TECHTALK SEPTEMBER 2015 ISSUE 5 VOLUME 14

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1 TECHTALK SEPTEMBER 2015 ISSUE 5 VOLUME 14

2 EDITOR CONTENTS Sandra Hogg Sandra is the senior tax manager within Scottish Widows with 17 years of hands on experience dealing with HMRC and advising owner managed businesses as an accountant and tax adviser. She has over 16 years insurance industry experience as a financial planning expert within the group. She represents Scottish Widows at industry forums and at the ABI s Investment Product Tax Panel and is Scottish Widows expert spokesperson on Tax and Financial Planning. CONTRIBUTORS Ian Naismith Ian is a senior manager in retirement income & planning. He also writes and presents extensively on pensions as well as representing Scottish Widows on trade bodies and in consultations with Government. Bernadette Lewis Bernadette joined the group in 2006 and has over 30 years experience in the financial services sector, gaining a broad experience across both life and pensions while working for providers and intermediaries. She now specialises in pension planning and automatic enrolment, while maintaining her expertise in tax and trusts. Jeremy Branton Jeremy has over 25 years experience working for financial services providers in a number of technical and advisory roles. Having joined the group in 2006 he now specialises in corporate pensions, with particular focus on pensions reform. Chris Jones Chris joined the group in He s worked in a number of technical roles in marketing, product development and technical support. After many years specialising in life and investment products his recent focus has been on the new pension reforms. Thomas Coughlan Tom has spent over 14 years in technical roles. He has wide experience including the provision of technical support to financial advisers covering life, pensions and investment compliance. He currently specialises in pension planning and automatic enrolment. Lynn Graves Lynn has 15 years experience in financial services, specialising in marketing, strategy and business development roles. MBA qualified, with a career dedicated to the B2B sector, Lynn is a senior manager within the Corporate Pensions, Market Development A RECORD HIGH FOR SAVINGS THE SCOTTISH WIDOWS RETIREMENT REPORT 2015 Ian Naismith The latest Scottish Widows Retirement Report reveals a record number of people saving adequately for retirement, but there s still a lot to do to provide a comfortable living standard for the majority. AGE DISCRIMINATION, RETIREMENT AND PENSIONS: CHANGING PATTERNS AT WORK? Bernadette Lewis A look at key aspects of age discrimination legislation applying to retirement ages and workplace pension provision. WORKPLACE PENSION SCHEMES AND EMPLOYER CONSULTATIONS Jeremy Branton Employers making changes to their pension arrangements in light of their automatic enrolment obligations may have a legal duty to consult their employees. LIFETIME ALLOWANCE PROTECTION READY FOR ANOTHER ROUND? Chris Jones The Lifetime allowance reduces again from April 2016 to 1m, accompanied by another round of protection. A further reduction means many more clients will be affected and in need of advice. We look at the options available. TUPE, PENSIONS AND AUTOMATIC ENROLMENT: UNDERSTANDING THE INTERACTIONS Bernadette Lewis Employers involved in TUPE transfers often have to comply with both TUPE and automatic enrolment legislation. We provide an adviser s guide to the essentials. AUTOMATIC ENROLMENT: SCHEME CERTIFICATION Thomas Coughlan A summary of the automatic enrolment certification options that allow employers to use an alternative definition of pensionable pay for automatic enrolment. PENSION FREEDOMS EDUCATING YOUR EMPLOYEES Lynn Graves The pension freedoms offer more choices, leading to employees wanting guidance and advice from sources including their employer. Poor decisions could mean being unable to retire and poor morale, affecting the employer too. This could lead to new opportunities for advisers. 2 techtalk

3 WELCOME TO THE SEPTEMBER EDITION OF TECHTALK Welcome to the September edition of Techtalk. I hope everyone has had a good summer break and is feeling refreshed and geared up to take full advantage of the opportunities presented by the usual multitude of legislative change! This month we ve got a big focus on workplace pensions planning looking at a range of subject matter that is likely to be of most concern to your employer clients. Bernadette provides some informative insight on the key aspects of the age discrimination legislation, looking at how it applies to retirement ages and workplace pension provision. She has also compiled a useful summary explaining how the TUPE (Transfer of Undertakings Protection of Employment) rules interact with automatic enrolment requirements. Many pension schemes will need to be reviewed and perhaps amended as employers approach their staging dates under automatic enrolment and the prospect of re-enrolment may also provoke employers to review their existing automatic enrolment arrangements. Jeremy provides a useful reminder about what would trigger the employer consultation requirements and how these rules apply. Tom outlines the certification options and explains how it can allow employers to use an alternative definition of pensionable pay for automatic enrolment. Certification can offer a useful alternative for employers who are looking for a straightforward, cost-effective and sometimes fairer approach to automatic enrolment. And Lynn Graves looks at the role that employers can play in supporting the financial education of their employees. She also considers the opportunity this presents for advisers. On the wider pensions planning front, Ian Naismith analyses the results from the latest Scottish Widows Retirement Report. The research indicates a good improvement in savings levels over the last couple of years, but is this likely to be enough to meet people s aspirations? You can also read the full report at: working/about/reports/pension-report And Chris provides a timely aide memoire about the protection options that are available to help an individual shield their pension pot from unwelcome tax penalties ahead of the reduction to the Lifetime Allowance that s set to come in on 6 April I hope you will find this edition both a useful guide and an interesting read and that we will have helped you in your discussions with your clients on these important and very topical subjects. For more information on workplace pension planning and pension freedoms please also take a look at our extensive range of support at: and financial-planning/pension-planning/retirementincome-planning Enjoy the read. Sandra Hogg techtalk 3

4 A RECORD HIGH FOR SAVINGS THE SCOTTISH WIDOWS RETIREMENT REPORT 2015 Ian Naismith There s been a definite upturn in the mood on pension savings in recent months. Around 5.3 million workers have now been automatically enrolled, though the pace has slowed considerably with only 133,000 added in the first half of As a direct result of automatic enrolment, active membership of pension schemes has been rising since 2012, following a decade of decline. So it was not unexpected, though very welcome, that the eleventh Scottish Widows Retirement Report revealed that a record number of people are now saving adequately, and that current savings levels have reached our benchmark 12% for the first time. But does that mean we re now saving enough as a nation? WHAT IS ADEQUATE PREPARATION FOR RETIREMENT? We ve used the same definition of adequacy for the last eleven years. It is that someone is either expecting to get their main retirement income from a defined benefits scheme or is saving at least 12% of their income for retirement. It s therefore a snapshot of current efforts rather than an assessment of total savings. The 12% includes employer contributions and non-pension savings for retirement, but not any money invested in property. The 12% assumes that the income we need in retirement to feel we are adequately provided for is related to our earnings while working, but lower earners need a higher replacement percentage than high earners. Figure 1 illustrates the potential replacement rates at various income levels from a 12% a year contribution plus state pensions. 4 techtalk

5 Figure 1 10,00 earnings a year 30,000 earnings a year 50,000 earnings a year 35% 46% 27% 98% Clearly, the 12% benchmark won t ensure a luxurious retirement, even when savings in National Insurance, travel costs and possibly mortgage are taken into account. It should provide what most would consider an acceptable, but not particularly comfortable, living standard. When we asked consumers what income they felt they would need to live comfortably in retirement, the average came out as 23,469. This is close to the average earned while working (taking into account that National Insurance is not payable in retirement), with lower earners looking for an increase to their income and higher earners willing to accept some reduction. Current savings levels are well short of those required to meet this target we estimated that a combination of state pension and savings at 12% from age 30 could produce a pension of around 15,600 a year for an average earner, which is only around two-thirds of what they were looking for. So while there s been a good improvement in savings levels over the last couple of years, it s only enough to provide a basic level of retirement income if it s sustained, and not enough to meet people s aspirations. techtalk 5

6 ADEQUATE AND INADEQUATE SAVERS This year, 56% of consumers met our definition of adequate saving, which is the first time it s broken out of the band of 45% to 55%. As in the past, men are saving more on average than women (figure 2), and that applies even to those at similar income levels. Over-50s save better than under-50s (62% against 54%). 28% believe their main income in retirement will come from a defined benefits pension, a figure which unsurprisingly has been declining steadily. Figure 2 52% of women are saving adequately 60% of men are saving adequately Another recurring feature of our research is that the group with the highest average income is those saving up to 6% of their income each year. High earners almost always have some savings, but often it is little more than a token effort, with around one in five of those earning over 50,000 saving under 6%. Unless they have other resources to use in their retirement, they could see a substantial drop in their living standard. Looking at occupational factors, public sector workers are understandably the best provided for because of the continuing prevalence of defined benefit schemes, meaning that twothirds (67%) are preparing adequately. At the other end of the spectrum, only 38% of the self-employed are saving enough, and that s even with 20% feeling their main income will come from a former employer s defined benefits scheme. Company size is a very important factor, with 68% of those employed by companies with 4,000 or more staff preparing adequately, but only 41% of those whose companies have fewer than 50 staff. 19% of people are saving nothing at all for their retirement, and this figure has hardly moved in recent years. The improvements have almost all come from people increasing their savings rates, rather than starting to save. One of the key measures of the remaining roll-out of automatic enrolment will be whether it prods habitual non-savers who largely work for small employers to start some preparation for retirement. Most say they can t afford to save anything (see Figure 3) but the incentive of an employer contribution, or simply lethargy when they are automatically enrolled, may change that view. Figure 3 1/5 people don t save anything 2/3 of those say they can t afford to save anything RECOMMENDATIONS Our report made a number of recommendations for the future: 1. A comprehensive reform of pension tax relief to develop a system which is less complex, and incentivises low and average earners to save more. This is now happening following the summer Budget, though we don t claim all the credit for that! 2. After that, a period of calm to embed the new pensions landscape in the minds of consumers. The public need the chance to digest the new pension rules, and educate themselves about the options now available to them, in order to make crucial decisions about their financial future. 3. A significant reduction to the automatic enrolment earnings trigger, and contributions based on full salary rather than band earnings. This would benefit lower earners, including many women. 4. Life-long financial education, and innovative use of technology to enable good quality independent advice at an affordable cost for lower earners. There is no single measure that will dramatically improve levels of saving for retirement, but if these recommendations are implemented they can build on the good work already done, including automatic enrolment, pensions freedom and state pensions reform, and enable more people to look forward to a financially secure retirement. 6 techtalk

7 AGE DISCRIMINATION, RETIREMENT AND PENSIONS: CHANGING PATTERNS AT WORK? Bernadette Lewis A look at key aspects of age discrimination legislation applying to retirement ages and workplace pension provision. This article includes: a summary overview of age discrimination legislation; a review of the age discrimination provisions of the Equality Act 2010 which apply to retirement ages and pension provision, particularly group personal pensions; discussion pointers on possible effects of the Freedom and Choice reforms. techtalk 7

8 EQUALITY ACT 2010 The Equality Act 2010 replaced a wide range of existing discrimination law. This included the age discrimination legislation relating to pensions that had been in place since 1 December Under the Equality Act it s unlawful to discriminate against employees, job seekers and trainees because of their age, and there are no upper age limits on unfair dismissal and redundancy. The age discrimination provisions don t apply to state pension arrangements, pension sharing on divorce, or National Insurance rebates paid to contracted out schemes. There are four types of age discrimination: direct discrimination treating someone less favourably because of their age; indirect discrimination for example, requiring 10 years industry experience may disadvantage younger job applicants; harassment related to someone s age; victimisation unfair treatment of an employee who has made or supported a complaint about age discrimination. The direct and indirect discrimination provisions still offer some scope for employers to treat employees differently on the grounds of age. The test is whether any direct or indirect discrimination is objectively justified as a proportionate means of achieving a legitimate aim, which can include business needs and efficiency. Essentially, the employer has to consider if there s a less discriminatory way to achieve the same outcome. There are no objective justification provisions in respect of harassment or victimisation. ABOLITION OF DEFAULT RETIREMENT AGE The default retirement age (DRA) was abolished with effect from 1 October 2011 by the Employment Equality (Repeal of Retirement Age Provisions) Regulations Before that, it was lawful for employers to set a DRA, so long as it was at least age 65. Employers can still set their own Employer Justified Retirement Age (EJRA), but this has to be objectively justified. For example, an EJRA might apply to posts in the emergency services that require a significant level of physical fitness. As this won t be relevant to most occupations, in general older workers can now retire when they choose. The regulations abolishing the DRA also made age limits lawful where employers provide insurance or related financial services to employees. For example, an employer providing life cover or critical illness cover can impose an upper age limit of the older of age 65 or state pension age. This reflects that fact that it becomes ever more expensive to provide insured benefits to older age groups. GROUP PERSONAL PENSIONS Under schedule 3, paragraph 20 of Equality Act 2010, where an employer offers a group personal pension (GPP), it s responsible for ensuring that the benefits meet the provisions in Part 5: Work of the Act. That is, it has to ensure that it has considered all the discrimination legislation, not just the age related provisions. In respect of employer contributions to personal pensions, under schedule 2 of the Equality Act 2010 (Age Exceptions for Pension Schemes) Order 2010 it s permissible: to pay different rates of contribution based on age, provided the aim is to equalise (or make more equal) the age related outcomes for members in comparable situations; to pay different rates of contribution linked to remuneration levels; to cap pensionable pay; to set a minimum eligibility age for an employer contribution and for different minimum eligibility ages to apply to different groups of workers; for the employer to pay the same rate of contribution for all workers. There s no specific exemption permitting an age cap for employer contributions to personal pensions. As, on the face of it, this is age discrimination, an employer who wants to do this will have to show that it s objectively justified. Within limits, it s permissible to base entitlement to an employer pension contribution on length of service criteria. The relevant provisions are in the Equality Act 2010 (Age Exceptions for Pension Schemes) (Amendment) Order For example, the employer could pay lower contributions for workers with less than five years service than for those who ve worked for it for at least 5 years. If the employer wants to set a length of service requirement of more than 5 years, it must show there s a reasonable business justification. For example, rewarding loyalty or motivation. OCCUPATIONAL PENSION SCHEMES The age discrimination provisions in the Equality Act 2010 cover all types of occupational pension schemes (OPSs), including defined benefits, money purchase and hybrid arrangements. The age discrimination provisions don t apply to OPS pension rights accrued, or to benefits payable, in respect of service before 1 December This is confirmed in the Equality Act 2010 (Age Exceptions for Pension Schemes) (Amendment) Order The Equality Act treats every OPS as incorporating a non-discrimination rule, although this doesn t apply to pension credit members. The Equality Act also gives trustees and managers of OPSs the statutory power to make non-discrimination alterations by resolution, if the scheme lacks suitable means to make such changes. If the rules or operation of an OPS give the trustees or employer concern about possible discrimination claims under the Equality Act 2010, they should seek specialist professional advice before taking any action. There are extensive age-related exemptions in schedule 1 of the Equality Act 2010 (Age Exceptions for Pension Schemes) Order Given the complexity of the issues, the following list covers only a limited number of the key exemptions relevant to money purchase OPSs. In occupational pension schemes, it s permissible: to have minimum and maximum ages for admission to a scheme, which can vary for different groups of workers; 8 techtalk

9 to have a minimum level of pensionable pay before permitting admission to the scheme (subject to restrictions); to make age related contributions to a money purchase scheme, provided the aim is to equalise (or make more equal) the age related outcomes for members in comparable situations; to have earnings related contributions in a money purchase scheme; to have equal contributions irrespective of age in a money purchase scheme; to cap pensionable pay in a money purchase scheme. Under the Equality Act 2010 (Age Exceptions for Pension Schemes) (Amendment) Order 2010, a length of service exemption covers any rule, practice, action or decision by the scheme trustees or managers regarding accrual, admission or eligibility or of an employer regarding admission or benefit where one employee is disadvantaged compared with another because they have less service with the employer. For a money purchase scheme, it s permissible to base entitlement to an employer pension contribution on length of service criteria. Where the length of service requirement is more than 5 years, the employer must show there s a reasonable business justification. AUTOMATIC ENROLMENT Some employers aim to limit their automatic enrolment costs by segmenting their workforce and offering different pension arrangements to various groups of workers. They need to ensure they don t breach any of the direct or indirect discrimination provisions in the Equality Act 2010 by doing so. Employers that have reached their staging date have to automatically enrol eligible jobholders and offer opt in rights to non-eligible jobholders who are not in a qualifying workplace pension scheme. They must offer access to a workplace pension scheme to entitled workers. They can t use length of service criteria to avoid these legal duties. However, there is scope to use the age discrimination length of service exemptions. An employer could pay the minimum employer contributions required under the automatic enrolment legislation for new starters, but a higher level of employer contributions after, say, 2 or 5 years service. CHANGING RETIREMENT PATTERNS The Freedom and Choice pension reforms have fully broken the traditional link between ceasing paid employment and starting to take pension benefits. Extensive publicity means pension scheme members are more aware that it s possible to start taking pension benefits before stopping paid work. If this becomes more common in practice, it will have indirect effects on employers and workplace pension planning. Many workers nearing or over age 55 have built up a large enough pension pot to consider turning a hobby into part time work, using their skills on a consultancy basis, or realising an entrepreneurial dream. So it s possible the Freedom and Choice reforms will prompt experienced workers to retire earlier than the former expected age for their sector. This could result in problems in highly skilled sectors, where there s a lengthy training requirement before new entrants become fully competent. If employers haven t engaged with their skilled workers about their goals and plans, they may struggle to maintain the pipeline of replacements. In addition, some workers will be accessing their pension funds at age 55 to pay off debts or to help their children onto the property ladder. If they plan poorly, they may find themselves unable to afford to stop paid work at the age they d expected. As a result, employers could be coping with workers who really want to retire before state pension age, but don t have sufficient private pension provision to do so. Without a default retirement age to fall back on, employers may find themselves with morale and performance management problems. Employers who are concerned about these issues need an approach which doesn t fall into direct or indirect age discrimination. If a worker of any age is performing poorly, the employer should address this in the same way, offering the same opportunities to address any training and development needs. Expecting that an older worker who s performing poorly will simply retire soon may be discriminatory. An employer who follows the normal performance management procedure can dismiss a worker on capability grounds if performance levels don t improve. Employers can have discussions using open questions with all workers about their future aims, no matter what their age. This can help an employer identify training and development needs across all age groups. It also provides the opportunity for older workers to raise their retirement plans at a time of their choosing. This can help employers to plan recruitment early enough to replace experienced workers who ve indicated they want to retire in a few years time. There s also a potential role for workplace based financial planning advice. Basic financial education might help workers manage their finances, avoid or repay debts, and make realistic levels of pension contribution. More affluent workers may be prepared to pay for personalised advice on investing their pension funds outside the default option and then feel encouraged to move on to more holistic planning. If these approaches result in workers successfully achieving their retirement goals, both they and their employer are likely to benefit from their greater engagement in the workplace. FURTHER INFORMATION This article can only provide a high level summary of the key aspects of age discrimination legislation as it relates to pensions. In many cases, trustees of occupational pension schemes and employers will need to seek specialist professional advice. For further general information see: The Gov.uk website: The ACAS website: techtalk 9

10 WORKPLACE PENSION SCHEMES AND EMPLOYER CONSULTATIONS Jeremy Branton Employers reviewing existing workplace pension schemes against the automatic enrolment (AE) criteria may find they have a duty to consult with their workers. This could apply if they are considering amending contributions to an existing occupational pension scheme (OPS) or group personal pension (GPP) or closing an existing OPS as part of the process. This presents an ideal opportunity to promote the benefits of pension saving. Consultation with employees about their pension provision is likely to increase their engagement with the process. WHEN DOES THE DUTY TO CONSULT APPLY? The consultation rules apply to employers who: have at least 50 employees (not members) sponsor an OPS (including final salary and money purchase but not one member schemes) operate a GPP via salary deduction into which they make contributions from their own resources. The consultation process is triggered where a listed change (see below) has been proposed to affected members pension arrangements. Affected members are existing and prospective members and their representatives. Deferred and pensioner members don t need to be consulted as it s unlikely any changes would impact benefits already accrued or in payment. While the employer has the duty to consult, the change itself may have been initiated by another party such as the trustees, administrator or scheme provider. The Pensions Regulator (TPR) expects employers to provide sufficient information for those affected to understand the implications of the changes being proposed. Employers should also consider the quantity and complexity of information they provide employees and allow an appropriate period for the consultation process to take place. 10 techtalk

11 Consultation enables an employer s workforce to provide views on changes being proposed to a pension scheme before any final decisions are taken. It should also raise awareness of the employer s pension arrangements and encourage take up of membership or result in fewer opt outs. TPR has produced guidance for employers on the duty to consult: LISTED CHANGES THAT TRIGGER A CONSULTATION The following apply to money purchase OPS and GPP/GSHP except where indicated: An increase in the normal retirement age as set out in the scheme rules (OPS only) Closure to new entrants where active members remain in the scheme (OPS only) Stopping future accrual of benefits (OPS only) Stopping or reducing employer contributions Requiring members to contribute where previously there was no requirement Increasing member contributions Further listed changes apply to final salary schemes. There is no requirement to consult if a listed change is excluded under the legislation the most important being changes made to comply with a statutory requirement. Further details are included in Department of Work & Pensions (DWP) guidance: Employers need to consider the appropriateness of an existing scheme and whether it delivers good member outcomes. They may find that an existing scheme or GPP is unsuitable for AE purposes, particularly in light of the new governance requirements applying to defined contribution workplace pension schemes from 6 April As already mentioned, introducing a new AE scheme or GPP won t trigger a consultation in itself. However, if current arrangements are in place and the new scheme will result in either a reduction in employer contributions or increase in employee contributions, a consultation could be required. EXAMPLES OF CHANGES REQUIRING CONSULTATION Since staging, an employer has been funding the minimum level of contributions themselves with contributions based on members basic pay. The employer considers this will become too expensive when the minimum contribution increases to 6% in October If the employer wishes to introduce a requirement that members would need to contribute too, and has more than 50 employees, this would trigger the consultation requirement. Following a review of its existing pension arrangements, an employer chooses to wind up its OPS and replace it with a GPP. Consultation would be triggered if there are more than 50 employees, as benefit accrual and employer s contributions to an OPS will cease. Following consultation and assuming the decision is taken to proceed, members must also be provided with a notice period to wind up the scheme as specified in the scheme rules. The notice period is usually one month for contracted in schemes and three months if contracted out. EXAMPLES WHERE CONSULTATION WOULDN T BE REQUIRED An employer currently offers its employees a GSHP but there are no arrangements in place for either employer or employee contributions effectively a shell arrangement. Introducing a new scheme for AE would not trigger consultation. Where employees have been automatically enrolled into an AE scheme, the statutory communications issued at outset explain when phasing in of contributions will apply, in line with the statutory requirements under Pensions Act In this situation, there is no requirement to consult with employees before implementing the actual increases in employee contributions. As long as an employer s contributions don t change and members contributions don t increase, switching from one GPP provider to another won t trigger a requirement to consult. An employer has an existing QWPS they wish to use for AE. The current scheme offers a 5% employer contribution provided employees match this contribution. As the AE regulations only stipulate minimum contribution levels, higher contributions levels are permitted provided there is no intent to encourage employees to opt out. This shouldn t apply in this example as the proposed contribution level is in keeping with the current arrangement. As there are no changes to the existing provisions, this doesn t trigger a consultation. Even where there is no statutory requirement to consult, it would be good practice for employers to consider consulting on any matter affecting their employee s pension rights. HOW DOES THE CONSULTATION PROCESS WORK? Consultation takes place with representatives of the affected scheme members such as a trade union. In the absence of an employee representative, it may be necessary to elect member representatives or deal directly with the affected members. The period for consultation must take into account all the circumstances and nature of the change and shouldn t be less than 60 days. A longer period may be appropriate. Before consultation commences, the employer must provide written information to the affected members and their representatives. This will describe the proposed change, its implications on the scheme, its members, and timescales. Once the consultation has concluded, the employer, or other party proposing the change must consider all responses before deciding whether to proceed. While the employer, or other party won t need members consent to implement changes, they may find it difficult to demonstrate they are promoting good member outcomes if TPR deems the changes to be unfair or not in members best interests. FAILURE TO CONSULT In exceptional circumstances it may not be practical for an employer to consult and TPR may agree to waive or relax any of the consultation requirements, provided members best interests aren t prejudiced. Listed changes made to schemes without consultation will still be valid but members (or their representatives) may complain to TPR who can issue an improvement notice or impose financial penalties. techtalk 11

12 LIFETIME ALLOWANCE PROTECTION READY FOR ANOTHER ROUND? Chris Jones The lifetime allowance reduces again from 6 April 2016 to 1m, accompanied by another round of protection. A further reduction means many more clients will be affected and in need of advice. We look at the options available. Whilst at the time of writing we don t have the technical details, HMRC pension schemes newsletter 70 confirmed that there will be the same options as in 2014 with the same conditions. The only difference will be the application process and deadlines which are yet to be decided, however, there is a suggestion that the time limits may be removed altogether. Depending on the value of their funds as at 5 April 2016, clients have up to five choices, Individual Protection 2016, Fixed Protection 2016, both forms of protection, or no protection. In addition, clients over their minimum retirement age could also consider the option of crystallising benefits before 6 April Let s start with an overview of the two protection options we expect to be available. 12 techtalk

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14 FIXED PROTECTION 2016 (FP2016) Offers a protected lifetime allowance (LTA) of 1.25m No minimum fund value requirement Money purchase contributions must cease by 5 April 2016 Final salary allows limited accrual based on CPI increases or potentially other increases covered in scheme rules Not available to those with Primary or Enhanced Protection Await confirmation of the application window. It is possible that there will be no application deadline at all. INDIVIDUAL PROTECTION 2016 (IP2016) IP2016 will be available to those with funds valued at 1m or more as at 5 April 2016 Protects the value of the fund at 5 April 2016 up to a maximum of 1.25m Contributions and/or benefit accrual can continue Not open to those with Primary Protection Potentially no time limits on application Whilst there may be no time restrictions in applying for the latest rounds of protection, the requirement to cease accrual under FP2016 and the valuation requirements as at 5 April 2016 for IP2016, mean that this shouldn t make any difference to the advice considerations. DEPENDING ON THE VALUE OF THEIR FUNDS AS AT 5 APRIL 2016, CLIENTS HAVE UP TO FIVE CHOICES VALUATION OF BENEFITS The valuation of the client s current accrued benefits is the first important step in advising clients, as this will indicate what options are open to them and which type of protection, if any, should be considered. In summary benefits are valued as follows: For money purchase schemes it is simply the value of the fund For defined benefit schemes, it is the value of accrued pension X 20 plus any tax free cash (unless paid by commutation of the pension) For pre A-day pensions or annuities with no post A-Day crystallisation events the value is 25 X the pension in payment at April 2016 Pre A-day drawdown with no post A-Day crystallisation events 25 X the 120% of maximum drawdown (as if it were capped) in the drawdown year including April 2016 Crystallised rights will be valued at the amount tested against the lifetime allowance, re-valued in accordance with any changes to the limit. Once you have worked out the value of a client s benefits you can then consider the options available. CLIENTS WITH LESS THAN 1M Those that fall into this category have two choices; no protection or Fixed Protection Where there are no employer contributions then straightforward projections of future benefits to the expected retirement date will provide a useful guide to making a decision. Both the term to retirement and the assumed growth rates will make substantial differences to the outcome. EXAMPLES A client has a fund of 700,000 with 5 years to retirement. With an assumed growth rate of 5% after all charges, the projected fund value would be 893,397. This may indicate that fixed protection is not required and there may be scope for further contributions. If however, the same client has 10 years to retirement, using the same growth rate assumption they would have 1,140,226 meaning that FP2016 may be of benefit. Taking a more cautious view and assuming a growth rate of 3.5% a year, the same fund would only be worth 987,419. In this case the numbers would indicate FP2016 isn t required. The closer to retirement the client is the easier it will be to make the decision as you are less reliant on the assumptions proving accurate. Where there are no employer contributions and there is any likelihood that FP2016 will be of benefit then the safest option may be to rely on FP2016 and wait and see. They can then revoke FP2016 if further contributions will be of benefit in future years. Where there are employer contributions the decision is more difficult. If there is no alternative benefit on offer from the employer, then a taxed benefit is usually better than no benefit. However, it is possible that the effective rate of tax on the contribution is greater than 100%. In this case stopping contributions or benefit accrual and applying for protection may be the better option. More complex projections may be required to provide guidance. These could be similar to our examples in the section on funds between 1m and 1.25m below. 14 techtalk

15 CRYSTALLISE BEFORE THE REDUCTION Clients who have reached their minimum retirement age also have the option to crystallise benefits by 5 April This may be a better option for many as it effectively gives them a higher lifetime allowance and allows them to make further contributions. For example, a client aged 57 has built up a fund value of 850,000. If they crystallise by 5 April 2016 this will use up 68% of the LTA ( 850,000/ 1,250,000). This leaves them with 32% ie another 320,000 for further funding under the reduced lifetime allowance rather than 150,000 if they did nothing. Of course to achieve this they would need to withdraw the 25% tax free cash from the pension fund, however, the option of further funding may make this a more attractive option than simply applying for FP2016. Any exit penalties or guarantees on the current pension fund should also be considered. CLIENTS WITH MORE THAN 1.25M Where the fund is worth more than 1.25m the decision in most cases is fairly straightforward. FP2016 is no better than IP2016 in this scenario. Clients can rely on IP2016 and retain the option to make further contributions later, if for example fund values fall. With the previous round of protection, one potential issue with Individual Protection were pension sharing orders as pension debits reduced the relevant amount for IP2014 purposes. We will await further details in the technical guidance to see how these will be treated this time. CLIENTS WITH FUNDS VALUED BETWEEN 1M AND 1.25M This is where the decision can become more difficult. However, as before it can be more straightforward if there are no employer contributions to consider. In this case using both forms of protection is probably the obvious and easiest choice. This allows clients to adopt a wait and see approach. If the fund grows clients can rely on FP2016. If it drops they can revoke FP2016, rely on IP2016 and make further contributions. For many clients in this bracket the decision won t be so simple. This can arise where there are employer contributions and employees have no discretion as to how they are rewarded, for example many senior public sector workers. As with clients with less than 1m, projections comparing FP2016 and IP2016 can help guide the decision. EXAMPLES FP 2016 AND IP 2016 COMPARED The projections below compare FP2016 with IP2016 over two different terms. Where IP2016 is used, employer contributions can continue. Where FP2016 is relied upon, contributions must cease. To keep this simple, we are using money purchase contributions but the same principles will apply for defined benefit schemes. ASSUMPTIONS Current fund value 1.125m (half way between 1.25m and 1m) Employer contributions of 25,000 per year in advance under IP2016 No contributions with FP 2016 Average investment growth of 5% pa compound after charges LTA charge of 55% on excess over protected lifetime allowance Table 1 shows 3 years to retirement Table 2 shows 8 years to retirement Table 1 1,125,000 initial value 3 years until retirement FP2016 IP2016 Projected fund value 1,302,328 1,302,328 Projected value of contributions 0 82,753 Total fund 1,302,328 1,385,081 Excess over LTA 52, ,081 LTA charge 28, ,044 Benefit after charge 1,273,548 1,242,037 Value of additional contributions Outcome Fixed Protection would be better - 31,511 Table 1 shows that applying for IP2016 and continuing with employer contributions can produce a worse outcome than if contributions cease and the client instead applied for FP2016. This is because the protected growth on the fund is worth more than the value of the employer contributions which are subject to the LTA charge. Table 2 1,125,000 initial value 8 years until retirement FP2016 IP2016 Projected fund value 1,662,137 1,662,137 Projected value of contributions 0 250,664 Total fund 1,662,137 1,912,801 Excess over LTA 412, ,801 LTA charge 226, ,290 Benefit after charge 1,435,462 1,479,511 Value of additional contributions 44,049 Outcome Individual Protection would be better techtalk 15

16 In table 2 we have the same scenario but over a longer term. In this example a smaller proportion of the growth on the fund is protected and the employer contributions are more significant meaning that individual protection produces a better outcome. As before, the growth assumptions will also make a significant difference to the projected outcomes. Any projections can only provide a guide and each client will need individual advice based on their personal situation. Clients in this category who have reached their minimum retirement age should also consider the option of crystallising funds before 6 April 2016 as described above in the section on clients below 1m. MAXIMISING CONTRIBUTIONS Any decision about LTA protection may also involve ensuring contributions are maximised by 5 April 2016 using any carry forward allowance from the previous three tax years plus any available annual allowance for the post alignment period in 2015/2016. Clients applying for either FP2016 or IP2016 may want to consider this. For those applying for FP2016 it will be their last opportunity to contribute. For those applying for IP2016 contributions will increase their fund value allowing them to protect a higher amount. KEY FACTORS IN THE DECISION VALUE OF BENEFITS AT 5 APRIL 2016 The value will determine which protection options are available. Clearly individual protection will be of greater benefit the closer the initial fund value is to 1.25m. AGE/LENGTH OF TIME TO RETIREMENT The longer the term the more difficult it will be to predict which option will produce the best outcome. For those closer to retirement it is also important to remember that early retirement adjustments or tax free cash commutations could mean that clients with notional funds greater than 1m may find that there is no issue when they actually take benefits. ATTITUDE TO RISK/EXPECTED INVESTMENT RETURNS The expected or projected investment returns will have a big influence on any decision. EMPLOYER CONTRIBUTIONS/CONTROL OF REMUNERATION PACKAGE As we have seen above, where there are no employer contributions the decision is relatively more straightforward. Where employer contributions can be controlled or redirected, the choice is also easier. However, clients with no control or choice over employer contribution will be the most complex to advise. They may have to face the difficult decision to give up what seem like valuable benefits in order to protect the benefits built up so far. Individual Protection aims to prevent this to an extent but as we have seen it can still produce a worse outcome than giving up contributions entirely and applying for Fixed Protection. The key factors above are all interlinked. The only way to make a sensible choice is to consider all of them in terms of the specific client s individual situation. This is an area where clients really can benefit from personal financial advice. PENSION TAXATION CONSULTATION Another factor in the decision is the government s consultation on the taxation of pensions. It is possible that the whole regime may have changed by the time the new protection comes into place making advice even more difficult The suggestion that application deadlines will be removed or extended will help, however, those relying on FP 16 will still need to cease contributions/accrual on 5 April 2015 so hopefully we will have a clearer idea of any changes before then. 16 techtalk

17 TUPE, PENSIONS AND AUTOMATIC ENROLMENT: UNDERSTANDING THE INTERACTIONS Bernadette Lewis Employers involved in TUPE transfers often have to comply with both TUPE and automatic enrolment legislation. We provide an adviser s guide to the essentials. This article covers the interactions between pension entitlements under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) and the automatic enrolment legislation. The TUPE provisions protect employees terms and conditions when they re compulsorily transferred from one employer (the old employer) to another (the new employer). The TUPE rules oblige the old employer to provide details of the affected employees terms and conditions to the new employer. In the private sector, the TUPE rules normally apply when one employer takes over another. In the public sector, the TUPE rules often apply when a public sector body outsources work to a contractor. The automatic enrolment legislation under Pensions Act 2008 applies to an employer from its staging date. techtalk 17

18 PENSIONS, TUPE AND TEPP The TUPE provisions protect employees entitlements (whether taken up or not) to employer contributions to group personal pensions (GPPs), individual personal pensions (PPPs) including self invested personal pensions, and group or individual stakeholder pensions (GSHPs/ISHPs). TUPE applies to both contractual and automatic enrolment. In this context, contractual enrolment covers any method of arranging membership of a workplace pension scheme apart from automatic enrolment under the Pensions Act 2008 legislation. Trust based occupational pension schemes (OPSs) are exempt from TUPE, but are covered by the Transfer of Employment (Pension Protection) Regulations 2005 (TEPP). The TEPP regulations apply even if the TUPE d staff were still in a waiting period for the OPS or had access but hadn t bothered to join. TEPP applies to automatic enrolment under Pensions Act 2008 and any other methods of arranging membership of a workplace pension scheme. Special rules protect pension entitlements for outsourced public sector employees, under the New Fair Deal or similar provisions. These rules often oblige the new employer to join the relevant public sector scheme. If so, this will be set out in the outsourcing tender document. As a further complication, some employers will have groups of TUPE d staff with differing pension rights derived from various original employers. TUPE AND PENSIONS IN THE PRIVATE SECTOR The new employer must offer either a TUPE or TEPP compliant pension, depending on the type of pension entitlement the TUPE d workers had with their old employer. GPP, PPP, GSHP, ISHP with old employer New employer must offer TUPE compliant pension Old employer Entitlement to employer contribution to GPP, PPP, GSHP, ISHP. Examples: 5% employer contribution, no requirement for employee contribution. Match employee contributions up to 10%. 1% employer contribution, conditional on 1% employee contribution. New employer Must match existing entitlement to employer contributions. 5% employer contribution, no requirement for employee contribution. Match employee contributions up to 10%. 1% employer contribution, conditional on 1% employee contribution. Trust based OPS with old employer New employer must offer TEPP compliant pension Old employer Defined benefit OPS. Money purchase OPS. (NEST, NOW Pensions and The People s Pension are all trust based money purchase OPSs.) New employer Defined benefit OPS which meets specified criteria. Money purchase OPS matching employee contributions of up to 6% of basic pay. Offer to contribute to a GSHP or ISHP matching employee contributions of up to 6% of basic pay.* Any of the above three options. Money purchase OPS matching level of contributions the old employer was required to make. Offer to contribute to a GSHP or ISHP matching level of contributions the old employer was required to make.* * The new employer could establish a GPP instead of a GSHP/ISHP with the TUPE d workers agreement. This is because OPSs are covered by TEPP, not TUPE. TUPE AND PENSIONS IN THE PUBLIC SECTOR TUPE often applies to staff employed in the public sector who are compulsorily transferred to a new employer under outsourcing. The outsourcing contract normally specifies the pension provision requirements for TUPE d employees not only for the original contractor, but also on a secondary transfer to a new contractor. If a new employer is uncertain how to meet its obligations, it should seek specialist advice. Summary of usual requirements for staff TUPE d out of the public sector Public sector employer New Fair Deal Other Mainly central government bodies, NHS, some schools. Local authorities, other public sector bodies in England, Wales, Scotland. New employer Become participating employer in public sector scheme. Make OPS provision broadly comparable to public sector scheme. Or obtain admitted body status to public sector scheme. 18 techtalk