current i s s u e s i n pensions

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1 health wealth career current i s s u e s i n pensions trustee edition february 2016 health wealth career 1

2 in this edition first streamlined longevity hedge executed in the uk 3 eu referendum 4 contracted-out schemes used for auto-enrolment 5 plans to cap early exit charges announced 5 scheme reconciliation service: have you registered? /17 ppf levy: deadlines approaching 7 Dates to remember 8 health wealth career 2

3 first streamlined longevity hedge executed in the uk FOCUS ON DB In December 2015 a ground-breaking longevity hedge, on which Mercer acted as lead advisor to the trustees, was agreed between an undisclosed UK defined benefit pension scheme and Zurich Assurance Limited. The streamlined named life longevity hedge the first of its kind will safeguard against the risk of rising costs as a result of the current pensioners of the scheme living longer than expected. The hedge covers around 200 named scheme pensioners and contingent dependants with a total liability of around 90 million. Before this transaction, longevity hedges of this type were exclusive to the largest DB schemes with over 400 million of pensioner liabilities. However, streamlining and standardising both the contracts and the process has now made such transactions accessible to schemes with pensioner liabilities as low as 50 million. This unlocks the door to competitive longevity reinsurance pricing for trustees of small and medium-sized DB schemes looking to de-risk. Such schemes are more exposed to so-called concentration risk, where diverse pension amounts across a small population produce greater variability in members life expectancies. You can read more about the transaction in our press release. If you would like to know more about the options for managing your scheme s longevity risk, speak to your Mercer consultant. what is longevity risk and how is it hedged? Put simply, longevity risk is the risk that scheme members live longer than expected, increasing the funding requirements of the scheme. This can represent one of the most significant elements of risk in a DB scheme. It is also a risk for which most trustees or employers do not expect to be rewarded unlike, say, equity risk where there is an expected upside. Longevity risk can be directly hedged through a contract, which results in payments being received from an insurer for as long as a scheme member lives. Longevity exposure is fixed, as there is no extra cost to the scheme if the member lives longer than expected at outset by the insurer, although if the member dies earlier than expected the scheme loses out on any profit. Longevity hedge contracts do not require a transfer of assets at outset, unlike a bulk annuity where an insurer takes on responsibility for all liability risks for a premium. Rather, a longevity hedge contract delivers a stream of net payments either to the scheme or to the insurer, depending on how long members remain alive. This provides additional flexibility compared to a bulk annuity as the scheme s assets can remain invested, earning returns and managing the scheme s other risks as directed by the trustees. trustee training Research by Mercer has found that a high percentage of UK pension scheme trustees lack confidence in making key decisions. Our Confident DB Trusteeship courses, which have received PMI Accreditation recognising their high quality, are designed to build this confidence. They go beyond technical knowledge and focus on developing the skills needed to be a more effective DB scheme trustee. Alternatively, our Toolkit Blitz courses, for both DB and DC scheme trustees, are aimed to ensure understanding of the Pensions Regulator s Trustee Toolkit. For more information on upcoming Mercer events, see or speak to your Mercer consultant. health wealth career 3

4 eu referendum HOT TOPICS The process of renegotiating the terms of the UK s membership of the European Union has started. After this preliminary step, the Government will set a date for the referendum on whether or not the UK should remain a member of the EU. Speculation is growing that the date could be as early as June The question the referendum will address is: Should the United Kingdom remain a member of the European Union or leave the European Union? Whatever the final wording, the electorate will be offered a straight choice of in or out. Recent polls suggest that public opinion is fairly evenly split. But what does the referendum mean for pension schemes? In the short term, depending on how close the vote is predicted to be, the period leading up to the referendum is likely to create uncertainty in financial markets, leading to volatile equity prices and bond yields. This could affect saver confidence, making it harder for individuals to plan for retirement. For defined benefit arrangements, trustees may need to consider how they monitor the scheme s funding position over this volatile period. If the vote results in so-called Brexit a UK exit from the EU this would mean up to two years of unravelling the UK s EU membership and negotiating exit terms, followed by further negotiations to establish the basis for future UK trade with the EU. The broad consensus amongst economists is that the ensuing uncertainty as exit terms are negotiated, and the potential impact on Scotland s status inside the UK, would lead to a negative impact on UK growth. This in turn could lead to lower equity and bond prices in the UK. Defined contribution retirement accounts and drawdown funds could fall in value, at least in the short term, although lower bond prices could help those wanting to buy annuities. Trustees of DC schemes may need to consider whether investment options, in particular default and lifestyle funds, should be reviewed. DB scheme trustees may need to review their scheme s funding position, taking into account the effect, if any, Brexit has on the employer s covenant. Another consideration is the effect of Brexit on UK pension law and regulatory requirements. Currently, the EU has a significant influence on the UK s pension legislation and a growing role on regulatory issues. However, it is not clear what relationship the UK would have with the EU if it exits. There are a number of possibilities, ranging from membership of the European Economic Area (EEA) to entering into some form of free trade agreement with the EU, with various options in between. All scenarios would involve a degree of agreement with the EU and its rules, in exchange for some form of access to its markets. Membership of the EEA, for example, would mean that the UK would still be signed up to the Institutions for Occupational Retirement Provisions (IORP) directive. This and many other provisions affecting pensions would continue to apply, even though the UK would have less influence over them. However, without knowing the terms of a UK exit from the EU, the possible impact on pension and investment regulation cannot be predicted. Although there are few, if any, clear steps that can be taken ahead of the referendum, trustees should continue to monitor the position closely. Brexit, if it occurs, has the potential to create significant uncertainty for UK pension schemes. health wealth career 4

5 contracted-out schemes used for auto-enrolment focus on db In the run up to 6 April 2016, employers need to ensure they verify that any scheme that is currently contracted out, and is being used to meet the employer s duty under automatic enrolment, will continue to meet the quality requirements after 5 April. After this date it will no longer be an option for schemes to use contracted-out status to meet the requirements. In addition to the existing quality test, in which scheme benefits are compared to a test scheme, a new method introduced from April 2015 allows employers to verify the position by comparing the cost of accrual in the scheme against the minimum requirements set out in legislation. If the benefits under the scheme are the same for all members, this check can be easily performed using the schedule of contributions or the funding report. However, if different benefits are provided to different groups of members (for example, different accrual rates, normal pension ages or methods of deferred revaluation), unless the costs for the different groups have already been identified separately, an actuary will need to confirm that the difference in cost is not material, or alternatively provide a breakdown. However, on 26 January the Department for Work and Pensions published a consultation on a potential easement, which would allow certain schemes that satisfy the contracting out conditions as at 5 April 2016 to apply the cost of accrual test at scheme level, rather than at benefit scale level. The easement would apply for a transitional period, between 6 April 2016 and the date of the next actuarial report (or 5 April 2019, if earlier), and only if the benefits under the scheme have not been amended to offset the impact of the cessation of contracting out, or in any other way that would have prevented the scheme from satisfying the contracting out requirements. While trustees have no direct responsibility here, they should be prepared to respond to any requests for assistance from employers, which could include asking the scheme actuary to provide additional cost information. PLANS TO CAP EARLY EXIT CHARGES ANNOUNCED focus on dc On 19 January, the Chancellor announced that legislation would be drafted placing a duty on the Financial Conduct Authority to cap early exit charges for savers. The aim is to ensure that individuals accessing pension funds under the new freedoms are not unfairly penalised. The FCA will be responsible for setting the level of the cap, and will consult on this. The FCA regulates contract-based schemes and the announcement did not make any reference to the Pensions Regulator or trust-based defined contribution arrangements. However, the pensions minister Baroness Altmann has subsequently confirmed that similar measures would be implemented for trust-based schemes, so that all savers get the same help. Further details are expected to emerge shortly when the Government publishes a formal response to its consultation on transfers and early exit charges (see the September 2015 edition of Current Issues). health wealth career 5

6 scheme reconciliation service: have you registered? focus on db Contracted-out defined benefit schemes have until 5 April 2016 to register for the HM Revenue & Customs Scheme Reconciliation Service (SRS), and until December 2018 to resolve any data discrepancies with HMRC. Trustees who have not yet taken appropriate action should review their position as soon as possible. From December 2018, HMRC will issue individuals with pension statements to confirm the details of their contracted-out benefits. The data held by HMRC at that time will be used as the default and there will be no opportunity for the details to be amended. A reconciliation exercise has the following potential advantages: It avoids your scheme being responsible for extra unknown members and/or liabilities. It helps you meet your responsibility for ensuring that your scheme s records are accurate and the correct level of benefits is being paid. It gives you confidence that your scheme s records match those held by HMRC. It can help you prepare for any specific exercises that are planned for your scheme for example, trivial commutation or a buy-in/ buyout. It will limit member queries and possible claims that benefits are incorrect. The April 2016 deadline for registration applies to members who have already left contracted-out employment. Registering for the service will trigger the provision of data in respect of these individuals by HMRC, so that each pension scheme can carry out checks and agree any changes that are needed. For active members, HMRC will close its records and provide all schemes with data in December HMRC support for reconciling the data for all members will then extend over the period until December In its Countdown Bulletin published on 22 December 2015, HMRC confirmed that 3,116 schemes had registered for the SRS and 2,717 schemes had received data from HMRC relating to 13.5 million individuals. HMRC is continuing to contact schemes that have not yet registered, as well as schemes that have registered but have not yet raised any queries with HMRC. A typical reconciliation exercise can take up to two years and can be significantly longer in some cases. It is also possible that HMRC s resources will come under some strain as more schemes submit queries and once the work relating to active members starts in April If your scheme has not yet registered with the SRS you should consider doing so as soon as possible. Even if your scheme has already registered, you should ensure that reconciliation work is progressed in a timely fashion. Prior to April 1997, DB pension schemes were able to contract out of the State Earnings Related Pension Scheme (SERPS) on a Guaranteed Minimum Pension basis, meaning that both the employer and scheme members paid National Insurance contributions at a lower rate than would otherwise have applied. In exchange, scheme members became entitled to receive a GMP from the scheme. HMRC holds details of GMPs and contracted-out service for individuals who have been contracted out the Scheme Reconciliation Service allows the administrator and trustees of each pension scheme to compare this data with the data shown on the scheme s records. health wealth career 6

7 2016/17 ppf levy: deadlines approaching focus on db The Pensions Regulator is in the process of issuing the 2016 scheme return notices for defined benefit and hybrid schemes. You should ensure that the return is submitted on the Regulator s online Exchange system before the due date stated on your scheme return notice, although you will then have a further opportunity to update Exchange before 31 March If you haven t already done so, you should also be considering whether any Pension Protection Fund levy reduction measures are appropriate for your scheme, and what needs to be done for them to be taken into account in the calculation of the 2016/17 levy. In conjunction with this, you may wish to ask your actuary for a levy estimate to assist with budgeting and to help with understanding the impact of any mitigation. A summary of the main 2016/17 PPF levy deadlines is set out below. Submission of data on Exchange for levy calculation purposes midnight, 31 March Certification and recertification of contingent assets midnight, 31 March Certification of asset-backed contributions midnight, 31 March Certification of mortgages to Experian midnight, 31 March Certification of deficit-reduction contributions 5pm, 29 April Certification of full block transfers 5pm, 30 June BRITAIN S HEALTHIEST WORKPLACE 2016 Britain s Healthiest Workplace 2016 has been launched! The survey, which began as Britain s Healthiest Company in 2013, has become the UK s largest annual workplace wellness survey and is delivered in partnership with Vitality, the Financial Times, the University of Cambridge and RAND Europe. It is the only study of its kind that combines benchmarking on what organisations are doing to manage health and wellbeing, with measurement of the impact of those initiatives on employees. It helps employers to measure their organisational health risks, understand how these risks impact employee engagement and productivity levels, and provides a set of practical recommendations on how to manage these risks. There is no entry fee for taking part it is completely free. Find out more about last year s results and register online for 2016 by 18 March health wealth career 7

8 dates to remember date issue the latest 31 March /17 PPF levy Deadline for submitting data on Exchange, certification of asset-backed contributions, certification and recertification of contingent assets, and certification of mortgages to Experian. 5 April 2016 Refund of surplus Scheme rules can be amended by trustee resolution until this date to allow refunds of surplus to employers to continue. This is subject to certain conditions, including it being in the interest of scheme members and members being notified three months beforehand. 6 April 2016 Lifetime allowance The lifetime allowance will reduce to 1 million, subject to legislation. Fixed and Individual Protection will be made available to impacted individuals. 6 April 2016 Annual allowance The annual allowance will be reduced from 2016/17 for high earners, tapered down to 10,000 for the highest earners. All pension input periods will be aligned with the tax year. 6 April 2016 State pensions The Government will introduce a single-tier state pension. Contracting out for defined benefit schemes will be abolished. 6 April 2016 Scottish devolution From this date the Scottish parliament will have a limited power to vary the income tax rates paid by Scottish taxpayers. 29 April /17 PPF levy Deadline for certification of deficit-reduction contributions. 30 June /17 PPF levy Deadline for certification of full block transfers. 5 July 2016 Abolition of contracting out Trustees of DB schemes that cease to contract out from 6 April 2016 must notify active members of the change to their contracted-out status by this date. July 2016 DC code of practice Expected month of publication of the final version of the Regulator s updated DC code of practice. 31 December 2016 VAT on pension scheme costs For DB schemes, the transitional period during which employers can recover VAT under existing arrangements has been extended to this date. 5 April 2018 Protected rights Scheme rules can be amended up until this date to remove hard-coded protected rights restrictions. Mercer select Keeping up to date with HR issues, trends and legislation that affect your business can be challenging. Mercer Select is an online information service that helps trustees and HR directors stay up to date with legal, business and market developments on benefit, compensation and other HR topics.. uk.select@mercer.com for more information. health wealth career 8

9 about current issues This edition of Current Issues is for information purposes. It may be read as informal training and recorded in your training log. The articles do not constitute advice specific to your scheme and you are responsible for obtaining such advice. Mercer does not accept any liability or responsibility for any action taken as a result of solely reading these articles. For more information about other training available or advice about how any article in this issue relates to your scheme, please contact your usual Mercer consultant. Mercer retains all copyright and other intellectual property rights in this publication. You are welcome to reprint short quotations or extracts from this material with credit given to Mercer. Editor: Jacqueline Brough jacqueline.brough@mercer.com current issues online Did you know that you can also read Current Issues online? Visit our website here to view this month s newsletter and download previous editions. Current Issues in Pensions is published by Mercer Limited, which is authorised and regulated by the Financial Conduct Authority. Registered England No Registered Office: 1 Tower Place West, London EC3R 5BU Visit us at: Copyright 2015 Mercer Limited. All rights reserved. health wealth career 9