Pensions News. Topical Digest of Occupational Pension Issues No. 113

Transcription

1 Pensions News Topical Digest of Occupational Pension Issues No. 113 February 2015

2 2015 Xerox Corporation and Buck Consultants, LLC. All rights reserved. Xerox and Xerox and Design are trademarks of Xerox Corporation in the United States and/or other countries. Buck Consultants is a registered trademark of Buck Consultants, LLC in the United States and/or other countries. BN Other company trademarks are also acknowledged. Document Version: 1.0 (February 2015).

3 Table of Contents 1 Recently Implemented Changes Budget 2014 Transitional Measures VAT and Pension Schemes Pensions Act A new Statutory Power for the Pensions Regulator The Revised Statutory Definition of Money Purchase Benefits Lifetime Allowance Protection Same Sex Marriage Budget 2014 The Impact on Defined Contribution Members who have Recently Taken their Tax-Free Cash and/or Purchased an Annuity Finance Act Further Action to Combat Pension Scams Forthcoming Legislative and Other Changes The Pension Schemes Bill Changes to how Defined Contribution Savings can be drawn at Retirement Defined Contribution Flexibility The Ability to Amend Scheme Rules Transfers from Defined Benefit to Defined Contribution Schemes Pension Wise (The Guidance Guarantee) A Second Line of Defence for Pension Schemes on Pension Flexibility Changes to the Taxation of Lump Sum Death Benefits Consultation on Minimum Governance Standards and a Charging Cap for Defined Contribution Schemes New Rules on Paying Refunds of Contributions from Defined Contribution Schemes Automatic Transfers of Small Defined Contribution Funds Automatic Enrolment Earnings Thresholds for 2015/ Exceptions from the Employer Duties for Automatic Enrolment State Pension Reform The Cessation of Contracting Out Changes to the PPF Compensation Cap Removal of the NEST Restrictions Increases to the PPF Administration Levy Other Current Issues Scheme Reconciliation Service Availability of Pension Savings to Trustees in Bankruptcy Defined Ambition Schemes Action to Combat Pension Scams i

4 5. New IORP Directive Occupational Pension Schemes Survey Recent Pensions Regulator Publications Definitive Guidance DC Scheme Return Data Results Changes to the Scheme Return New questions have appeared on this year s Scheme Return from December The new information required includes: Funding Defined Benefits Revised Code of Practice and Guidance.. 23 Pension Liberation Scorpion Material Rebranded as Pension Scams.. 23 Statement on the Revised Definition of Money Purchase Benefits Updates to the Trustee Toolkit Governance Statements Recent Pension Protection Fund Publications Definitive Guidance PPF Levy Determination 2015/ Out of Cycle Valuations for the Amended Definition of Money Purchase Benefits Publication of the Purple Book Appendix Summary of Recent and Impending Changes ii

5 1 Recently Implemented Changes 1. Budget 2014 Transitional Measures Ahead of the changes to how defined contribution (DC) benefits can be accessed from April 2015 (see section 2.2), transitional measures have been introduced. These include increases to the sums that can be paid (or valued for payment), as either a trivial commutation lump sum or a small lump sum. The maximum amount of pension savings a member may commute, in all registered pension schemes, as a trivial commutation lump sum must not be valued at more than 30,000 (an increase from 18,000). The maximum amount that can be paid as a small lump sum on a per scheme basis has increased from 2,000 to 10,000. These increases apply to both DC and defined benefit (DB) pensions. The minimum age for payment of these benefits will remain as age 60, until 6 April 2015, when the minimum age will fall to 55. From that date trivial commutation lump sums will only be payable in respect of DB savings. Trustees that wish to take advantage of these increases should check whether any amendments to their scheme s rules are required. 2. VAT and Pension Schemes In November 2014, HMRC published new guidance on VAT for pension schemes, in light of two Court of Justice of the European Union (CJEU) judgments last year. HMRC had previously allowed employers to deduct VAT on expenses incurred in relation to the general management of an occupational pension scheme but not in relation to the costs of managing scheme investments. The CJEU judgments have implications for both DB and DC pension schemes, which is reflected in the new HMRC guidance. DB Pension Schemes Earlier in 2014, HMRC had accepted that the VAT on investment-related services, paid for by an employer which go further than management of the investments, may be recoverable by an employer. However, HMRC warns that specific investment 3

6 management costs are not general costs of the employer and so cannot be recovered. HMRC had also announced the end to its 70/30 rule. Where a fee could not be divided into general management and investment activities, employers could assume that 70% of activities were management and the remaining 30% were investment. Use of the 70/30 rule was to be phased out. HMRC has now stressed that VAT, incurred on goods and services supplied to a taxable person, is only deductible if it is used for the onward taxable supplies of that person. Thus only if the services are supplied to the employer will they be deductible. In the case of an occupational pension scheme there are two potential recipients of supplies, the employer and the pension scheme through its trustees. Who the receiver is will be highly fact sensitive and will in each case depend on the circumstances. A starting point is to look at the agreement between the parties. Who makes payment is an important indicator, but it is not decisive. Thus HMRC maintain that the VAT incurred in relation to a pension scheme is not deductible by the employer unless there is contemporaneous evidence that the services are provided to the employer and, in particular, the employer is a party to the contract for those services and has paid for them. HMRC accepts there are now no grounds to differentiate between the administration of a pension scheme and the management of its assets. If the employer pays for services and passes the cost onto the pension scheme then this onward taxable supply is subject to VAT. HMRC has announced that whilst the 70/30 rule is being removed, it will not be removed until the end of 2015 to allow a transitional period for businesses to adapt to its new policy. DC Pension Schemes There is a VAT exemption for management of special investment funds to facilitate investment in common funds for small investors. Such funds are supposed to pool the money of several investors, to enable them to spread the risk over a range of securities. The VAT exemption allows these investors to engage in such investments without incurring the additional cost of VAT. The CJEU found that a pure DC pension scheme shares enough characteristics with special investment funds to be regarded as a special investment fund provided the funds are invested using a risk-spreading principle, and if the pension customers bear the investment risk. The judgment only applies to pure defined contribution arrangements. The fact that an employer pays contributions is not relevant. HMRC now accepts that DC pension funds are special investment funds and are, and always should have been, exempt from VAT, where: they are solely funded (whether directly or indirectly) by persons to whom the retirement benefit is to be paid, (i.e. the pension customer); the pension customers bear the investment risk; the fund contains pooled contributions of several pension customers; and the risk borne by the pension customer is spread over a range of securities.

7 3. Pensions Act 2014 The Pensions Act 2014 received Royal Assent on 14 May As is often the case with such legislation, it covers a variety of issues, including: The creation of the single-tier state pension (see section 2.13). Increasing the state pension age to 67, earlier than previously planned. Automatic transfers of DC pots (see section 2.10). The abolition of short service refunds for DC schemes unless a member s pensionable service is less than 30 days (see section 2.9). A new statutory objective for the Pensions Regulator (see section 1.4). Changes to the PPF compensation cap for long-serving members (see section 2.15). Simplifying the requirements for defined benefit schemes to be used for automatic enrolment. Requiring pension providers to disclose all transaction costs in DC workplace pensions (see section 2.8) 4. A new Statutory Power for the Pensions Regulator The Pensions Regulator has been given a new statutory objective, to have regard to the growth prospects for sponsoring employers when considering trustees scheme funding plans. This reflects concerns that pension scheme deficits are hampering private sector growth and development. The Pensions Act 2014 provides that, from 14 July 2014, the Regulator is expected to minimise any adverse impact upon the sustainable growth of an employer. To coincide with this new power, the Regulator has revised its code of practice and guidance on funding defined benefits (see section 4.1). 5. The Revised Statutory Definition of Money Purchase Benefits Section 29 of the Pensions Act 2011 provides for a revised definition of money purchase benefits, which came into effect on 24 July This stems from a 2011 Supreme Court judgment, which acknowledged the possibility of a deficit arising in relation to certain benefits that had previously been regarded as being money purchase, despite there being no statutory protections in place for members of such schemes. The change in the law ensures that only those benefits where there is no risk of a funding deficit can be classed as money purchase, and so subject to DC rather than DB regulatory requirements.

8 The new definition will affect schemes that: will continue to allow payment of AVCs as scheme pensions from the scheme after 1 April 2015; contain an element of money purchase underpin or defined benefit top-up; guarantee investment returns; or treat cash balance benefits as money purchase for some or all purposes. Transitional protection is provided for events occurring between 1 January 1997 when the legislation has retrospective effect from and 24 July This means that schemes will not have to revisit past decisions in almost all cases. In November 2014, the DWP published guidance for trustees on the changes to the statutory definition. 6. Lifetime Allowance Protection To protect members who are affected by the lifetime allowance (LTA) reduction, to 1.25m from 6 April 2014, HMRC has made two forms of protection available. Applications to use the first, fixed protection 2014 (FP14), had to be submitted to HMRC by 5 April FP14 members should normally have ceased to contribute or accrue further benefits in registered pension schemes from 6 April HMRC is also offering an individual protection option (IP14) for members, with pension pots of more than 1.25m on 5 April 2014, and who do not have primary protection of their pre-6 April 2006 rights. Further accrual is permitted under IP14 and members with enhanced protection, fixed protection or FP14 will be able to also register for individual protection (with enhanced protection or either form of fixed protection taking precedence). IP14 members will be granted a personalised LTA that is equivalent to the value of their pension rights at 5 April 2014 (up to a maximum of 1.5m). Members can now register with HMRC for IP14, and have until 5 April 2017 to do so. 7. Same Sex Marriage Marriage for same sex couples in England, Wales and Scotland became law in As a result, employers and trustees need to decide on the treatment of same sex married couples in respect of survivors benefits under their scheme and references to marriage, and related terms under scheme rules may need to be updated. Generally speaking, same sex married couples are provided with the same legal rights as opposite sex married couples, although this does not apply to survivors benefits under occupational pension schemes. The Equality Act 2010 enables trustees of occupational pension schemes to exclude surviving civil partners and same sex spouses from any statutory entitlement to non-contracted-out benefits accrued before 5 December Rights to contracted-out rights accrue in respect of the member s service from 6 April 1988 in respect of GMPs, and 6 April 1997 for post- 97 rights.

9 The DWP has reviewed the legitimacy of allowing occupational pension schemes to treat same sex married couples and civil partners differently from opposite sex married couples, in relation to survivors benefits. A report on this review was published in June 2014, but no decision has been reached on whether (and if so, how) to resolve these differences. 8. Budget 2014 The Impact on Defined Contribution Members who have Recently Taken their Tax-Free Cash and/or Purchased an Annuity Since April 2006, a pension commencement lump sum (PCLS) has had to have been paid within an 18 month window of - six months before and 12 months after - a member attaining an actual entitlement to receive their pension to be an authorised payment. In a DC pension scheme, PCLS is typically paid to members in the six months before their annuity is purchased. Following the Budget 2014, members approaching their retirement are likely to now have different views on how, and when, they might want to take their pension savings from DC arrangements. The Finance Act 2014 includes temporary provisions to enable members to take a PCLS, but give them longer to decide how to access the residual pension. Members will need to take their PCLS before 6 April 2015 and the associated pension before 6 October 2015 for these rules to apply. For DC arrangements, the Finance Act 2014: allows the pension associated with a PCLS that is paid before 6 April 2015 to be paid no later than 5 October 2015; allows the funds intended to provide a pension associated with a PCLS that is paid before 6 April 2015 to be transferred to and paid from a different scheme to the PCLS; ensures that where the associated pension is paid from a different scheme to the PCLS under the bullet point above, any right to a protected pension age or protected lump sum is preserved as part of the transfer; ensures that where an intended PCLS received before 6 April 2015, is repaid to the scheme before 6 October 2015, it is treated for all tax purposes as if it had never been paid; allows a member who has received a PCLS before 27 March 2014 to commute the uncrystallised expected pension to a lump sum under the trivial commutation or small lump sum rules providing they meet the other conditions; ensures that where a member receives a PCLS, and dies before taking the expected pension under these transitional provisions, the PCLS will continue to be an authorised payment; modifies the scheme administrator reporting and scheme sanction charge rules in certain circumstances relating to the above changes.

10 9. Finance Act Further Action to Combat Pension Scams Legislation has been introduced to widen the circumstances in which HMRC may refuse to register a pension scheme (and also seek to de-register a scheme), to include situations where HMRC believes that the scheme administrator is not a fit and proper person to fulfil that role, and where the scheme has been established for purposes other than the provision of pension benefits. These provisions came into force on 1 September HMRC has confirmed that these changes should have little or no impact on scheme administrators of pension schemes who comply with the legislation and operate the pension scheme in the manner intended by the pensions tax legislation.

11 2 Forthcoming Legislative and Other Changes 1. The Pension Schemes Bill The Pension Schemes Bill provides the legislative framework for defined ambition schemes (see section 3.3), including the introduction of collective defined contribution schemes. The Bill also introduces new definitions for defined ambition, defined benefit and defined contribution schemes. These definitions are based on the extent of the promise that schemes offer to members. Getting these definitions right is going to be critical to avoid creating problems for existing pension schemes and this is likely to be the issue that most attention is focused on as the Bill progresses through Parliament. Other issues are also included in the Bill, to support the pensions tax changes being introduced in April The Bill also includes the legislative provision for the guidance guarantee (see section 2.5). There are also changes to the statutory right of member s to transfer. The key change to the transfer provisions is that members will have a statutory right to certain partial transfers, such as AVCs in defined benefit schemes. Connected with this is the requirement that trustees of defined benefit schemes must have checked that members seeking transfers to DC arrangements have first obtained appropriate independent advice about the transfer. 2. Changes to how Defined Contribution Savings can be drawn at Retirement The Taxation of Pensions Act 2014 legislates for the pensions flexibility provisions announced in the Budget Subject to the provisions of scheme rules, members of DC arrangements will have far greater flexibility in how they access their retirement benefits. Members will still be able to purchase a lifetime annuity or receive a scheme pension, and take up to 25% of their benefits as tax-free cash. From 6 April 2015, members will be able to take their entire DC fund as an Uncrystallised Funds Pension Lump Sum (UFPLS). It will be possible for members to take their entire fund as an UFPLS in one go, or for more than one such lump sum to

12 be paid. 25% of each UFPLS will be payable tax-free, with the balance taxed at the member s marginal rate of tax. It will also be possible for members to transfer funds into a drawdown account (known as flexi-access drawdown) and take tax free cash. Members will not be restricted to only one of these options, but instead may choose a combination of some or all of these (subject to the rules of their scheme). From 6 April 2015, a new 10,000 annual allowance will apply to DC members, to run in parallel to the normal annual allowance. This DC annual allowance will apply in a number of circumstances, including where a member receives a payment from a flexiaccess drawdown fund or an UFPLS, as well as when a lifetime annuity or scheme pension is taken in certain circumstances. 3. Defined Contribution Flexibility The Ability to Amend Scheme Rules The Taxation of Pensions Act 2014 gives trustees the power to allow for the flexibility above. There is no requirement for employer consent when using this override. 4. Transfers from Defined Benefit to Defined Contribution Schemes The Budget changes are expected to make DC schemes more popular with members, and the government has confirmed that members of private sector (and funded public sector) DB pension schemes will continue to be able to transfer to these schemes. Trustees will be required to check that a member has received appropriate independent advice before transferring benefits from a DB scheme to a DC arrangement. During the Pension Schemes Bill s passage through Parliament, the government confirmed that this requirement will not apply where the DB transfer value is less than 30,000. Employers may be required to arrange, or pay, for this advice in certain circumstances. This could include cases of employer-led transfer exercises and DB to DC transfers within the same scheme. The amount that employers may have to pay for this advice may be capped in certain circumstances. The statutory requirement for trustees to pay a transfer value within six months will not apply where trustees have been unable to check whether the appropriate independent advice has been received, for reasons beyond their control.

13 The government has reaffirmed trustees powers with regard to the application of reductions to transfer values and their ability to seek extensions from the Pensions Regulator when paying cash equivalent transfer values. It is working with the Regulator to publish updated guidance for trustees on these issues, which the Regulator is to launch a consultation on shortly. The new guidance will give an overview of DB scheme trustees duties in relation to transfers, drawing together existing provisions and the main changes following the 2014 Budget. 5. Pension Wise (The Guidance Guarantee) Every member with DC savings will have a right to free and impartial guidance at retirement from April This guidance will be tailored to the member s circumstances, but will not recommend specific products (making it guidance rather than advice). In January 2015, the government revealed that this service would go to market as Pension Wise. To ensure impartiality, Pension Wise will be provided by independent organisations with no actual or potential conflict of interest. The Citizens Advice Bureau will provide face to face guidance, and telephone guidance will be provided by the Pensions Advisory Service. While it will not be mandatory for members to make use of the guidance before they access their pension benefits, members must be signposted to Pension Wise before they do so. It must also be made clear this guidance is free to members, impartial and with the option of having a face-to-face conversation. Precisely what trustees will have to tell members, about the availability of the guidance, is not yet known. New disclosure of information requirements will be introduced to confirm this. Owing to time constraints, the DWP will not be formally consulting on these new requirements. 6. A Second Line of Defence for Pension Schemes on Pension Flexibility In addition to Pension Wise, trustees will also be expected to check with DC members about their decisions on accessing their pension funds. In January 2015, the Financial Conduct Authority (FCA) wrote to providers of contract-based pension arrangements confirming that it would be expecting them to challenge members over their decision to access their funds and direct these members to either Pension Wise or a financial adviser. The FCA letter was not taken to include trust-based pension schemes. However, the government has since confirmed that it is working to ensure that similar rules are

14 introduced for trust-based schemes. Further detail on this is now awaited from the DWP and the Pensions Regulator. 7. Changes to the Taxation of Lump Sum Death Benefits The 55% tax rate on inherited pension funds, in both DC and DB pension funds, is to be abolished. The key date is when the payment is made, rather than when the member died. The reforms will apply to payments made on or after 6 April Beneficiaries of a member who died before 6 April 2015 (including deaths before the government s initial announcement about this on 29 September 2014) will be able to request that the payment of death benefits is delayed until the new tax year, in order to benefit from these changes. This does not mean however that payments can be deferred indefinitely. Lump sum death benefits will still have to be paid within two years of the trustees being notified of the member s death, to avoid unauthorised payment charges. In the Autumn Statement 2014, the Chancellor confirmed that these changes would be extended to benefits in a joint life or guaranteed term policy paid after the member s death. 8. Consultation on Minimum Governance Standards and a Charging Cap for Defined Contribution Schemes In October 2014, the DWP issued a Command Paper that expanded on the government s ongoing work on DC governance. This Command Paper consulted on draft regulations for DC occupational pension schemes (or DC sections of hybrid schemes), as well as the introduction of a 0.75% charge cap on default funds. These measures are due to come into force on 6 April The Command Paper builds on the earlier consultation by: setting out the government s proposed approach on various elements of governance; setting out in greater detail how it sees the charge cap working (including a ban on active member discounts); proposing requirements for greater transparency in workplace pension schemes; and suggesting new enforcement powers for the Pensions Regulator.

15 Each scheme s Chair of Trustees will be obliged to issue a regular Chair s Statement reporting on reviews of investment strategy and assessments of the value of costs and charges. The consultation closed on 14 November 2014 and in February 2015, the DWP published the government s response, and also laid draft regulations before Parliament. The government s position is largely unchanged from what it proposed last autumn. 9. New Rules on Paying Refunds of Contributions from Defined Contribution Schemes The government has confirmed that short service refunds for members of DC schemes will be restricted to periods of service not exceeding 30 days. This will affect members who join a pure DC schemes from next October. (The precise date has still to be confirmed.) Members of defined benefit schemes, or members whose entitlement is not restricted to DC benefits, are unaffected by this announcement. Trustees of pure DC schemes that currently offer the option of short service refunds to members with pensionable service of more than 30 days should review their scheme rules and member booklets, to see what changes are required. 10. Automatic Transfers of Small Defined Contribution Funds In December 2014, the Pensions Minister Steve Webb announced that autumn 2016 will see the launch of a new system in which small pension pots will automatically follow workers from job to job. The DWP is continuing to work on developing the details of the automatic transfers or pot follows member implementation model. This is likely to include an initial opt-in facility, where members will have to make an active decision to transfer their benefits. The autumn 2016 timetable is designed to bring in the scheme as soon as possible while also giving sufficient time for the industry to develop the new systems required. The DWP is looking to publish further information about the implementation model and timetable in February 2015, ahead of consulting on draft regulations.

16 11. Automatic Enrolment Earnings Thresholds for 2015/16 The DWP has consulted on its approach and broad proposals for the next annual revision of the automatic enrolment earnings trigger and lower and upper limits of the qualifying earnings band (QEB). The automatic enrolment earnings trigger determines who saves. The QEB sets minimum contribution levels for money purchase schemes. The DWP is required to review these thresholds each year, and revise them if appropriate, taking into account the prevailing rates of National Insurance contributions (NICs), PAYE personal tax allowance, basic state pension, inflation and any other factors that the DWP considers relevant. The earnings trigger for 2014/15 is set at 10,000 and is aligned with the personal allowance for income tax purposes. It has been aligned in this way since automatic enrolment was first introduced. However, the personal allowance has been increased significantly in recent years (rising from 7,475 in 2011/12 to 10,600 from April 2015). As a result, the DWP consulted on four options for the 2015/16 earnings trigger. To strike a balance between ensuring fairness and providing administrative simplicity, the DWP has decided to freeze the earnings trigger for 2015/6 at the current level. The DWP has also confirmed that it will maintain the link between the upper and lower limits for the QEB with the Upper Earnings Limit (UEL) and the Lower Earnings Limit (LEL) for National Insurance contributions respectively (using the 2015/16 LEL and UEL). 12. Exceptions from the Employer Duties for Automatic Enrolment The Pensions Act 2014 contains a general power for the government, to make exceptions from the employer duties under automatic enrolment, and the DWP has been considering when it would be appropriate to grant such an exception. In February 2014, the DWP signalled its intention to permit exceptions with regard to: workers with some form of tax protection on existing pension savings (e.g. fixed protection); workers who are under notice to retire or leave service for another reason; and members who had been contractually enrolled into a pension scheme and who cease active membership. The DWP is now consulting on exactly when these exceptions will apply. At the same time it is also consulting on proposals to introduce an alternative quality requirement that employers can choose to meet where a defined benefit scheme is being used to meet the automatic enrolment duties. There are also proposals to simplify some of the information requirements for employers. The consultation ran until 9 January 2015.

17 13. State Pension Reform The Basic State Pension and the State Second Pension (S2P) will be replaced by a new single-tier state pension from April The new benefit is likely to be payable at a rate of around 150 per week, which would be above the basic level for meanstested support. Individuals will need 35 years of National Insurance contributions (NICs) (or credits) to qualify for the full pension. The Government has also committed to review the state pension age (SPA) every five years, from the next Parliament, to ensure that SPA keeps track with increased life expectancy. Any changes to SPA would require at least ten years notice before implementation. The government is looking to base future SPA increases on the principle that on average, people should not spend more than 1/3 rd of their adult life in retirement. This means that SPA is likely to rise to 68 in the mid 2030 s and to 69 by the late 2040 s. 14. The Cessation of Contracting Out The abolition of S2P means that contracting-out for defined benefit schemes will cease. This means that sponsoring employers, and members, of contracted-out schemes will face an NIC increase. The Government is to give sponsoring employers of such schemes, limited powers to change scheme rules for these purposes, without trustee consent. This means that employers may choose to reduce benefits and/or increase member contributions. The terms of this statutory override are included in the Pensions Act The DWP has consulted on regulations, which give more details about the operation of the override. The government response to this consultation and the regulations are expected to be published shortly, in time for them to come into force before dissolution of Parliament on 30 March Employers will only be able to use the power to offset the additional NIC costs incurred through the abolition of contracting-out. The DWP has also consulted on another set of draft regulations governing the rules which schemes that were contracted-out will need to comply with following the abolition of DB contracting-out in April These are not now expected to be laid until after the General Election on 7 May The basic provisions floated under these regulations were that accrued contracted out rights: would be protected and that many of the statutory provisions relating to them (for instance, calculation of lump sums, provision of widow and widowers benefits and revaluation requirements) would continue with some modifications. The DWP is also expected to issue a short guide on a number of contracting-outrelated technical changes that have been made in the last year. Trustees of schemes that have a liability for guaranteed minimum pensions accrued before 6 April 1997 may use a scheme reconciliation service established by HMRC,

18 ahead of the abolition of contracting-out in April 2016, for all non-active members (see section 3.1). In November 2014, the DWP published guidance for both trustees and sponsoring employers explaining what needs to be done to prepare for the cessation of contracting out. 15. Changes to the PPF Compensation Cap The PPF compensation cap is used to determine the maximum level of compensation payable, where a member had not yet attained a scheme s Normal Pension Age at the date of entry into the PPF assessment period, and was not receiving an ill health pension from the scheme at that date. In these circumstances, their compensation is subject to a 10% reduction. Should a member s compensation exceed the compensation cap, then their benefit is limited to the level of the cap, before the 10% reduction is applied. The cap varies, depending on a scheme member's age, and the PPF publishes agerelated factors to apply to members benefits. However, no account has been taken of a member s length of service in their scheme, which means that long-serving members can be disproportionately affected by the cap. To remedy this, the Pensions Act 2014 provides that the maximum level of capped PPF compensation will be increased by 3% for every year of service over 20 years. There will still be a cap on PPF compensation for long-serving members, although it is to be double the standard cap that applies for members with less than 20 years service. 16. Removal of the NEST Restrictions The National Employment Savings Trust (NEST) was established in 2010 to support automatic enrolment. It was specifically designed to target moderate earners and smaller employers. To ensure that NEST remained focused on this target market, and ensure stability during the implementation of automatic enrolment, a number of policy constraints were imposed on the scheme. These included an annual contribution limit ( 4,600 in 2014/15) and restrictions on transfers. These restrictions have been the subject of criticism since NEST came into being. However NEST receives State aid approved by the European Commission (EC) and the constraints were cited in the case for State aid, as ways in which the government has sought to minimise any market distortion. The EC has recently confirmed that removing the restrictions was indeed compatible with the State aid measure.

19 Following consultation, the DWP has confirmed that amending regulations to remove the restrictions will be brought into force, although they will not take effect until 1 April Increases to the PPF Administration Levy The PPF administration levy is payable by pension schemes that would be eligible to enter the PPF in the event of a scheme sponsor entering insolvency. This is separate from the levy paid to actually fund PPF compensation (see section 5.1) and funds the general running costs of the PPF. The levy is paid on a per member basis by eligible schemes and has not increased for the past two of years. Recent government analysis has indicated that if the PPF administration levy rates continued to remain unchanged a deficit of over 5m would exist at this end of this current tax year, and this would increase by around 3m per year, if action is not taken. Following consultation, the DWP is to increase the PPF administration levy rates in each year from 2015/16 to 2017/18, to eliminate the deficit by the end of March 2022.

20 3 Other Current Issues 1. Scheme Reconciliation Service Contracting out for defined benefit schemes is ceasing from 6 April 2016, when the new single-tier state pension comes into effect (see section 2.13). In advance of this, HMRC is offering a Scheme Reconciliation Service to assist administrators and trustees in the reconciliation of their membership and guaranteed minimum pension (GMP) data for all non-active members against HMRC records. The service provides a list of contracted out periods and GMP data for members who have left contracted-out employment. This includes early leavers, pensioners, widows, widowers and surviving civil partners. In November 2014, HMRC revealed it had received an unexpectedly low volume of queries from schemes that have obtained data as part of the service. According to HMRC, it received 1,889 requests and issued records for 1,175 schemes, but very few of these schemes had follow up queries. Although schemes are under no obligation to use this service, it represents an ideal opportunity to ensure the accuracy of scheme data ahead of April Trustees that intend to use the service should submit a request to do so as soon as possible, as HMRC are dealing with cases in the order they are requested and there is already a delay of several months in receiving this data from HMRC. 2. Availability of Pension Savings to Trustees in Bankruptcy In December 2014, the High Court ruled that a bankrupt individual s uncrystallised pension rights were not available to his creditors. This decision breaks from previous case law and raises questions about how other members pension funds may be dealt with in bankruptcy. This case, which is expected to be referred to the Court of Appeal, comes at a particularly inconvenient time for trustees in bankruptcy (who seek funds on behalf of a bankrupt s creditors). From April 2015, it will be possible for many members to access their DC pension savings as a cash lump sum, and pension schemes are expected to become a much more attractive target for trustees in bankruptcy. Until the Court of Appeal rules on this case, pension scheme trustees should seek legal advice in the event of receiving any claims from a trustee in bankruptcy.

21 3. Defined Ambition Schemes The drive for defined ambition (shared risk) schemes stems from the desire to bridge the gap between defined benefit (DB) and defined contribution (DC) schemes. The DWP recognises the need for some middle ground, due to the costs involved with DB schemes and the lack of guarantees inherent in DC schemes. In conjunction with pensions industry, the DWP has been considering the designs that defined ambition schemes could take. Different models were proposed, which can be summarised as: Flexible DB schemes where employers are not necessarily subject to all of the requirements currently imposed on DB schemes. Guaranteed DC schemes where some security is provided for members against investment risks. Collective DC schemes where members funds are pooled, rather than invested individually. The Pension Schemes Bill (see section 2.1) provides for the latter two of these proposed designs to be included in legislation. Plans for flexible DB schemes have been dropped by the government after it made it clear that employers would not be able to amend members accrued rights. 4. Action to Combat Pension Scams There has been a marked increase in possible pension scams (or pension liberation) in the past couple of years, and Xerox is carefully monitoring suspicious transfer cases involving such arrangements, in conjunction with the Pensions Regulator, HMRC and the Financial Conduct Authority (FCA). In July 2014, the Regulator updated its guidance on pension scams (see section 4.1). The Finance Act 2014 has given HMRC further powers to consider if those behind a scheme are fit and proper with regard to registration and de-registration of a scheme (see section 1.9). A cross-industry group (which has been acknowledged by the DWP and includes representation from the Regulator) is drawing up a code of practice for scheme transfers as a barrier against fraudulent transfer activity. This is now expected to be published in February There are currently more than 140 complaints relating to suspected pension scam activity lodged with the Pensions Ombudsman. Of these, the majority relate to member complaints about schemes blocking transfers to suspicious receiving arrangements. Most of the determinations on these cases are still awaited. This delay has been very frustrating for both trustees and advisers, as the Ombudsman s opinion on pension scam cases will help to determine how such issues are treated in the future. The first determination was published just before Christmas, with three more being issued in January The Ombudsman has rejected the members complaints on

22 technicalities, warning transferring schemes that more unspecified checks need to be undertaken if transfers are going to be blocked. There is also concern about the implications for pension scams of the new flexibility for DC scheme benefits, which comes into force in April It is anticipated that those behind the scams will increasingly look to target members who are aged 55 and over in DC schemes. Such activity will be far harder for pension scheme trustees to combat. 5. New IORP Directive In March 2014, the European Commission published its long-awaited proposal for a new, revised IORP (Institutions for Occupational Retirement Provision) Directive. (IORP is the term used by the Commission for pensions.) The proposals, requiring a formal review of the solvency requirements for IORPs by the Commission following entry into force of the Directive, have been watered down from earlier drafts. However, the proposed Directive does contain extensive new governance and communications, which will significantly impact UK occupational pension schemes. These include requirements for IORPs to: implement effective risk management, internal audit and actuarial functions; produce and maintain a risk evaluation report; be run by people with adequate professional qualifications, knowledge and experience (which could potentially signal the end of lay trustees); produce and maintain a remuneration policy; provide prescribed information to members, including detailed requirements regarding the format and contents of pension benefit statements; appoint a depository to safeguard plan assets, where members and beneficiaries fully bear the investment risk (which will be the case for most UK DC occupational pension schemes); and notify their national regulator before any activities are outsourced. The Directive also proposes a relaxation of some of the regulatory requirements for cross-border schemes. In October 2014, The Council of the EU published the amended text of a draft revision of the directive. The text includes an amendment to the current requirement for cross border schemes to be fully funded (on a technical provisions basis) at all times. It had previously been reported that the Directive would remove this requirement, but the first published draft earlier this year did not reflect this. Under the amended wording, cross-border schemes will only be required to be fully funded at the start of cross-border activity. If underfunding is later apparent, this may be rectified by the use of a recovery plan. The intention is that this will help to reduce barriers to cross-border provision a key aim of the revision of the Directive. There has been criticism of some of the proposals: not least the provisions on pension benefit statements, which are highly prescriptive and yet, are expected to cover no longer than two pages of A4 paper. The proposed Directive states that Member States will have to implement the new requirements by 31 December It remains to be seen how achievable this timescale is.

23 6. Occupational Pension Schemes Survey 2013 The Office for National Statistics (ONS) has published the results of its latest survey of occupational pension schemes. The survey, previously run by the Government Actuary s Department, has been published annually since 2004, although it has been published at less regular intervals since the early 1950 s. It looks at DB and defined contribution DC occupational pension schemes with at least two members. Issues such as membership, contributions, and benefits are covered. Key points to emerge include: Total membership of occupational pension schemes with two or more members was estimated to be 27.9 million in 2013, an increase of 300,000 compared with The number of active members rose slightly from 7.8 million in 2012 to 8.1 million in For private sector DB schemes, the average contribution rate (not including deficit reduction payments) was 5.2% of pensionable earnings for members and 15.4% for employers. For private sector DC schemes, the average contribution rate was 2.9% for members and 6.1% for employers.

24 4 Recent Pensions Regulator Publications 1. Definitive Guidance DC Scheme Return Data Results In January 2015, the Regulator published the latest annual statistical update of occupational defined contribution (DC) trust-based pension schemes and memberships, including DC memberships of hybrid dual-section schemes. The information is based on data provided by schemes on returns issued by the Regulator in the second half of 2014 and relates to the levy year 2013/14 or earlier. It is based on a wide-ranging data set covering around 40,000 current schemes from the pension schemes register, with an effective date of 31 December Key findings: The total number of DC memberships of occupational pension schemes with 12 or more increased by 80% (from 2.5 million to over 4.5 million). Active membership increased by 140% (from 1.3 million to over 3 million). There are 300 DC trust-based schemes being used for automatic enrolment. Reported assets in DC schemes with at least 12 members increased by 3 billion (11%). DC schemes received net transfers in of 398 million. Schemes with less than 12 members, and membership of these schemes, continued to reduce (by around 3%). Changes to the Scheme Return New questions have appeared on this year s Scheme Return from December The new information required includes: More recent membership details. Details of the financial assumptions used, where a scheme was in surplus at the most recent valuation. Information about a scheme s Value at Risk (VaR) calculation (where it has one). This is a common method for assessing the size and likelihood of potential risks happening over a defined period of time. If a scheme cannot provide a VaR figure, the Regulator will assess the investment risk by reference to the scheme s asset allocation. Where a scheme has an asset-backed contribution (ABC) arrangement in place, information about the structure, valuation and terms of the ABC.

25 Funding Defined Benefits Revised Code of Practice and Guidance On 29 July 2014, the Regulator s updated DB code of practice and associated guidance came into force, following consultation with the pensions industry. Following the introduction of the Regulator s new statutory objective (see section 1.3) the new code of practice seeks to strike a balance between employers DB funding obligations and their ability to invest in sustainable business growth. The update code also reflects how the Regulator s approach has evolved since the code of practice was first published in The Regulator has published: a code of practice that provides practical guidance to help trustees to meet the requirements of scheme funding legislation; a regulatory strategy summarising the Regulator s risk-based approach to tackling issues in DB schemes; and a funding policy describing in more detail the Regulator s intended approach to regulating DB funding issues. The Regulator is looking for trustees and sponsoring employers work together to establish viable, long-term funding plans, with trustees encouraged to take an integrated approach to managing key scheme risks: namely funding, investment and the employer's ability to meet its obligations to the pension scheme. Pension Liberation Scorpion Material Rebranded as Pension Scams In July 2014 the Regulator refreshed its scorpion material on the dangers of pension liberation activity. Now branded as pension scams, the Regulator s material, aimed at the pensions industry, trustees and members now focuses on the experiences of those who have been affected by transferring their pension savings. Victims of pension scams have warned of the devastating impact of losing thousands of pounds in retirement savings as part of a hard-hitting campaign to help tackle the problem. These members have spoken out in a bid to prevent others from being enticed into trying to access their pension pot as a lump sum or loan before age 55 without understanding the tax penalties or from being scammed into moving their retirement savings into unregulated high-risk or bogus investments that could result in them losing their entire pension pot. The known amount of funds paid into pension scams now stands at 495m in total. However, it is suspected that the real amount is likely to be substantially higher as not all activity is reported to the Regulator. Trustees are being urged to include the revised two-page leaflet in the next annual benefit statement sent to members, and anyone who requests a transfer in the meantime. This is standard practice for schemes administered by Xerox.

26 Statement on the Revised Definition of Money Purchase Benefits In July 2014, the Regulator published a statement on changes to the statutory definition of a money purchase benefit (see section 1.5). The statement advises trustees to consider whether their scheme may be affected by the clarified definition of money purchase benefits. (Affected schemes are more likely to be hybrid schemes and schemes that offer cash balance benefits and/or internal annuities.) Where it is determined that a scheme no longer offers money purchase benefits only, that scheme may be subject to different legislative and regulatory regimes, subject to the transitional measures provided by regulations. The Regulator is urging trustees to review their scheme s trust deed and rules and seek independent legal advice in order to determine the character of benefits provided by their scheme in light of the clarified definition of money purchase benefits. Trustees of hybrid schemes should also consider whether benefits within their scheme that have previously been treated as money purchase benefits continue to satisfy the definition of money purchase benefits. Conducting such a review and obtaining the necessary legal advice should assist trustees of affected schemes in complying with the appropriate legislative and regulatory regimes. If following a review, trustees find that despite its current or historic treatment as a money purchase scheme, their scheme offers benefits that have the potential to result in a funding deficit (and therefore falls outside the amended definition of money purchase benefits); they must notify the Regulator immediately, so that its records can be amended. Updates to the Trustee Toolkit The Regulator s Trustee toolkit is a free online learning system that can assist trustees in meeting their statutory knowledge and understanding obligations. In July 2014, the Regulator refreshed the toolkit, following the changes made by last year s DC code of practice and the recently updated code on funding defined benefits. The toolkit now offers four completely new modules focused on trustee governance and investment. There are also significant updates to existing content. Improvements include: The introduction of four new modules, two of which are focused on DC-related content, including investment in a DC scheme, and two new modules for all trustees. Restructured content so users can focus on modules which apply to the scheme type they oversee (DB, DC or hybrid). Rewritten tutorials, including the introduction of a charges glossary. The creation of a learning needs analysis tool so trustee boards can be directed to the area that will meet their needs.