In Sight. a quarterly pensions publication. Summer Budget This quarter s round up

Transcription

1 Aon Hewitt In Sight a quarterly pensions publication August 2015 This quarter s round up Page 1 Summer Budget Governance of money purchase schemes 3 Scheme funding 4 Update on transfers 4 Pensions Regulator 6 Pension Protection Fund 6 European developments 7 News round-up 7 Abolition of short service refunds Regular features 5 On the horizon 8 Seminars and events Summer Budget 2015 The newly elected Government s first Budget contained several pensions-related announcements. Many were expected but commentators had failed to predict a consultation on the future landscape for pension tax reliefs. Against a background of increased longevity and the changing nature of pension provision, the Government wants to make sure that the system incentivises people to take responsibility for their pension saving. Its green paper, Strengthening the incentive to save: a consultation on pensions tax relief, asks questions such as whether a simpler system is likely to result in greater engagement with pension saving, and how the system could be simplified to strengthen the incentive for individuals to save. In principle the Government believes that any framework for reform should: be simple and transparent allow individuals to take personal responsibility build on the early success of automatic enrolment be sustainable (in line with the Government s long-term fiscal policy). This high level consultation runs until 30 September. The Government does not express a preferred approach, stating that there is a need to proceed gradually and that the consensus may be that no change is needed. Tapered annual allowance As trailed in the Conservative Party s election manifesto, from 6 April 2016 there will be a reduction in tax relief on pension contributions for people whose income and pension savings exceed 150,000. As anticipated, the annual allowance of 40,000 will be reduced by 50p for each 1 in excess of 150,000, down to a minimum of 10,000 for those above 210,000. Continued on next page Risk. Reinsurance. Human Resources.

2 Individuals with taxable income below 110,000 will generally be able to ignore the complexities and maintain an annual allowance of 40,000. (Any salary sacrifice made for pension provision after 9 July will be added back to this income calculation.) The implementation of the tapered annual allowance will have wider implications as pension input periods (PIPs) are going to be aligned with the tax year for all pension savers. At present, pension savings are measured for annual allowance purposes over the PIP ending in a given tax year. This PIP is not necessarily aligned with the tax year for example, some schemes chose to align their PIPs with their scheme year to streamline administration. As part of the move to the new regime for high earners the Government is proposing to align all PIPs with tax years from 2016/17 onwards. This will be done by closing all open PIPs on 8 July 2015, with a separate PIP applying from 9 July 2015 to 5 April All subsequent PIPs will then run from 6 April to 5 April. Other pensions measures As previously announced, the lifetime allowance will be reduced from 1.25 million to 1 million from 6 April In the March 2015 Budget the Chancellor had announced his intention to extend the flexibilities for money purchase benefits to existing pensioners who are in receipt of an annuity. Following consultation on how to remove the barriers to the creation of a secondary market in annuities, the Government has decided to delay implementation of this measure until 2017 and will set out its plans this autumn. Access to the government s guidance service, Pension Wise, is going to be extended to all individuals aged 50 and over. A campaign is being launched to raise awareness of the service. Consultation on pension flexibilities The Government confirmed its intention to consult this summer to ensure that people are not charged excessive early exit penalties and are treated fairly when moving their pension to a company that offers them flexible options to access their savings. The April 2015 flexibilities for money purchase arrangements allow people aged 55 or over to access their savings how and when they want. However, the Government is concerned that providers are putting barriers in the way of people getting access to their money and it will consider imposing a legislative cap on early exit charges where these are judged to be excessive. Employers and trustees need to consider actions resulting from the Budget announcements. Governance of money purchase schemes Preparing for the first chair s governance statement Trustees of occupational schemes providing money purchase benefits should be preparing for their first annual governance statement. The chair of trustees is responsible for signing off an annual statement within seven months of each scheme year end, which must explain how the scheme has complied with the new governance standards and charge controls that came into force in April It should be produced as part of the annual report and accounts and will cover the part year from 6 April 2015 up to the scheme year end. If the period covered is less than three months, the first statement can be rolled into the one for the following year. Content of the annual statement: The latest statement on the default investment strategy, including a report on any review during the year and resulting actions, or the date of the last review if none was undertaken during the year. A description of how the trustees have met the requirement to process core scheme financial transactions promptly and accurately. A report on the level of charges and transaction costs in the default arrangement/s and the range of the levels of charges and transaction costs in other funds during the scheme year; and the trustees assessment of the extent to which these represent good value for members. If trustees have been unable to obtain information about transaction costs, they must explain what steps are being taken to obtain that information in future. A description of how the trustee knowledge and understanding requirements have been met during the year; and an explanation of how the combined knowledge and understanding of the trustees, together with the advice available to them, enables them to properly exercise their functions as trustees. Signature by the chair of trustees. There are additional requirements for master trusts. The deadline may seem to be some time off, but there is plenty to prepare. Trustees should consider what needs to be done and ensure that they will be in a position to comply with the various issues. Regulator updates its scheme return In their next scheme return, trustees of occupational money purchase schemes will be asked to confirm whether or not their scheme complies with the new charge cap and to provide the name of the scheme s chair of trustees. The Pensions Regulator has updated its DC scheme return in light of the new regulations on charges and governance introduced in April A guide to what s new in this year s scheme return and a checklist setting out the information needed to complete the return are available online at 2 In Sight August 2015

3 Scheme funding The Pensions Regulator s annual statement on scheme funding is primarily aimed at defined benefit schemes with valuation dates between 22 September 2014 and 21 September 2015, but also includes information of interest to other schemes. The statement reinforces the key principles set out in the code of practice on funding defined benefits, which was updated last year, and explains how these can be applied in current market conditions. Managing risks The Regulator expects trustees to understand their scheme s sensitivity to different risks and set investment and funding strategies that carry an appropriate level of risk. Contingency planning is encouraged, to enable prompt action when necessary to ensure risk levels remain appropriate. Schemes that are relatively unhedged against interest rates and inflation should be aware of the degree of risk exposure that remains unhedged. The level of hedging should reflect the employer s risk tolerance and its ability to support downside events. Investment return assumptions In current market conditions the Regulator anticipates that most schemes will set funding strategies based on lower expected investment returns than assumed in their last valuation. Where schemes previously allowed for gilt yields to rise to a higher level and/or sooner than implied by the markets, additional deficit repair contributions or new contingent security may now be required. The Regulator expresses caution about allowing for such gilt reversion in 2015 valuations. Managing deficits Despite all major asset classes having performed well and employers having paid significant deficit repair contributions, many schemes with 2015 valuations are expected to have larger funding deficits than at the previous valuation. This is mainly due to falling interest rates and schemes not being fully hedged against this risk. The funding regime is designed to be sufficiently flexible to allow a scheme s funding requirements to be met without compromising the employer s ability to invest in its business and support the scheme in the long term. The trustees should be comfortable with the overall level of risk within the recovery plan, being mindful that the certainty with which the employer s covenant and expected investment returns can be relied upon reduces over time. Although schemes may find themselves with increased deficits, trustees and employers can set strategies that are relevant to their particular circumstances. The Regulator distinguishes between schemes that have capacity to take additional risk (perhaps because they took a more prudent approach previously or the employer covenant has improved) and those with limited capacity. Those with capacity to take risks should be able to address their deficit by making modest increases in recovery periods and/or contributions, and/or changing assumed investment returns. Schemes that have less capacity will have fewer options and the Regulator suggests trustees might seek higher contributions with a view to maintaining the same recovery plan end date, subject to affordability and the employer s sustainable growth plans. Where affordability constraints mean that trustees are faced with lower contributions than they think the scheme needs, they are expected to undertake a higher level of due diligence on affordability and understand why previous levels cannot be maintained. They should seek to manage the risk by obtaining additional security. If investment in the employer s business is prioritised over contributions, trustees should understand how the investment will benefit the covenant and how and when growth will fund increased contributions to the scheme. Possible actions We set out below a list of potential actions for trustees and employers in light of the issues raised in the Regulator s statement: Consider the financial position of the scheme under different scenarios for future investment conditions Right-size the level of interest rate and inflation hedges Review use of gilt reversion if this was incorporated into the previous valuation Consider which levers are right for the scheme whether to amend assumptions, recovery period, contributions or additional security? Carry out due diligence and consider additional security if affordability constrains contributions Allow for post valuation experience? Aon Hewitt 3

4 Update on transfers FCA s pension transfer rules The Financial Conduct Authority (FCA) has ruled that advice on transfers of safeguarded pension benefits (broadly defined benefits) worth over 30,000 must be provided by, or checked by, a pension transfer specialist. From April 2015 members wishing to transfer or convert safeguarded benefits into flexible benefits (broadly money purchase or cash balance benefits) must take appropriate independent advice if their safeguarded benefits in a scheme exceed 30,000 in value. Trustees have to provide members with information on what they need to do in order to demonstrate that this advice has been received. The trustees must check that the advice has been given, although they are not required to check the advice itself. Before April 2015, the FCA was responsible for advising on transfers to personal pensions, but transfers to other occupational schemes were not within its remit. The FCA has therefore published changes to its pension transfer rules: because it is now a regulated activity to advise on the conversion or transfer of safeguarded pension benefits into flexible benefits, the advice must be provided by an individual regulated by the FCA. Under its new rules, that individual must also be a pension transfer specialist. The rules do not cover transfers of non-safeguarded benefits from occupational money purchase schemes. As it has been recognised that the definition of safeguarded benefits is not clear, the FCA will be working with the Department for Work and Pensions with a view to publishing broad categories/themes to help providers identify safeguarded benefits. They will also consider whether amendments are needed to ensure that the requirement for advice works as intended for non-uk residents. Recognised transfers to overseas schemes Trustees may need to change their procedures to ensure that they do not pay a transfer to an overseas scheme that is not recognised by HM Revenue & Customs (HMRC). If a transfer to an overseas scheme is not a recognised transfer, the member will be liable for penal tax charges and the scheme administrator may be liable for a scheme sanction charge. In order to be a recognised transfer the receiving scheme must be a Qualifying Recognised Overseas Pension Schemes (QROPS). This is essentially a Recognised Overseas Pension Schemes (ROPS) that has undertaken to provide HMRC with specified information, for example on when benefits are paid. From 6 April 2015 the conditions for being a QROPS changed. In particular, QROPS are no longer permitted to pay out any benefits transferred from a UK pension scheme before the normal minimum pension age (currently 55) except in cases of ill health. HMRC refers to this requirement as the pension age test. Some overseas schemes permit benefits to be paid earlier than they would in the UK and could lose their QROPS status. As well as the change to legislation, HMRC recently replaced its published list of QROPS, with a list of ROPS. It has also reformatted the list and removed all schemes that it believes no longer meet the pension age test. HMRC has also made it clear that inclusion on the list does not guarantee that a scheme is a ROPS it is a list of schemes that have told HMRC they meet the conditions to be a ROPS; and the responsibility for checking whether a scheme is a QROPS lies with the transferring scheme and member. Trustees and members need to satisfy themselves that the overseas scheme is a QROPS before making a transfer. Schemes should not rely on any previous inclusion on the HMRC list when considering whether an overseas scheme is in fact a QROPS. Even if a scheme is on this list, further checks will be needed in order to establish whether it is a QROPS. In particular, it should be checked that the scheme complies with the pension age test. Trustees should consider confirming their administrator s process for dealing with overseas transfers, which should include ensuring that the member has provided the information required by legislation. This includes details of the QROPS, and an acknowledgement that the member is aware of the penal tax charges applying if the receiving scheme turns out not to be a QROPS. Pensions Regulator Corporate plan for In relation to defined contribution (DC) arrangements, the Regulator intends to revise the DC code of practice and guidance in the light of practical experience of the code to date, the new governance standards and charge controls, and the evolving landscape. It may also carry out a review of the code of practice on trustee knowledge and understanding. It will take action where schemes are not complying with the new governance standards, with a particular emphasis on ensuring schemes are competently run. It will also provide guidance where necessary to protect the security of member benefits in light of the new flexibilities that came into force in April For defined benefit (DB) schemes, it will continue to encourage trustees to consider employer covenant, funding, and investment strategy together. It will develop its risk identification systems to focus on the riskiest schemes and also develop strategies for schemes which may not be sustainable in the long term due to the continued weakness of the sponsoring employer and the relative size of the scheme. It will also monitor the developing market for DB to DC transfers in light of the new flexibilities and where appropriate will escalate cases for intervention. 4 In Sight August 2015

5 As employers start going through the automatic re-enrolment process, information will be provided to help them with their ongoing duties; in addition the Regulator will ensure small employers are complying with their automatic enrolment obligations. Record-keeping findings The Regulator continues to focus on record-keeping and has been monitoring the progress schemes are making to improve their pension scheme records. In a follow-up report to its 2014 thematic review of record-keeping, the Regulator concludes that there is still much to improve in order to protect members from the consequences of poor records. The report sets out a list of reasons why good record-keeping must be a priority for trustees and scheme managers, including the new legal requirement for core financial transactions in occupational money purchase schemes to be carried out promptly and accurately. Over the next year the Pensions Regulator intends to reinforce its expectations for record-keeping and to take into account the new duties for trustees of DC schemes which explicitly strengthen the requirement for good administration and record-keeping. Contribution notices The Regulator can issue a contribution notice where a company or individual has taken action with the main purpose of avoiding an obligation to pay a section 75 debt to a pension scheme. The Carrington Wire case has established that the main purpose test extends to acts which prevent recovery under a guarantee, including situations where the acts take place before liability under the guarantee is established. Financial support directions Following the insolvency of the Nortel Group in 2009, courts in the US and Canada ruled that any financial support direction issued by the Regulator would have no effect under US or Canadian Law. This meant that the Pension Protection Fund (PPF) and trustees of the UK pension scheme had to negotiate with other creditors for a claim on the sale proceeds from Nortel s assets. The latest court ruling requires the remaining funds from the asset sale to be shared on a pro rata basis based on the level of creditor claims against the various companies. It has been reported that this will mean creditors (including the UK pension scheme) receiving up to 71% of their claims, but the impact on the UK pension scheme and the PPF is not yet clear. There may be appeals against this judgment from some creditors. On the horizon Here are some key future developments likely to affect pensions. April 2016 Introduction of single-tier state pension and end of contracting-out Tapered annual allowance implemented Lifetime allowance reduced to 1 million Scottish Parliament empowered to set Scottish rate of Income tax Deadline for section 251 of Pensions Act 2004 October 2015 Short service refunds from occupational money purchase schemes to cease April 2017 NEST contribution limits and bulk transfer restrictions to be removed October 2016 First phase of automatic transfers of small money purchase pots due to go live Aon Hewitt 5

6 Pension Protection Fund 2015/16 levies Experian has finalised the Pension Protection Scores that will be used to calculate schemes 2015/16 Pension Protection Fund (PPF) levies. We have reported in previous editions of In Sight on the 2015/16 levy, and on the new insolvency scoring methodology used by Experian. The scores are available on Experian s web portal. Scores for guarantors of Type A contingent assets will be subject to further adjustment for the level of gearing implied by the guarantee. If any of these scores are believed to be incorrect, they can be appealed to Experian in the first instance. If a scheme is unhappy with the outcome of an appeal to Experian, scores can be further appealed to the PPF. This can be done prior to the PPF issuing a levy invoice, unlike appeals on any other issue. Trustees and employers should check their scores and appeal them if necessary. They may also wish to obtain a levy estimate reflecting these scores in advance of the levy invoice being issued in the autumn. 2016/17 levies The 2016/17 PPF levy year effectively commenced on 30 April 2015 as Experian s scores will be taken at each month end between 30 April 2015 and 31 March Trustees and employers may wish to consider the following actions in order to manage their levy: Put in place a process to monitor scores on an ongoing basis to address any unexpected changes. Review the data held by Experian that is being used to calculate the scores, both to understand the factors that are driving them (and therefore how they could change in the future) and to check whether the data held by Experian is correct. Obtain an initial 2016/17 levy estimate at this stage we are not expecting any material changes to the PPF s methodology, but changes in market conditions are likely to result in 2016/17 levies being higher than 2015/16 levies (all else being equal). Doubts over PPF entry for overseas companies The Supreme Court has ruled in agreement with the Court of Appeal that it was not possible to wind up the UK operation of Olympic Airlines following Olympic s insolvency in Greece in Although this case was about insolvency law, the practical implication of the ruling is that the company s UK pension scheme was not able to enter the PPF, despite paying annual levies. There may be similar implications for other schemes with sponsoring employers based outside the UK. Regulations were introduced specifically to allow the Olympic Airlines scheme to enter the PPF. Following this latest ruling, we would expect legislation to be changed more generally, so that there is a clearer link between the ability of a UK scheme to enter the PPF in the event of an overseas employer s insolvency and the requirement for the scheme to pay levies. In the meantime trustees of schemes with non-uk employers will need to remain vigilant to the risk of employer insolvency, and may need to take action at very short notice. European developments Pension scheme solvency EIOPA the European Union s pensions authority has launched two exercises relating to possible pension scheme solvency requirements. Both run until 10 August The stress test will assess the resilience of schemes to adverse market scenarios, including increased longevity. It covers both defined benefit and defined contribution plans. The quantitative assessment will gather data on potential uses of the Holistic Balance Sheet, which compares a scheme s liabilities with its assets allowing for sponsor support and the existence of the Pension Protection Fund. This will help EIOPA to develop its advice to the European Commission on solvency rules for pension schemes. Pan-European Personal Pensions EIOPA is consulting until 5 October 2015 on the creation of a standardised pan-european personal pension product (PEPP), intended to be a simple, transparent, cost-effective and trustworthy long term savings product. To achieve this, EIOPA suggests the creation of a new legal framework for an internal European PEPP market, which it believes would create a level playing field between providers and facilitate cross-border pension provision. This alternative framework would run alongside the existing regulatory regime for personal pensions and would be supervised by national regulators. The Pensions Regulator has contacted large UK pension schemes to encourage engagement on a voluntary basis. EIOPA expects to issue its advice to the European Commission in March In Sight August 2015

7 News round-up Measuring inflation The UK statistics authority (UKSA) has launched a consultation on measuring consumer prices, which runs until 15 September This follows the Johnson review earlier this year, which included some quite radical recommendations, particularly for the Retail Prices Index (RPI). The consultation is less wide ranging than might have been anticipated. On RPI, whilst reiterating that the measure is not consistent with international best practice and not deserving of National Statistics accreditation, UKSA simply states that it does not propose to discontinue RPI. The RPI-related questions focus on relatively minor issues. Other questions include whether the Office for National Statistics should identify a main measure of price change across the economy and whether it should seek to measure changes in prices experienced by different households. Accounting changes proposed The International Accounting Standards Board is consulting on narrow-scope amendments to its pension accounting requirements for defined benefit schemes. The exposure draft, entitled Re-measurement on a Plan Amendment, Curtailment or Settlement/Availability of a Refund from a Defined Benefit Plan, proposes amendments to international accounting standard IAS 19 Employee Benefits and IFRIC 14 (guidance on IAS19) which are designed to improve information to investors and address some diversity in practice. The consultation closes on 19 October Capping pensionable salary through the employment contract The High Court has upheld the Pensions Ombudsman s determination in the Bradbury vs BBC case. The High Court ruled that imposing a cap of 1% a year on future pensionable salary increases did not amount to a breach of the implied duty of trust owed by the BBC to its employees. Both rulings considered that the BBC s action was reasonable in the light of the scheme deficit and the BBC s potential future liability, resources and obligations and other steps it had taken. This case has drawn comparisons with the IBM case (covered in the May 2015 edition of In Sight) where, in the context of member expectations engendered by the company, the manner in which a similar scheme reconstruction was implemented was found to be a breach of the implied duty of good faith to members. Reviewing commutation factors The Pensions Ombudsman has determined that the failure by the Government Actuary s Department (GAD) to review commutation tables was maladministration. The Ombudsman upheld a complaint by Mr Milne that his pension commencement lump sum was smaller than it otherwise would have been. The Ombudsman determined that GAD failed to identify its continuing responsibility to calculate appropriate factors. GAD changed its stance in the mid-90s and rather than instigating reviews, it waited for the relevant government department to instruct it to do so. The Ombudsman decided that GAD had failed to identify its implied statutory obligation to review the commutation factors and that it should have maintained and reviewed them proactively. While the decision turns on its own facts and GAD s unique position, the case acts as a reminder of the importance of keeping scheme factors under regular review. Trustees should check the provisions in their trust deed and rules to see who is responsible for setting factors and consider how often they should be reviewed. Abolition of short service refunds From 1 October 2015, occupational money purchase schemes will only be able to pay refunds of contributions to new joiners who leave the scheme within 30 days of joining. Currently occupational pension schemes are not required to preserve benefits for those who leave with less than two years qualifying service, although they must offer a short service refund or a cash transfer sum to those who leave the scheme with between three months and two years service. However, members of occupational schemes with only money purchase benefits who join on or after 1 October 2015 and complete at least 30 days qualifying service will be entitled to preserved benefits. Those members will keep their benefits within the scheme or can transfer them to another arrangement. The Government proposes to deal with the resulting small pots under its system of automatic transfers, which is due to start on a phased basis in October Defined benefit occupational schemes will still be able to make short service refunds. Also, short service refunds may still be paid if the member s benefits are not pure money purchase i.e. they are also entitled to defined benefits within the same scheme. Contract-based schemes (e.g. group personal pensions) will not be affected as contributions to those schemes already vest immediately, although there is a 30 day cooling off period. The preservation requirements are not overriding, so scheme rules must be amended, where necessary, before October Trustees will also need to update scheme communications, such as the member booklet, and administration processes. Currently, if a refund of employee contributions is paid, the employer contributions would normally remain in the scheme and may be used to offset administration costs. The change could have cost implications for employers, particularly if they have a high turnover of staff, therefore they may wish to consider options for offsetting this. Aon Hewitt 7

8 Seminars and events Dates scheduled for our pensions training seminars are set out below. Unless stated otherwise, all courses and events take place in central London. For further information, or to make a reservation, please pensionstraining.enquiries@aonhewitt.com or telephone the Pensions Training team on: +44 (0) You can also book online at aon.com/pensionstraining Courses Defined Benefit part 1 (one day) Defined Benefit part 2 (one day) Defined Contribution (one day) PMI Award in Pension Trusteeship (two days) Dates 8 September (Leeds office), 21 October, 8 December, 13 January September (Manchester office), 15 December 18 November 30 September to 1 October (Hartsfield Manor, Betchworth, Surrey) Other events Current Issues for Trustees Seminars 5.30pm Trustee Teleconferences 9.00am Dates 9 September, 3 November 1 September and 10 November Contacts If you have any questions on In Sight, please speak to your usual Aon Hewitt consultant or contact: Helen-Mary Finney +44 (0) helen-mary.finney@aonhewitt.com About Aon Aon plc (NYSE:AON) is a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 69,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative risk and people solutions. For further information on our capabilities and to learn how we empower results for clients, please visit: Aon plc All rights reserved. The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales. Registered No: Risk. Reinsurance. Human Resources.