Pensions Bulletin 2014/44. Government moves to next stage in implementing better workplace pensions. Page 1 of October 2014

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1 Page 1 of 10 io Pensions Bulletin 2014/44 23 October 2014 Government moves to next stage in implementing better workplace pensions The Department for Work and Pensions (DWP) has published another command paper that sets out its next steps to improve the quality of workplace defined contribution (DC) schemes. This follows the paper published in March that set out a range of measures such as a charge cap on default funds, a ban on inappropriate charges and proposals to introduce minimum governance standards and improve transparency (see Pensions Bulletin 2014/13). The latest paper contains the DWP s response to its March consultation on minimum governance standards and on transparency. It also has within it a consultation on draft regulations relating to charges and governance in occupational pension schemes. Although the key decisions on policy in both areas have now been taken, there have been some developments in its detailed application and so comments are being sought on this as well as whether the draft Occupational Pension Schemes (Charges and Governance) Regulations 2015 deliver the overall policy intent. Charges Looking first at charges, the regulations provide, from April 2015, for a charge cap in relation to the default arrangements of most money purchase occupational pension schemes used as qualifying schemes for auto-enrolment purposes (including stakeholder pension schemes). The cap is set at 0.75% of funds under management, or equivalent to 0.75% for schemes with combination charge structures. The only permissible such combination involves a percentage of funds under management along with either a percentage of contributions of no more than 2.5% of the contributions to the default arrangement, or a flat amount of no more than 25 pa. Where such a combination is used the percentage or flat amounts need to be assessed via look up tables to establish the maximum permissible percentage of funds under management. So, for example, the NEST 1.8% contribution charge implies that a further charge of no more than 0.5% of funds under management is permissible (compared to the 0.3% actually charged). The cap covers all Member-Borne Deductions (MBDs), excluding transaction costs, costs resulting from pension sharing, complying with court orders and scheme wind-up. Any commission payments must be counted as MBDs.

2 Page 2 of 10 The regulations ban, from April 2016, Active Member Discount (AMD) structures from qualifying schemes. Prior to this any such AMDs must not result in the level of charges faced by members who cease contributing going over the charge cap. Trustees will be legally responsible for ensuring that there is compliance with all of the above. Governance Turning to governance, the regulations apply, with some exceptions, to money purchase occupational pension schemes, no matter whether they are being used as qualifying schemes for auto-enrolment purposes. They also apply to the non-avc money purchase benefits accrued in otherwise non-money purchase occupational pension schemes. The regulations provide for: Trustees 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 the trustees assess the value of all transaction costs and charges borne by scheme members (not just those who are protected by the charge cap). Independence requirements for master trusts (other than NEST) they must have a minimum of three trustees, the majority of whom (including the chair) must be independent. These independent trustees are subject to limited terms. The appointment of a trustee chairman responsible for signing off an annual statement on how the minimum governance standards have been met. This statement also describes how trustees have the relevant knowledge and understanding to run the scheme effectively. The trustees not to be restricted as to who provides administrative, fund management, advisory, or other services to the scheme. Consultation closes on 14 November 2014, following which the DWP intends to lay the regulations in early 2015 to come into force on 6 April Transparency of costs and charges The Command Paper reprises the DWP s view that improving the transparency of costs and charges is essential to address what it sees as the current weaknesses in the workplace pensions market and to enable an effective review of the charge cap in 2017 (see below). So in addition to the governance measures outlined above, the DWP intends to consult in 2015 on regulations under duties in the Pensions Act 2014 requiring information about

3 Page 3 of 10 transaction costs to be disclosed to members and others and the publication of costs and charges information. In relation to transparency in defined benefit schemes, the paper weighs up the views reported to it and promises to look specifically at whether regulation for additional transparency in DB schemes is required. Other matters The paper also highlights where action is being taken in related areas. In particular: From April 2015 providers of workplace personal pensions will have new duties to establish Independent Governance Committees (IGCs) to oversee the value delivered by the schemes they supervise, including the design and performance of the default arrangement, standards of administration and the value of costs and charges. A consultation by the Financial Conduct Authority (FCA) on rules to introduce IGCs closed recently (see Pensions Bulletin 2014/32). A separate consultation by the FCA on the charges measures will start shortly. From April 2015 member-borne adviser commission and consultancy charges in all qualifying workplace personal pension schemes will be banned. Rules and regulations are promised to achieve this. From April 2016 commission charges in occupational pension schemes used as qualifying schemes will be banned. The DWP intends to consult on the necessary regulations in In 2017, the charge cap will be reviewed, to see whether it should be lowered and whether it should include some or all transaction costs. In a linked development the Pensions Regulator chairman, has announced that the Regulator will publish a series of guides in the New Year to help support trustees of defined contribution schemes once the details of proposed pension reforms are confirmed by Government, in areas such as minimum governance standards, charge controls and changes to decumulation. The Regulator has also acknowledged that trustees are experiencing a great deal of change and that guidance will be provided as soon as possible. Its DC code, in particular, will be updated next year. There is a lot in this command paper and the timetable is ambitious. But once the dust has settled in relation to measuring up whether default arrangements are within the charge cap, trustees are likely to need assistance in relation to what the governance requirements mean in practice. The DWP has quite rightly not overprescribed in this area, but it has set down, via this paper, some clear expectations. Just ensuring that default fund charges are within the cap will not be enough.

4 Page 4 of 10 ACA calls for rethink on auto-enrolment details as staging moves to smaller employers The Association of Consulting Actuaries (ACA) is calling for the Government to look at some of the important details of its auto-enrolment policy as the staging focus switches from larger to smaller schemes. Specifically, the ACA wants the informal link of the earnings trigger (the level below which employees are not auto-enrolled) to the income tax personal allowance to be reviewed and, secondly, the suitability of current autoenrolment policy to the three-quarters of a million micro-employers (with one to four employees) to be re-examined This is contained within its latest pension survey of businesses employing less than 250 people. The ACA believes that a policy review is needed in 2015 because: the significant increase in the income tax personal allowance during this Parliament has resulted in the exclusion of a high number of employees in large and mid-sized firms, which is likely to accelerate as smaller firms stage; and in a climate of modest earnings growth the generally much lower average earnings in smaller firms together with the increase of contributions (operating from October 2017) soon after staging for such firms could result, in high opt outs. Turning to the survey itself, amongst the key findings are the following: Changing workforce demographics Today, employers expect around half of their employees to retire at age 65 and just 8% at age 66 or above. But in just six years time employers expect that three-quarters of their employees will retire at ages as the increases to State Pension Age start to come into effect. Freedom and choice pension reforms Nearly six out of ten smaller employers are supportive of the new pension reforms, announced at the 2014 Budget, with just one in ten opposed. Guidance guarantee where employers have taken a view, face-to-face meetings are seen as likely to be the most popular channel for the guidance guarantee, followed by web-based tools and then telephone guidance. Pension contributions tax relief 56% of employers support a refocusing of tax relief towards those with lower incomes, with over a third also saying that reliefs should be further restricted for those on higher incomes. Opt-out the median opt-out level of employees from auto-enrolment reported to the survey falls in the 11-15% band.

5 Page 5 of 10 Auto-enrolment scheme where small and micro employers have made decisions (most have not) by far the majority have decided to enrol all eligible jobholders into NEST or another multi-employer scheme. Amongst those employing employees, 57% are proposing this route; amongst those with 1-9 employees, the figure reaches 70%. Staging dates upwards of nine out of ten employers yet to auto-enrol feel that a delay or pause in staging should be considered until the current raft of pension reforms that are unresolved is finalised. With this survey, the ACA is contributing to the emerging debate about big picture pensions policy ahead of next year s General Election and has chosen to do so primarily by taking a step back from the hot topic at the moment of pension taxation to remind the parties that there are other important matters needing attention. By questioning whether the burdens of auto-enrolment on micro employers are holistically worthwhile, this report also echoes the ACA s recent call for a pause in the permanent revolution of pension change. NAPF launches its pensions manifesto The National Association of Pension Funds (NAPF) has launched a pensions manifesto at last week s NAPF Conference, setting out what it believes should be the next Government s priorities in the pensions space. The NAPF s six recommendations are that the next Government should: Commit to the continued rollout of automatic enrolment on the current legislative timetable. The NAPF believes that auto-enrolment has been very successful so far but acknowledges that as smaller, less well-resourced employers reach their staging date there could be higher rates of employee opt-out and employer non-compliance. The NAPF also points out that the retirement outcomes from auto-enrolment are as yet unknown and there is a danger that individuals who have done the right thing by auto-enrolling could still be disappointed at their retirement outcome. The NAPF acknowledges there are no easy solutions. Plan for the long term through an Independent Retirement Savings Commission. The NAPF believes that establishing an independent Commission will help ensure pension policy is looked at for long-term results rather than shortterm (political) results. The NAPF proposes that such a Commission should be established in time to present its first annual report to Parliament in 2017, at the same time as the already planned review of auto-enrolment. Enable pension schemes to be effective investors in the economy. The NAPF states that it is important that the Government makes infrastructure investment important and cost-efficient for long-term investors, presumably meaning such

6 Page 6 of 10 vehicles as the NAPF s own recently established Pensions Infrastructure Platform. Manage European legislation. The NAPF states that the Solvency proposals put forward by the European Commission are one of the biggest threats to DB pension provision in the UK and calls on the government to oppose any further attempts by the European Commission to drive up funding requirements through the creation of a Holistic Balance Sheet. Drive higher standards of governance and reduce tick-box regulation. The NAPF proposes that high-level principles should be set but there should be a move away from detailed regulations and codes. Supplement the guidance guarantee and monitor people s outcomes after using guidance. The NAPF observes that the old work-retirement model is changing rapidly and that these changes are creating uncertainty about the retirement process. To help alleviate this, the independent Commission (as above) should have a role reviewing the advice, products and solutions available to those retiring and the government should use the review of the Money Advice Service and the establishment of the guidance guarantee to increase the amount spent on information and education on retirement. There are some thoughtful ideas in here, many of which will be welcomed by those working in pensions. If there is one overall theme it is that pensions need a period of stability (through an independent commission, no further European legislation etc). Pensions guidance providers unveiled HM Treasury has announced that the guidance guarantee service due to start next April (see Pensions Bulletin 2014/30) will be delivered by the Citizens Advice Bureau and the Pensions Advisory Service. The Citizens Advice Bureau will provide face to face guidance and telephone guidance will be provided by the Pensions Advisory Service. An online service will also be designed by the Government as part of the scheme. A new Schedule to the Pension Schemes Bill has now been tabled that names these providers and sets out the role of HM Treasury and the Financial Conduct Authority (FCA). Amongst other things, the FCA is required to make general rules requiring information about the availability of the guidance guarantee to be given by the trustees or managers of a relevant scheme to members with a right or entitlement to cash balance benefits or other money purchase benefits.

7 Page 7 of 10 The new Schedule does not go into any detail as to what the guidance service actually is. So all eyes are now on the FCA which is due to issue a policy paper on the guidance guarantee later in the autumn this should start to firm up exactly what the service is all about. So what type of pensions guidance do consumers want? This is the essence of an illuminating study commissioned by the Chartered Insurance Institute that gauged consumer views towards the Government's pension guidance service now being worked up for its April 2015 launch. The research was undertaken with over 1,000 consumers who were all within five years of retirement, who had defined contribution pension pots and other assets of less than 100,000 and did not have a financial adviser. The results included the following: 92% said that they would, or probably would make use of the service provided that they are satisfied that those delivering it are impartial and qualified. But to engage they would need to receive official and personalised correspondence, specifically from the Department for Work and Pensions, about the guidance service, six months to two years prior to their intended retirement. They would also value reinforcing messages from other parties connected with their pension including, but not just limited to, their pension provider. Most envisage that pension guidance will be of value as a generic advice service sitting outside the boundary of regulated advice provided it is sufficiently personalised to edit their choices, navigate the information relevant to them and build their confidence to make good decisions. Face-to-face is the overall preference for delivery 57% placing this first with only 6% placing telephone first. But 34% place a self-completion questionnaire on-line first. Consumers expect to use a number of sources of information to help them decide how to use their DC pension pot on average four. But when asked to choose their most likely follow-up action, a third say make their own decision through shopping around and a quarter say they would seek professional financial advice. The report concludes with some recommendations for the Government and the Financial Conduct Authority in particular for the Government to work on what constitutes success as soon as possible after next April, through follow up with consumers who have used the service.

8 Page 8 of 10 This study demonstrates that awareness of the Budget reforms is very high and the likelihood of a very strong demand for pensions guidance at or near retirement from Day 1. Although accepting that the service is not independent financial advice, there is a strong desire for sufficient tailoring and adviser/ consumer interaction in order that the consumer is empowered to take what might turn out to be irrevocable decisions. So a potentially tall order in terms of both volume and quality for the now named guidance providers. The pension regime updated draft HMRC guidance published HM Revenue & Customs has updated its draft guidance about the tax aspects of the planned pensions flexibilities from April 2015 announced in the Budget, following the introduction of the Taxation of Pensions Bill to Parliament last week. The Bill is to a large extent similar to earlier draft clauses issued in August, but there were some clarifications and new points of detail see our Taxation of Pensions Bill Special Bulletin 2014/43 for what the proposed tax regime looks like as a consequence. The updated draft guidance reflects this but we note two points: Death benefit charges the guidance confirms that indeed, the Bill will need further changes to fulfil the plans for death tax for 2015/16 as set out in the Chancellor s announcement on 29 September 2014 (see Pensions Bulletin 2014/40) Reporting, tax deduction and Real Time Information (RTI) requirements as we noted in our Special Bulletin the Bill contains many new burdens on pension scheme administrators related to the new 10K Money Purchase Annual Allowance measure, and scheme administrators might want to read the draft guidance chapter on this to get a flavour of what will be involved. The guidance also sets out the tax that providers will be expected to deduct before paying over the new flexible payments (the uncrystallised pension fund lump sum and income from flexi-access draw down). This will inevitably, mostly if anything, be weighted towards more tax than is actually due, so the guidance also sets out changes to RTI reporting to enable HMRC to identify whether the correct tax has been paid. But the outlined changes are noted as subject to change. Scheme administrators will have a challenge explaining to individuals the tax being deducted from the new flexible payments so will need to understand the final proposals thoroughly. Where there is over-deduction, we hope from the guidance

9 Page 9 of 10 (but are not sure) that in cases where members do not submit personal returns the system will mean that ultimately HMRC will identify this and arrange the necessary actions to ensure refund, rather than members having to understand the tax position and take action. We look forward to the final details of the legislation still to come, particularly on the outstanding elements of the radical changes to death benefit charges announced by the Chancellor (matters not yet in the Bill include the widening of the potential beneficiaries who can use drawdown from DC funds following a member s death; and no tax applying to such drawdown if the death is before age 75). HMRC s RPSM catches up with the Budget changes that applied from March 2014 HM Revenue & Customs has updated its Registered Pension Schemes Manual primarily to catch up with the changes made effective from 27 March 2014 (temporarily by parliamentary resolution at the 2014 Budget and then consolidated by the Finance Act 2014 in July) including the new tax law limits for some small benefit cashouts (see our News Alert 2014/01); and to link Individual Protection guidance into the RPSM. And the sections about Scheme Administrators and registration/ de-registration processes have been rewritten. The RPSM has become an essential tool for pension scheme administrators, advisers to schemes and to individuals and sometimes for scheme members themselves. The fact that it is so large, so that it is such a time-consuming task for HMRC to update when the law changes, reflects how complicated pensions tax law has become. All change at the Pensions Ombudsman The Department for Work and Pensions has announced that it will shortly commence recruitment for a new Pensions Ombudsman and a Deputy Pensions Ombudsman. Tony King, the current Ombudsman, will stand down from his post in late spring Jane Irvine s second term as Deputy Ombudsman ends next autumn. Both post holders will be flexible about their departure dates to ensure a smooth transition when the new Pensions Ombudsman and Deputy Pensions Ombudsman take up their posts.

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