SURVIVOR S PENSION 2015 MORTALITY MODEL PUBLISHED 4 BANNING MEMBER-BORNE COMMISSION PAYMENTS 5 state pension top-up scheme 6 REPAYMENT OF SURPLUS 6 NEGATIVE INFLATION 7 vat update 7 DEFINED AMBITION AND AUTOMATIC TRANSFERS ON HOLD 8 Dates to remember 9 3 health wealth career 2

3 COURT OF APPEAL DECISION ON SAME-SEX SURVIVOR S PENSION HOT TOPICS Trustees and employers who decided not to fully equalise survivor benefits for civil partners and same-sex spouses may have been monitoring the progress of the Walker v Innospec case. The case revolved around an appeal by Mr Walker, a member of his former employer s (Innospec) pension scheme, whose same-sex spouse would receive a survivor s pension of around 500 p.a. on his death, compared to a pension of over 40,000 p.a. if Mr Walker had been married to someone of the opposite sex. In a much anticipated decision, the appeal was dismissed by the Court of Appeal, which concluded that pension schemes are not legally required to provide same-sex survivors pensions in respect of the period prior to 5 December The Court of Appeal held that the UK exemption allowing pension schemes to restrict same-sex survivor benefits in this way is not incompatible with EU law. It is too early to say whether this concludes the debate over the level of survivor benefits to be provided in this case. Mr Walker may seek leave to appeal to the Supreme Court, or even consider bringing an action based on contravention of his human rights. It is worth noting that the Government carried out a review in 2014 of the differences in survivor benefits provided by occupational pension schemes for opposite-sex and same-sex couples in legal relationships. The Government said that it would consider the findings of the review very carefully before making a decision on whether the law should be changed. Given the costs involved in the full equalisation of past-service rights, the Government may conclude that the Court of Appeal judgement is a welcome confirmation of the legal validity of the exemption. The Marriage (Same Sex Couples) Act 2013 provides that same-sex married couples are entitled to the same survivors benefits as those available to civil partners. As a result, schemes may exclude benefits relating to service before 5 December 2005 when calculating survivors pensions for same-sex spouses, in the same way that they may do so for civil partners. There are no legal barriers to the trustees and employer agreeing to modify their scheme to provide the same survivors benefits to civil partners and same-sex spouses as are available to opposite-sex spouses, irrespective of whether the pension was accrued before or after 5 December health wealth career 3

4 2015 MORTALITY MODEL PUBLISHED FOCUS ON DB The Continuous Mortality Investigation (CMI) has published the latest annual update to its mortality improvements projection model, which is used by defined benefit scheme trustees across the industry to derive life expectancy assumptions. The previous version of the model took into account data on the number of deaths in England and Wales up to the end of September The CMI has now analysed data from October 2014 to July 2015 inclusive. Over the whole of 2014, rates of mortality were lower than in However, due to a high number of deaths in early 2015, thought to be linked in part to the poor performance of the 2014/15 winter flu jab, it is estimated that mortality rates will actually be higher in 2015 than in It is the biggest increase in actual mortality rates over a year since the inception of the CMI model in The 2015 version of the CMI model therefore produces life expectancies that are lower than the 2014 version for males and females at all ages. History has shown that bad years for mortality are frequently followed by good years, and vice versa. For example, a 4% improvement in mortality rates was widely reported for 2011, but improvements for 2012 and 2013 were close to zero. It is perfectly feasible that data for 2016 will show significant improvements in mortality rates. At a headline level, simply switching to the new 2015 version of the model compared to the 2014 version would typically reduce the value placed on pension scheme liabilities, perhaps by as much as 1%; although the actual impact for any scheme will depend on the gender, ages and pension amounts of its members. The mortality table adopted by trustees is a crucial assumption amongst the many that must be made to place a present value on pension scheme liabilities, and should be based on expected developments over the long term. Changing the mortality assumption as a reaction to the latest data will not affect the ultimate cost of the scheme, only the timing of when those costs are recognised. Trustees should therefore consider carefully whether it is appropriate to adopt the 2015 version of the model. Key questions include: If life expectancy assumptions are deliberately prudent, is it appropriate to remove some of this prudence? And is this latest data a oneoff, or the start of a trend? INTRODUCING MERCER PENSION RISK EXCHANGE At Mercer we believe that you should be able to access the information you really need to set strategy for your UK defined benefit pension scheme. With this in mind, we have launched the Mercer Pension Risk Exchange, a market-leading innovative product for trustees and employers considering a full or partial buy-in or buyout. The Exchange is a sophisticated monitoring and pricing platform that offers a new online marketplace, including access to exclusive insurer proposals. It supports all types of buy-in or buyout and is the only solution that provides genuine scheme-specific pricing, based on detailed scheme disclosures, which is produced directly by insurers on a regular basis and visible in real time. For more information visit our website or speak to your Mercer consultant. health wealth career 4

5 BANNING MEMBER-BORNE COMMISSION PAYMENTS FOCUS ON DC In March 2014, the Government announced that it intends to prohibit the cost of commission paid to an adviser from being imposed on pension scheme members. A consultation has now been launched on how best to regulate to prevent such charges. The intention is to ban commission under new agreements from April 2016 and to consult on regulations covering existing commission agreements later in The ban will apply to occupational pension schemes that provide money purchase benefits (including additional voluntary contribution arrangements) and are used as qualifying schemes for auto-enrolment. The consultation sets out two options for preventing member-borne commission payments: 1) placing a duty on trustees to ensure that members are not subject to such charges, or 2) placing the duty on service providers. Under option 1), trustees would have to ensure that no new contracts entered into contain member-borne commission charges. For any existing contracts, trustees would have to use their best endeavours to ensure that no such payments are present, which could, for example, involve renegotiating the terms of the contract. Compliance under both options would be enforced by the Pensions Regulator. The regulations will apply to all investment options within a scheme - not just the default - but will not prevent the members or employer from choosing to pay for advice. The intention is that the ban will not cover advice or services provided by an adviser to trustees, and so trustees will be allowed to continue to use member-borne charges to pay for such advice. The consultation closes on 27 November. trustee training Research by Mercer has found that a high percentage of UK pension scheme trustees lack confidence in making key decisions. Our Confident Trusteeship courses, which have received PMI Accreditation recognising their high quality, are designed to build this confidence. They go beyond technical knowledge and focus on developing the skills needed to be a more effective trustee. Alternatively, our Toolkit Blitz courses are aimed to ensure understanding of the Pensions Regulator s Trustee Toolkit. We are also planning to introduce a short introductory course covering both defined benefit and defined contribution schemes. For more information on upcoming Mercer events, see health wealth career 5

6 state pension top-up scheme state benefits Trustees who have been keeping members up to date on the upcoming State Pension reforms may also wish to consider informing members about a scheme launched in October that allows anyone currently receiving a State Pension, and those reaching State Pension date before 6 April 2016, to buy extra State Pension of up to 25 a week. The scheme will remain open for 18 months and the cost will depend on both the amount of extra pension and the age of the member. The lump sum payment will be classed as a new type, class 3A, of National Insurance contribution. In most cases, surviving spouses and civil partners will be able to inherit at least 50% of the extra pension and it will increase in line with the Consumer Prices Index. Individuals who don t have a full NI contribution record can continue to use the current system of voluntary Class 3 NI contributions to qualify for a full State Pension. Individuals also have the option of deferring their State Pension (or suspending it, if already in payment) and subsequently receiving a higher amount when they do take it. The Government will increase the State Pension by 1% for every 5 weeks it is deferred, for anyone with a State Pension date before 6 April If an individual buys a State Pension top-up this can also be deferred and will increase in the same way. The decision as to whether to pay for a State Pension top-up will depend on an individual s financial circumstances, NI contribution history, and state of health. The Government recommends that people seek independent financial advice. repayment of surplus LEGISLation Under the Pensions Act 2004, ongoing schemes that had the power to repay surplus to an employer as at 5 April 2006 may lose that power, unless a resolution is actively made by the trustees before 5 April Many trustees have already made such a resolution; but for those who haven t, and who wish to retain the option, action is now required. In order for a resolution to be effective, trustees will have to give notice to members and employers on or before 5 January 2016 to meet the deadline. As the resolution can only be made once, trustees should discuss the scope of the resolution with their legal advisors and the employer before making it. WE WORK WELL WHEN WE RE WELL FOR WORK That s the clear conclusion of the 2015 Britain s Healthiest Company awards, which have again shown that employers who value the health and wellbeing of staff reap benefits in productivity. Now in its third year and one of the biggest studies of employee health and wellbeing in the UK, the research shows that sick leave and working while unwell costs companies, on average, 7.85% of their yearly wage bill up from 7.78% in However, the cost of lost productivity for those companies performing best in the awards was 24% lower than the worst-performing companies. By looking after staff, they looked after the bottom line. If you would like to know more about the findings from the 2015 study, you can request a free insights session speak to your consultant or Mercer.UK@mercer.com. health wealth career 6

7 negative inflation HOT TOPICS In the year to September 2015 the annual rate of inflation, as measured by the Consumer Prices Index, was negative at -0.1%. The September CPI figure has import to pension schemes as it is used as a reference point for various items, including: Limited price indexation for post 5 April 1997 pensions based on the statutory reference period. Increases on Post 5 April 1988 Guaranteed Minimum Pensions under section 109 of the Pension Schemes Act Early leaver non-gmp statutory revaluation. Increases to state pension benefits. Annual allowance calculations for defined benefit schemes. Formal confirmation of statutory increases and revaluation will be published by Government in due course. However, it is expected that statutory minimum increases to pensions in payment will be collared at nil. For DB schemes, annual allowance calculations for the 2016/17 tax year are expected to show a higher pension input amount than if CPI had been positive. vat update hot topics As reported previously in Current Issues, following the PPG and ATP cases in the European Court of Justice, the treatment of VAT on pension scheme costs is set to change. HM Revenue & Customs updated its guidance in 2014 and a further update has just been released. Details on the most recent HMRC update will be included in next month s Current Issues; however, a key headline is that the existing arrangements will now continue until 31 December 2016, rather than 31 December Trustees and employers should continue to seek expert legal and tax advice given the considerable complexity associated with this area. MERCER HARMONISE TM HAS BEEN LAUNCHED! Our new service is a digital platform aimed at helping both employers and employees address some of the fundamental health and savings issues facing the UK s workforce. The platform aims to help employers reduce benefit administration costs and improve employee engagement. It empowers employees to manage their health, workplace benefits and personal financial affairs in one place using nudges to stimulate better understanding of their health and long-term savings needs. Accessible on smartphone, tablet and desktop, Mercer Harmonise TM enables employees to set goals, adjust their savings, compare themselves to peers, select benefits, purchase products, and take steps to improve their health and finances. All of these digital services are supported by a customer care team, which consists of benefit experts and financial advisers who can support users either over the phone, using chat or face to face. For more information visit our website. health wealth career 7

8 DEFINED AMBITION AND AUTOMATIC TRANSFERS ON HOLD HOT TOPICS The pensions minister, Baroness Altmann, has confirmed the Government s decision to delay the implementation of defined ambition, collective benefits and automatic transfers. The minister said that the market needs time to adjust to recent reforms - such as automatic enrolment, pension flexibilities and the upcoming introduction of the new State Pension - and that these other areas will be revisited once there has been an opportunity for that to happen. Defined ambition and collective benefits are designed to deliver the option of shared risk schemes in the UK pension environment. While the previous coalition government introduced a regulatory framework for such schemes through primary legislation, the latest announcement means that the regulations to bring these rules into force will be delayed. Automatic transfers - commonly known as pot-follows-member - were designed by the previous government to avoid employees leaving multiple defined contribution pension pots behind as they move jobs. The intention was to prevent the proliferation of small, dormant pots in the system following the introduction of automatic enrolment, by consolidating them in the scheme of the new employer. Given the uncertain timescale as to when the automatic transfer regulations might be brought into effect, combined with the restrictions on short-service refunds from 1 October this year, trustees and administrators of DC schemes may need to consider whether there are any implications arising from an increasing number of small pots. it s all in a name The National Association of Pension Funds has announced that it has changed its name to the Pensions and Lifetime Savings Association. The rebranding is in recognition of the changing pension landscape and because, as the Association states, the lines are blurring, between pensions and other forms of savings, between work and retirement, between scheme and saver responsibility. Although it will continue to focus on pensions, the Association will expand its scope and membership, launching new products and services to help its members support savers. health wealth career 8

9 dates to remember date issue the latest 31 December 2015 Equitable Life Payment Scheme January 2016 European insurance company legislation (Solvency II) The ELPS will close to new claims from this date. Although not directly relevant to occupational schemes, it has the potential to affect the pricing and availability of bulk and individual annuities. 5 April 2016 Refund of surplus Scheme rules can be amended by trustee resolution until this date to allow refunds of surplus to employers to continue. This is subject to certain conditions, including it being in the interest of scheme members and members being notified three months beforehand. 6 April 2016 Lifetime allowance The Government plans to reduce the lifetime allowance to 1 million, subject to legislation. Fixed and Individual Protection will be made available to impacted individuals. 6 April 2016 Annual allowance The Government has announced plans to reduce the annual allowance for high earners, and to align all pension input periods with the tax year. This is subject to legislation. 6 April 2016 State pensions The Government will introduce a single-tier state pension. Contracting out for defined benefit schemes will be abolished. 6 April 2016 Scottish devolution From this date the Scottish parliament will have a limited power to vary the income tax rates paid by Scottish taxpayers. 5 April 2018 Protected rights Scheme rules can be amended up until this date to remove hard-coded protected rights restrictions. Mercer select Keeping up to date with HR issues, trends and legislation that affect your business can be challenging. Mercer Select is an online information service that helps trustees and HR directors stay up to date with legal, business and market developments on benefit, compensation and other HR topics.. uk.select@mercer.com for more information. health wealth career 9

10 about current issues This edition of Current Issues is for information purposes. It may be read as informal training and recorded in your training log. The articles do not constitute advice specific to your scheme and you are responsible for obtaining such advice. Mercer does not accept any liability or responsibility for any action taken as a result of solely reading these articles. For more information about other training available or advice about how any article in this issue relates to your scheme, please contact your usual Mercer consultant. Mercer retains all copyright and other intellectual property rights in this publication. You are welcome to reprint short quotations or extracts from this material with credit given to Mercer. Editor: Jacqueline Brough jacqueline.brough@mercer.com current issues online Did you know that you can also read Current Issues online? Visit our website here to view this month s newsletter and download previous editions. Current Issues in Pensions is published by Mercer Limited, which is authorised and regulated by the Financial Conduct Authority. Registered England No Registered Office: 1 Tower Place West, London EC3R 5BU Visit us at: Copyright 2015 Mercer Limited. All rights reserved. health wealth career 10