In Sight. a quarterly pensions publication. Regulator consults on trusteeship. This quarter s round-up

Transcription

1 Aon Hewitt In Sight a quarterly pensions publication May 2017 This quarter s round-up Page 1 Regulator consults on trusteeship 2 Green paper on DB pensions 2 DB investment guidance 3 Pensions tax update 3 Contracting-out issues 4 Pension Schemes Bill 4 Paying for pensions advice 5 Other DC news 5 Auto-enrolment and NEST 6 PPF levy proposals 6 The Lifetime ISA 6 Cases 7 News round-up Regular features 7 On the horizon 8 Training and events Regulator consults on trusteeship As part of its 21 st century trustee initiative, the Pensions Regulator is consulting on a draft policy for monetary penalties. As this proposes different penalties for professional trustees, the consultation also covers a revised description of a professional trustee. For some time the message has been that the Regulator is getting tougher on poor governance and administration. The 21st century trustee initiative (as reported in the February 2017 edition of In Sight) seeks to raise standards of trusteeship by being clearer about what the Regulator expects trustees to do, and being swifter to take action where standards are not met. The Regulator expects professional trustees to demonstrate a higher level of knowledge and meet a higher standard of care than other trustees. The latest consultation is intended to provide clarity about which trustees would be held to higher standards and subject to higher fines for breaches. The Regulator considers a professional trustee to include any person, whether or not incorporated, who: acts as a trustee of the scheme in the course of the business of being a trustee; or is an expert, or holds themselves out as an expert, in trustee matters generally (rather than in certain areas only). Under this proposed definition, a trustee who is remunerated (beyond any necessary expenses) is not necessarily acting in the capacity of professional trustee; the Regulator believes it is more appropriate to consider the facts, including whether a trustee is acting in the course of the business of being a trustee. This consultation closes on 9 May Further stages of the 21st century trustee strategy and future plans are due to be announced shortly. Trustees should undertake a regular scheme governance assessment, to identify any actions they may wish to take to improve standards. Risk. Reinsurance. Human Resources.

2 Green paper on DB pensions The green paper on security and sustainability in defined benefit (DB) schemes sets out the government's evidence on the key challenges in the regulatory and legislative framework and highlights a number of options that have been suggested to improve confidence. The paper builds on recommendations by the Work and Pensions Committee (WPC) (as reported in the February 2017 edition of In Sight). The paper divides the discussion into four broad areas and poses questions on the options, without making any recommendations. The consultation runs until 14 May; no timescale is given for any legislative changes that might follow. Funding and investment The government does not agree that in general the discount rates being used are overly pessimistic (which could cause scheme deficits to be overstated), and it feels there is insufficient evidence to show a systemic problem with the existing flexibilities. There may be scope to encourage some schemes to make different investment decisions, and to mitigate any barriers to greater use of alternative asset classes. Possible changes include giving the Regulator a more central role in influencing the level of risk that a scheme should take, or encouraging (or mandating) alternative valuation measures. The government believes there is insufficient evidence about the quality of trustee decision-making and the rationale behind investment strategies, and proposes further research. It notes the WPC's proposal for shorter valuation time limits, or more frequent valuations, for some schemes, but has not seen compelling evidence that the current three-year cycle is inadequate overall. Employer contributions and affordability The government does not believe there is a widespread problem of affordability, but notes the range of experiences and feels that a targeted approach is needed to encourage or require deficits to be cleared more quickly for some employers and to reduce burdens on others. However the moral hazard risk of any possible relaxation needs to be borne in mind. Responding to the WPC's report, the government does not agree that indexation should be abandoned or reduced across the board; however, there may be a case for rationalisation. It also notes that there may be arguments for suspending indexation, for example where an employer is stressed and the scheme is underfunded. Views are invited on whether there are any circumstances in which it would be appropriate to allow benefits to be reduced and whether it should be easier to take small pots as a lump sum through trivial commutation. Member protection The government feels that the funding framework and the wider system for protecting members' benefits works broadly as intended. However, it is considering how the Regulator's powers and the role of trustees could be further strengthened, and whether more needs to be done to improve the knowledge and understanding of all parties, including scheme members. The paper highlights options for setting funding and recovery plan requirements such as explicit legislation or a more flexible approach of giving the Regulator the power to set binding standards, or detailed codes or guidance. Options to improve information gathering powers include the creation of a duty on all parties to co-operate with the Regulator and giving the Regulator power to interview relevant parties. Questions are also asked about the possibility of designing a system of compulsory clearance and whether the Regulator should be able to impose punitive fines for corporate transactions that are detrimental to schemes. Consolidation of schemes The paper discusses the removal of barriers to the consolidation of smaller pension schemes and asks what legislation might be needed to support voluntary consolidation. It is also noted that the rules for winding up lump sums could be widened and that aspects of employer debt legislation for multi-employer schemes could be reviewed. DB investment guidance The Regulator has published investment guidance for trustees of defined benefit schemes. It aims to provide practical information, examples of approaches that could be taken and factors to consider when investing scheme assets to fund defined benefits, whilst noting that the methods and approaches trustees choose to adopt will depend on the nature or their scheme. Trustees should consider the guidance and discuss it with their investment advisers. 2 In Sight May 2017

3 Pensions tax update Reduced money purchase annual allowance As proposed in the Autumn Statement, the money purchase annual allowance (MPAA) is expected to reduce from 10,000 to 4,000 from 6 April The MPAA applies once a member has accessed their pension benefits flexibly - for example by taking a taxed lump sum - limiting the taxrelief available on future contributions into a money purchase scheme indefinitely. The lower level of tax relief will apply to anyone who has accessed benefits flexibly since April 2015, as well as those who flexibly access their benefits in the future. No changes are being made to the way the MPAA operates, or how it is calculated. As before, any unused MPAA cannot be carried forward for later years. Where applicable, it does not limit savings into defined benefit arrangements. Trustees should review their member communications on pension flexibilities and consider communicating to members that if they take advantage of the money purchase flexibilities there are consequences for any future pension savings. There are some ways of withdrawing funds which do not trigger the MPAA, therefore members should seek professional advice appropriate to their own circumstances. Overseas pensions The spring Budget introduced a 25% tax charge for transfers to Qualifying Recognised Overseas Pension Schemes (QROPS) requested after 8 March. The following exemptions apply during the five years following the transfer (in which case it can be made tax-free): both the individual and the QROPS are in the same country (or both are within the European Economic Area); or the QROPS is an occupational pension scheme sponsored by the individual's employer. Unless the member has provided information showing that the exemption applies at the time of transfer, the administrator should automatically deduct the 25% charge. The charge can be applied retrospectively if at some point in the five years following transfer the individual s circumstances change and the exemptions no longer apply; conversely, a tax charge paid at the time of the transfer can be refunded if one or more of the conditions are met within the next five years. These measures add to those announced in the Autumn Statement, which were generally effective from 6 April They include changes to the UK tax charges that arise on overseas pension savings, including where payments are made out of funds that have had UK tax relief and where foreign pensions and lump sums are paid to UK residents, provisions to prevent new savings in s615 schemes and amendments to align the tax treatment of registered pension schemes based in and outside the UK. The UK residency test has been extended so that certain member payment charges arising out of UK tax relieved funds apply to members who have been resident in the UK in any of the last ten tax years, rather than the last five years as was previously the case. Irrespective of UK residency, such charges can apply to payments from a QROPS made within five years of a transfer to such a scheme (if the transfer took place on or after 6 April 2017). Trustees should review their processes to ensure that if they are asked to make a transfer to an overseas scheme they obtain sufficient information to assess whether it is subject to the overseas transfer charge. QROPS online service has closed Schemes should also be aware that the QROPS online service closed on 5 April Standalone forms and reference material must now be used to report information to HMRC about overseas pension schemes, including transfers to and payments from QROPS. Contracting-out issues Fixed rate GMP revaluation Minor amendments came into force on 6 April 2017 in relation to the administration of contracted-out rights, including a reduction in the fixed rate for guaranteed minimum pension (GMP) revaluation from 4.75% to 3.5% p.a. (not 4% as originally proposed) for those who leave pensionable service on or after 6 April Equalising pensions for the effect of GMPs In its response to the consultation on contracted-out rights (as reported in the February 2017 edition of In Sight) the Department for Work and Pensions (DWP) confirmed that it will be undertaking further work with the industry working group on its proposed methodology for achieving equal pensions through GMP conversion. The response lists a number of issues raised by respondents which need to be resolved. Given this, the DWP is unable to set out a timeline for the completion of the work, but promises to notify interested parties as soon as it is in a position to do so. Bulk transfers There is still no resolution to the problem of transferring contracted-out rights without member consent to new schemes, which is not possible following the cessation of contracting out in April The DWP had said that any changes to legislation would not be introduced before autumn 2017, but now says that it hopes to be in a position to consult on any proposed changes to legislation by autumn 2017 (suggesting that any change is unlikely to happen until some time later). Aon Hewitt 3

4 Pension Schemes Bill The Pension Schemes Bill continues to progress through Parliament and is expected to receive Royal Assent soon. Master trusts The Bill focuses on protecting members of master trust schemes. It is intended that the Pensions Regulator s new authorisation and supervision regime will commence in 2018, but some measures aimed at protecting members of master trusts will apply from 20 October An initial consultation on draft legislation is scheduled for the autumn, with the intention of laying final regulations during the summer of The government announced in the Budget that it will amend the tax registration process for master trust pension schemes to align with the new authorisation and supervision regime. Further caps on charges in 2017 The Government is consulting on draft regulations that would introduce a cap on early exit charges from 1 October Broadly, early exit charges are charges borne by members when taking, converting or transferring flexible benefits on or after normal minimum pension age (currently age 55) but before the member s expected retirement date. The cap will be 1% of the fund value for existing members and 0% for new joiners. A similar cap has applied to contract-based schemes since 31 March Also from 1 October 2017, the amending regulations will implement the second phase of the member-borne commission ban. On 6 April 2016 a ban was introduced for occupational pension schemes that provide money purchase benefits and are being used for automatic enrolment. However, it only covered new commission arrangements and those that were varied or renewed on or after 6 April The latest changes would prohibit member-borne commission payments in relation to contracts entered into before 6 April 2016, unless the payment was made before the regulations come into force. DC schemes will need to comply with the restrictions on early exit charges and member-borne commissions. Paying for pensions advice From April 2017, a new pension advice allowance allows members to take up to 500 tax-free from their defined contribution (DC) pension pot to put towards the cost of retirement financial advice. This can be combined with a separate income tax exemption for employer-financed advice. Provided the scheme rules allow, the pension advice allowance may be taken from DC schemes and hybrid schemes with a money purchase or cash balance element (including DB schemes with DC AVCs). It is available at any age and may be used up to three times in a lifetime, but only once in any tax year. The primary responsibility for ensuring that the limits are not breached lies with the member who must give a declaration to the scheme that the allowance has not been used more than twice previously and that it has not already been used in that tax year. The allowance can be used for regulated retirement financial advice, which is advice in respect of a person's financial position; this includes their pension arrangements and the use of their pension funds, but also allows for the consideration of other assets relevant to retirement planning. However it is not intended to cover advice that is not strictly related to retirement (such as inheritance tax planning or advice on investments that will not be used for retirement). The Regulator is due to release a factsheet to clarify that trustees will not generally be liable for advice given by a third party and HMRC intends to publish guidance on the allowance shortly. Separately, a new income tax exemption has been introduced to cover the first 500 worth of pensions advice paid for or reimbursed by an employer in a tax year (before April, there was an exemption only if the cost of the advice was less than 150 and if costs exceeded this level, the full amount was taxable). For this purpose, pensions advice includes information or advice in connection with the individual's pension arrangements, or use of their pension funds. For the exemption to apply, the advice must be available to all of the employer's employees, or all employees at a particular location, but it may be restricted to those who have reached age 50 (in most cases) or who meet the conditions for ill-health early retirement. Schemes are not required to offer the pension advice allowance but they may want to consider whether to do so and what scheme rules and processes would need amending. Employers may also wish to consider whether to include provision for employees to receive financial advice as part of their benefit package. Definition of financial advice The government has also confirmed that it will amend the definition of financial advice for regulated firms so that they will only be giving financial advice where they provide a personal recommendation. This is intended to give firms the confidence to develop better guidance services without fear of inadvertently straying into providing regulated advice. There is no change to the rules applicable to nonregulated individuals. The new definition is expected to have effect from 3 January The Financial Conduct Authority intends to consult on the new requirements and publish guidance later this year. 4 In Sight May 2017

5 Other DC news SMPIs - transition statement Statutory Money Purchase Illustrations (SMPIs) are statements that need to be sent to individuals with money purchase benefits each year, illustrating the projected amount of the benefits payable at the member s retirement date using today s prices. The basis on which they should be determined is set out in Technical Memorandum 1: Statutory Money Purchase Illustrations (TM1). Version 4.2 of TM1 is effective for SMPIs issued on or after 6 April 2017; however, the Financial Reporting Council has confirmed that version 4.1 may be used instead of version 4.2 for statements with illustration dates between 6 April 2016 and 5 April 2017 but issued on or after 6 April DC transfers without consent The government's call for evidence on improving the rules for bulk transfers of DC pensions without member consent closed in February. The bulk transfer provisions were originally designed for a defined benefit landscape and require an actuary to certify that the members' benefits under the receiving scheme will be broadly no less favourable. The DWP is considering how the process could be simplified, while ensuring that members are adequately protected. It suggests that reforms could remove a barrier that prevents scale from developing in the DC landscape by allowing smaller schemes (which often have weaker governance and higher charges) to exit the market or consolidate. A consultation on firmed up policy proposals is due during 2017 and secondary legislation, if necessary, is intended to be in place by April Auto-enrolment and NEST Legislative changes Auto-enrolment legislation has been amended so that employers do not have to auto-enrol individuals who have fixed protection 2016 or individual protection 2016, in line with the approach for individuals who have other forms of tax protection (there is an exception to the duty to auto-enrol eligible jobholders where the employer has reasonable grounds to believe that the worker has lifetime allowance transitional protection). The staging period for implementing auto-enrolment ends this year and there have also been some changes for new employers who become subject to the duties from 2017 and do not have a staging date: they become subject to the auto-enrolment duties on the day their first worker begins employment (rather than when PAYE income first becomes payable), and they can postpone auto-enrolment for an employee for up to three months (this option was already available to staging employers). Employers may need to review their processes to take these changes into account. Auto-enrolment review The government has carried out an initial consultation as part of its review of auto-enrolment. The purpose of the review is to build on the success of auto-enrolment to date, to ensure that it continues to meet the needs of individuals saving for retirement, and to ensure that the technical operation of the policy is working as intended. It covers three main themes: coverage striking the right balance between enabling as many people as possible to save for retirement whilst ensuring that it makes economic sense for them to be included. engagement driving greater personal ownership so that people are better enabled to understand and maximise their savings. contributions strengthening the evidence base around appropriate contribution levels (although the government does not expect to make policy recommendations in this area). The initial consultation posed a number of questions around these themes as well as some in relation to the charge cap on default funds. An advisory group, which comprises experts from the pensions industry will assist with the review. The government intends to publish its final report, including any policy recommendations, later this year. NEST's evolution The government has responded to its call for evidence on how NEST - the scheme it set up for any employer to use for auto-enrolment - might evolve in the changing pension landscape. The consultation considered whether NEST should provide new decumulation options (for converting pension savings into retirement income) and whether it should be expanded to enable individuals, employers and other schemes to access its services. The response confirms that NEST will not be offering new decumulation options at present, but this will be kept under review. However, the government will bring forward legislation to allow employers to contractually enrol workers into NEST. Aon Hewitt 5

6 PPF levy proposals The Pension Protection Fund (PPF) is consulting on initial plans for calculating its levy over the three years from 2018/19 to 2020/21. The PPF reviews its levy framework every three years and has only proposed changes where it believes there is a compelling case to do so. Feedback suggests the overall levy framework is working well, but there are a number of aspects that could be further improved. The PPF has carried out a review of Pension Protection scores calculated by Experian and concluded that the model has performed well. It has, however, proposed a number of changes to the score methodology, to ensure it remains predictive, reflects the expected level of insolvencies, and makes use of new data. These proposals will have implications for every employer rated by the PPF; its analysis has concluded that the changes are generally expected to result in a levy increase for larger schemes but a reduction for smaller schemes. Other material proposals include two possible options to simplify the process for certifying deficit reduction contributions and changes to the requirements for group company guarantees. In response to the Work and Pensions Committee's recommendation that the PPF re-examine how the levy framework could incentivise schemes to improve scheme governance (see the February 2017 edition of In Sight), views are sought on how good governance could be measured. The PPF also asks what changes could be made to reduce the compliance burden on small schemes, which it suggests are those with liabilities under 10 million (nearly 2,000 schemes). The consultation ends on 15 May The PPF expects to publish its response later this year along with a further consultation, at which point it will also consider the levy parameters, including the scaling factor, the levy estimate and the use of the levy cap. The Lifetime ISA The new Lifetime Individual Savings Account (LISA) was launched in April It sits alongside the current pension tax regime, allowing adults under the age of 40 to contribute up to 4,000 each tax year until they reach 50 to either provide a deposit for a first home or save for retirement. Contributions are eligible for a 25% government bonus and savings can be withdrawn at any time, but from 6 April 2018 withdrawals will be subject to a 25% charge unless they are made when the account holder reaches 60, is withdrawing their savings for a first-time residential property purchase or is terminally ill. The Financial Conduct Authority has published its final rules and guidance setting out the regulatory framework for the LISA. It can be sold without advice although providers are required to disclose information along with appropriate risk warnings. In particular, individuals must be warned that they may lose out on their employer s pension contributions and that the LISA could potentially affect the right to claim means-tested benefits. As individuals could choose a Lifetime ISA over a pension linked to their employment, schemes may notice that this impacts on the number of members who opt-out of pension schemes. Cases Self-employed plumber was in fact a 'worker' The Court of Appeal has found that a plumber should have been classed as a worker within the meaning of the Employment Rights Act 1996, not a self-employed contractor. An individual s employment status is important because it governs the legal rights for which they qualify. Mr Smith carried out plumbing work on behalf of Pimlico Plumbers Ltd; as a worker, he should have benefited from certain employment rights, and, if he had continued to work for Pimlico Plumbers, these would have included auto-enrolment into a workplace pension scheme. Other cases will depend on their own facts, but this demonstrates that courts will look beyond any written contractual arrangement and will evaluate the wider working relationship in order to determine an individual s employment status. Cohabitee nomination form An unmarried woman has won a Supreme Court case requiring the Local Government Pension Scheme in Northern Ireland to pay her a survivor's pension. The court found that the scheme's requirement for a completed nomination form (a condition that did not apply to spouses or civil partners and was not objectively justifiable) was a breach of Ms Brewster's human rights as she met the other eligibility conditions for a survivor's pension. Private sector schemes appear not to be directly affected, but trustees may wish to review whether rules and practices may discriminate against unmarried partners and take legal advice if appropriate. It should be noted that this case was about a discriminatory part of the scheme s procedures and not about whether failure to offer survivors pensions to unmarried partners was discriminatory in itself. 6 In Sight May 2017

7 News round-up State pension age review analysis An independent review of state pension age (SPA) arrangements after 2028 has been submitted to Parliament. The report recommends a timetable for increasing SPA to 68 over a two-year period from 2037 and looks at the wider factors that need to be taken into account, including affordability in the long-term and fairness to current and future generations of pensioners. A separate report has been published by the Government Actuary's Department, which considered specific scenarios. The reports are intended to help inform the government s review of SPA; its report is due in May Pension scams The Pensions Regulator has released new resources in its scorpion campaign to help prevent pension scams. These include videos for trustees and savers alerting them to typical scammer tactics, an online scam-spotting tool and a checklist for trustees to help them work through the due diligence they have to fulfil when considering transfer requests. Corporate governance reform The Work and Pensions Committee has responded to the government's 2016 green paper on corporate governance reform, recommending that company directors should have a new duty to pension fund trustees. This would extend the list of parties that directors are already obliged to have regard to and report to annually. The report recommends that including pension scheme trustees would increase the chances both that directors would take into account the interests of current and future pensioners in carrying out their duties, and that those who have failed to do so will be held accountable in the courts. Separately, the Financial Reporting Council has announced plans to consult on changes to the corporate governance code later in 2017, once the government has responded to the green paper. Employers may need to review the way that they provide information to trustees in future. In the meantime, the government has announced that it will respond to its consultation on pension scams later in the spring. On the horizon Here are some key future developments likely to affect pensions. Q FCA expected to publish rules for standardising disclosure of transaction costs October 2017 Expected introduction of cap on early exit charges for trust-based schemes April 2018 Lifetime allowance due to be indexed in line with CPI Auto-enrolment minimum DC contributions increase to 5% (including 2% employer contributions) May 2018 New EU General Data Protection Regulation expected to apply November 2018 State pension age reaches 65 for women April 2019 Auto-enrolment minimum DC contributions increase to 8% (including 3% employer contributions) September 2020 State pension age reaches 66 for men and women Aon Hewitt 7

8 Training and events Dates scheduled for our pensions training seminars are set out below. Unless it says otherwise, all courses and events take place in central London. If you would like to make a reservation, or receive a copy of the brochure or further information, please pensionstraining.enquiries@ aonhewitt.com or telephone the Pensions Training team on: +44 (0) You can also book online at aon.com/pensionstraining Pensions training courses Defined Benefit part 1 (one day) Defined Benefit part 2 (one day) Defined Contribution (one day) Pension Governance Committee (half day) PMI Award in Pension Trusteeship (two days) Other events 2017 Pension Conference: Success in uncertain times Dates May, 28 June, 5 September (Leeds), 18 October, 29 November January, 20 February (Leeds) May (Manchester), 14 June, 18 July, 14 November (Manchester), 13 December March July, 8 November March September (am) /12 October (Surrey) /15 March (Surrey) Dates 10 May London To register please visit: Contacts If you have any questions on In Sight, please speak to your usual Aon Hewitt consultant or contact: Helen-Mary Finney +44 (0) helen-mary.finney@aonhewitt.com About Aon Aon plc (NYSE:AON) is a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 72,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative risk and people solutions. For further information on our capabilities and to learn how we empower results for clients, please visit: Aon plc All rights reserved. The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales. Registered No: Risk. Reinsurance. Human Resources.