Pensions News June 2014

Transcription

1 Pensions News June 2014

2 2014 Xerox Corporation and Buck Consultants, LLC. All rights reserved. Xerox and Xerox and Design are trademarks of Xerox Corporation in the United States and/or other countries. Buck Consultants is a registered trademark of Buck Consultants, LLC in the United States and/or other countries. BRP2825. Other company trademarks are also acknowledged. Document Version: 1.0 (June 2014). The information contained in this document is considered both confidential and proprietary to Buck. Unless expressly agreed to the contrary with us, this document should not be disclosed or provided to any third party. In the absence of such consent, and an express assumption of responsibility by us, we accept no responsibility whatsoever for any consequences arising from any third party relying on this document or advice relating to its content. Contact us +44(0) hrconsultinguk@xerox.com

3 56BContents 1 0BRecently implemented changes B1) Budget 2014 transitional measures ) Pensions Act B3) Reduction to the annual allowance B4) Reduction in the lifetime allowance B5) Automatic enrolment B6) The Marriage (Same Sex Couples) Act B7) A ban on consultancy charging B8) Changes to the TUPE requirements for pensions B9) Consolidated disclosure of information regulations BForthcoming legislative and other changes B1) Budget 2014 Changes to how defined contribution benefits can be drawn at retirement B2) Budget 2014 The impact on members who have recently taken their tax-free cash and/or purchased a lifetime annuity B3) Budget 2014 The future of transfers from defined benefit to defined contribution schemes B4) Budget 2014 Increasing normal minimum pension age B5) Budget 2014 Further action to combat pension liberation B6) A new statutory power for the Pensions Regulator B7) Automatic enrolment exceptions B8) The legislative definition of money purchase benefits B9) Reform of the State Pension system and the cessation of contracting out B10) Changes to the PPF compensation cap B11) Call for evidence on quality standards for workplace DC schemes BOther current issues B1) DWP consultation on default fund charging B2) GMP reconciliation service ahead of April B3) Defined ambition schemes B4) Pension liberation B5) The imposition of VAT on investment management costs B6) New IORP Directive B7) NAPF Annual Survey BRecent Pensions Regulator publications B1) Consultations B2) Definitive guidance Pensions News i

4 5 4BRecent Pension Protection Fund (PPF) publications B1) Consultations B2) Definitive guidance BAppendix Summary of recent and impending changes ii- June 2014

5 1 0BRecently implemented changes 1) Budget 2014 transitional measures In a unexpected move, the Chancellor announced radical changes to the way in which retirement benefits can be accessed (particularly for defined contribution benefits) from April 2015 (see section 2.1). In advance of these changes, transitional measures have been implemented from 27 March Of specific interest to trustees of occupational pension schemes, are the increases to the sums that can be paid (or valued for payment), as either a small lump sum or a trivial commutation lump sum. The maximum amount of pension savings a member may commute, in all registered pension schemes, as a trivial commutation lump sum must not be valued at more than the commutation limit. This limit has increased from 18,000 to 30,000. The maximum amount that can be paid as a small lump sum on a per scheme basis has increased from 2,000 to 10,000. The minimum age for payment of these benefits will remain as age 60, until 6 April 2015, when the minimum age will fall to 55. These changes apply to both DC and defined benefit pensions. The legislative provision for these increases is contained in this year s Finance Bill, which was presented to Parliament on 27 March As the legislative provision for these changes is not yet in force, there is a possibility that unauthorised payment charges could be incurred with lump sums are paid up to the new limits now. Trustees should therefore seek legal advice before taking advantage of these increased limits, in advance of the Finance Bill receiving Royal Assent. 2) Pensions Act 2014 The Pensions Act 2014 finally received Royal Assent on 14 May As is often the case with such legislation, it covers a variety of issues, including: Pensions News 1-3

6 The creation of a single-tier state pension (see section 2.9) Increasing the state pension age to 67 earlier than previously planned Automatic transfers of DC pots and the abolition of short service refunds for DC schemes Limiting the option for trust-based DC scheme members to receive a refund of their contributions on leaving service to pensionable service not exceeding 30 days A new statutory objective for the Pensions Regulator (see section 2.6) Changes to the PPF compensation cap for long-serving members (see section 2.10) Simplifying the requirements for defined benefit schemes to be used for automatic enrolment Requiring pension providers to disclose all transaction costs in DC workplace pensions (see section 3.1) Confirmation is now awaited as to when the majority of the provisions will come into force. 7B3) Reduction to the annual allowance The annual allowance has reduced by 10,000 to 40,000, for pension input periods that end on or after 6 April Some schemes took the opportunity to retrospectively nominate a pension input period ending on 5 April each year when the annual allowance was reduced to 50,000 in However, many schemes did not take this step, and members of such schemes are more likely to be impacted by the reduction sooner than would otherwise be the case. Thankfully, the carry forward rules will continue to apply for members who exceed the annual allowance. There are no proposed changes to the carry forward rules, although the maximum amount that can be carried forward in respect of unused tax relief from the 2014/15 tax year onwards will be limited to 40,000. However, the 50,000 carry forward limit will still apply in respect of tax years from which unused allowance is being used where the current annual allowance applies June 2014

7 8B4) Reduction in the lifetime allowance The lifetime allowance also reduced with effect from 6 April 2014, by 250,000, to 1.25m. To protect members who are affected by this reduction, HMRC has made two forms of protection available. 39BFixed protection 2014 Applications for fixed protection 2014 had to have been received by HMRC by 5 April Members with fixed protection 2014 should normally have ceased to contribute or accrue further benefits in registered pension schemes from 6 April BIndividual protection HMRC is also offering an individual protection option for members, with pension pots of more than 1.25m on 5 April 2014, and who do not have primary protection of their pre-6 April 2006 rights. Members will be granted a personalised LTA that is equivalent to the value of their pension rights as at that date (up to a maximum of 1.5m). Applications for individual protection will be accepted by HMRC up to 5 April The legislation on individual protection is to be included in this year s Finance Bill and members should be able to begin registering for individual protection by mid-august Further accrual is permitted under individual protection and members with enhanced protection, fixed protection or the new fixed protection 2014 will be able to also register for individual protection (with enhanced protection or either form of fixed protection taking precedence). 9B5) Automatic enrolment The DWP has made changes to legislation to make the process of automatic enrolment simpler for small and medium-sized employers. These changes include: Alternative definitions of pay reference periods for both assessing jobholder status and determining whether a scheme is a qualifying scheme Extending the automatic enrolment joining window from one month to six weeks Extending the deadline for employers to provide information to individuals on their opt-in and joining rights to six weeks Aligning the deadlines for registration and postponement notices with the extended joining window Pensions News 1-5

8 Extending the deadline for passing worker contributions to a pension scheme to all new joiners (including contract joiners) Clarifying that opt-out notices can be customised by schemes Greater clarity and consistency concerning the requirements for defined benefit test schemes in relation to the appropriate age, service limits and revaluation that apply in those schemes The Pensions Act 2014 also provides for some other minor changes. This includes simplified certification requirements for DB pension schemes and a power to grant exceptions to the employer duties under automatic enrolment. The DWP has been considering the circumstances in which exceptions may be granted and a consultation with draft regulations is expected on this in due course (see section 2.7). Automatic enrolment is primarily an employer concern. However, trustees need to be aware of their sponsoring employer s staging date, and whether their scheme is expected to be used as part of an employer s solution for meeting its automatic enrolment obligations. In addition, the new deadlines for employers to pass contributions onto schemes mean that trustees should be reviewing their payment schedules and schedules of contributions. 10B6) The Marriage (Same Sex Couples) Act 2013 The marriage of same sex couples in England and Wales became law on 13 March 2014, and the first marriages took place on 29 March As a result, employers and trustees need to decide on the treatment of same sex married couples in respect of survivors benefits under their scheme and references to marriage, and related terms under scheme rules may need to be updated. Generally speaking, the Act provides same sex married couples with the same legal rights as opposite sex married couples. However, this does not apply to survivors benefits under occupational pension schemes. Same sex married couples will be subject to the exemption under the Equality Act 2010, which allows an occupational pension scheme to exclude civil partners from having any entitlement to a benefit the right to which accrued before 5 December 2005 (other than in relation to contractedout rights). This means that, according to the Act, it will be possible for the trustees of an occupational pension scheme to restrict the non-contracted-out element of a spouse s pension that is payable to a surviving same sex spouse to a member s pensionable service on and after 5 December 2005 only. Contracted-out rights accrue from 6 April 1988, in respect of GMPs, and 6 April 1997 for post- 97 rights. During the Act s passage through Parliament, questions were raised about the legitimacy of allowing occupational pension schemes to treat same sex married couples and civil partners differently from opposite sex married couples in relation to survivors benefits. As a result, the DWP is reviewing these differences and the costs, and other effects, of eliminating this June 2014

9 A report on the outcome of the review must be published by 1 July The Government also has the power to change the law of England and Wales and of Scotland for the purposes of eliminating or reducing the difference in treatment, as considered appropriate, in light of the review. 1B7) A ban on consultancy charging Consultancy charging allows advisers to deduct a fee directly from the pension pots of employees to pay for advice given to the employer. A ban on consultancy charges for pension schemes used in automatic enrolment came into force in September This was the first of a number of actions the government is taking to tackle "high and inappropriate" pension charges. The rules of any defined contribution scheme must not include a provision that allows for: Any deduction from employer or jobholder contributions Any deductions from income or capital gains arising from the investment of such contributions The value of the jobholder s rights under the scheme to be reduced by any amount where the amount is to be paid to a third party under an agreement between the employer and a third party (which is defined as being as someone other than the jobholder, the trustees of an occupational pension scheme or the provider of a personal pension scheme). 12B8) Changes to the TUPE requirements for pensions TUPE exists to safeguard employees rights when the business in which they work changes hands between employers as a result of an asset transfer (rather than a share sale). This means that a new employer (the transferee employer) must continue to provide at least the same level of employment benefits, including personal pensions/stakeholder pensions, provided by the old employer (the transferor employer) for TUPE d employees. Rights to occupational pension schemes are specifically excluded from the main TUPE legislation. Instead, there are separate regulations made in 2005 which offer a modified form of protection for transferred employees who had access to an occupational pension scheme with their previous employer. Changes have been made to the 2005 regulations to ensure that the TUPE requirements interact properly with the automatic enrolment legislation. These changes came into force on 6 April Pensions News 1-7

10 13B9) Consolidated disclosure of information regulations Revised regulations that came into force on 6 April 2014, have consolidated and harmonised the main disclosure of information regulations. There were previously three sets of these regulations, for occupational pension schemes, personal pension schemes and stakeholder schemes. The DWP has consolidated the regulations for occupational and personal pensions into one piece of legislation. The revised consolidated regulations seek to simplify and update certain areas of the legislation, particularly with regard to the provision of basic scheme information and benefit statements and the use of lifestyling in DC schemes. Although there are disclosure of information requirements in other regulations, for example in connection with preservation and transfer values, these provisions are not covered by the new regulations June 2014

11 2 1BForthcoming legislative and other changes 14B1) Budget 2014 Changes to how defined contribution benefits can be drawn at retirement The big surprise in the Chancellor s Budget this year concerned the way in which members will be able to draw defined contribution benefits from April Traditionally, members reaching retirement usually have to use their accumulated fund to purchase an annuity. Annuity purchase is not compulsory, but the main alternatives of using flexible or capped drawdown are not widely used: certainly with occupational pension schemes. Members with very small funds can look to take their funds as a lump sum, as an alternative to annuity purchase. In most other cases, commuting the value of a member s pot for a lump sum will result in members incurring a 55% tax charge. From April 2015, members will essentially have three choices, after taking a tax-free cash sum at retirement (which members will continue to have the option of). They will be able take a lump sum of their accumulated fund (taxed at their marginal rate), purchase an annuity or use a form of income drawdown. Exactly how this will work in practice is still to be decided, as the government is consulting on its proposals, until 11 June The legislation providing for these changes will be contained in a new Pensions Tax Bill, announced in this year s Queen s Speech. 15B2) Budget 2014 The impact on members who have recently taken their tax-free cash and/or purchased a lifetime annuity Clearly, no one expected the Chancellor s announcement in the Budget. Members approaching their retirement are likely to now have different views on how, and when, they might want to take their pension savings from defined contribution schemes. Pensions News 2-9

12 Since April 2006, a pension commencement lump sum (PCLS) has had to have been paid within an 18 month window of - six months before and 12 months after - a member attaining an actual entitlement to receive their pension. Failure to comply with this timescale can lead to unauthorised payment charge being incurred on payment of the PCLS. In a defined contribution pension scheme, PCLS is typically paid to members in the six months before their annuity is purchased. The Treasury has now confirmed that members who have received their PCLS will have 18 months in which to decide what to do with the balance of their pension savings. Members who have purchased an annuity, and are still within the cooling-off period stipulated in the annuity contract, may also be more likely to reverse their decision. This means that members can choose to delay making a decision until after April 2015, and so take advantage of the increased flexibility being made available from that date. The legislative detail on this change is to be included as an amendment to this year s Finance Bill. Trustees need to decide how to respond to members requests to make use of the flexibility, in advance of the Finance Bill receiving Royal Assent. 16B3) Budget 2014 The future of transfers from defined benefit to defined contribution schemes The expectation is that the Budget changes (see section 2.1) should make DC schemes more popular with members, who should welcome the increased choice and flexibility on offer. The government is mindful of the potential impact of these changes, on defined benefit schemes. It does not wish to see a big rush of defined benefit members transferring out to access the new flexibility in DC schemes. (This is only an issue in the private sector, as members of public sector DB schemes will not be permitted to make such transfers.) Consultation is therefore taking place on the extent to which DB members should be able to access the new DC regime. The government appears to be open-minded about this and is willing to consider all possible options. The consultation runs until 11 June Even if the government does decide not to allow private sector DB members to transfer to DC schemes (as in the public sector), such transfers can still be made at the present time. Trustees will need to be sure their administrators will be able to cope with a potentially increased workload in the short term. If there is a large movement out of DB pension schemes, this may affect schemes funding position and investment strategy. For example, trustees may wish to consider the level of any reduction applied to transfer values June 2014

13 17B4) Budget 2014 Increasing normal minimum pension age Normal minimum pension age (NMPA) is, as the term suggests, the earliest age at which a member of a registered pension can normally start to receive their retirement benefits. Since April 2010, NMPA has been age 55 (with certain exceptions for ill health and where members have a historic right to retire at an earlier age). The government is consulting on proposals to increase NMPA at the same rate as the increase in the State Pension age (SPA). The government is proposing to wait until 2028 (when SPA will rise to age 67) to fully implement this change. From 2028, people will not be able to draw their private pension benefits without a tax penalty until age 57, whether or not this is the point at which they stop work. From then on, NMPA will rise in line with the SPA so that it is always ten years below SPA. As with the other Budget proposals for pensions (see section 2.1 and 2.3), consultation on this proposal runs until 11 June Increasing NMPA will not prevent pension schemes offering retirement at earlier ages to people who have severe health problems. 18B5) Budget 2014 Further action to combat pension liberation Legislation will be introduced in the Finance Bill 2014 to widen the circumstances in which HMRC may refuse to register a pension scheme (and also seek to de-register a scheme), to include situations where HMRC believes that the scheme administrator is not a fit and proper person to fulfil that role, and where the scheme has been established for purposes other than the provision of pension benefits. HMRC has confirmed that these changes should have little or no impact on scheme administrators of pension schemes who comply with the legislation and operate the pension scheme in the manner intended by the pensions tax legislation. 19B6) A new statutory power for the Pensions Regulator The Regulator has been given a new statutory objective, to have regard to the growth prospects for sponsoring employers when considering pension schemes. This reflects concerns that pension scheme deficits are hampering private sector growth and development. The Pensions Act 2014 provides that the Regulator will be expected to minimise any adverse impact upon the sustainable growth of an employer. This will come into force on 14 July To coincide with this new power, the Regulator has consulted on a revised code of practice and guidance on funding defined benefits (see section 4.1). Pensions News 2-11

14 20B7) Automatic enrolment exceptions The Pensions Act 2014 contains a general power for the government, to make exceptions from the employer duties under automatic enrolment, and the DWP has been considering when it would be appropriate to grant such an exception. In February 2014, the DWP signalled its intention to permit exceptions with regard to: Workers with some form of tax protection on existing pension savings (e.g. fixed protection) Workers who are under notice to retire or leave service for another reason Members who had been contractually enrolled into a pension scheme and who cease active membership The DWP is now examining exactly how the exception should apply in each of these cases, and further consultation with draft regulations, is expected in due course. Other circumstances in which an exception could be provided had been suggested by respondents to the previous consultation, although these have been rejected, with the DWP pointing out that in lieu of a statutory exception, eligible jobholders still have the opportunity to opt out of automatic enrolment. 21B8) The legislative definition of money purchase benefits Section 29 of the Pensions Act 2011 provides for a revised definition of money purchase benefits. This stems from a 2011 Supreme Court judgment, which raised the possibility that a deficit could arise in relation to certain benefits that had previously been regarded as being money purchase, despite there being no statutory protections in place for members of such schemes. The change in the law ensures that only those benefits where there is no risk of a funding deficit can be classed as money purchase schemes, and so subject to DC rather than DB regulatory requirements. The change will mainly affect hybrid schemes which currently class benefits containing guarantees linked to salary or a guaranteed interest rate, or pensions in payment derived from money purchase benefits or cash balance benefits, as money purchase. The DWP has confirmed that the amending regulations will come into force in July Draft regulations have been published, but these are not yet in force. Transitional protection will be provided for events occurring between 1 January 1997 when Section 29 of the Pensions Act 2011 is effective from and the effective date of the regulations. This means that schemes will not have to revisit past decisions in almost all cases June 2014

15 2B9) Reform of the State Pension system and the cessation of contracting out The Basic State Pension and the State Second Pension (S2P) will be replaced by a new single-tier state pension from April The new benefit is likely to be payable at a rate of 144 per week (on 2013/14 earnings), which is above the basic level for means-tested support. Individuals will need 35 years of National Insurance contributions (NICs) (or credits) to qualify for the full pension. The abolition of S2P means that contracting-out for defined benefit schemes will cease. This means that sponsoring employers, and members, of contracted-out schemes will face an NIC increase. The Government is to give sponsoring employers of such schemes limited powers to change scheme rules for these purposes, without trustee consent. This means that employers may choose to reduce benefits and/or increase member contributions. The terms of this statutory override are included in the Pensions Act Supplementary regulations giving further detail are currently subject to consultation by the DWP. This consultation runs until 2 July Employers will only be able to use the power to offset the additional NIC costs incurred through the abolition of contracting-out. Trustees of schemes that have a liability for guaranteed minimum pensions accrued before 6 April 1997 may use a scheme reconciliation service established by HMRC, ahead of the abolition of contracting-out in April 2016, for all non-active members (see section 3.2). The Government has also committed to review the state pension age (SPA) every five years, from the next Parliament, to ensure that SPA keeps track with increased life expectancy. Any changes to SPA would require at least ten years notice before implementation. In the Autumn Statement of 2013, the Chancellor confirmed that the government would be looking to base future SPA increases on the principle that on average, people should not spend more than 1/3 rd of their adult life in retirement. This means that SPA is likely to rise to 68 in the mid 2030 s and to 69 by the late 2040 s. 23B10) Changes to the PPF compensation cap The PPF compensation cap is used to determine the maximum level of compensation payable, where a member had not yet attained a scheme s Normal Pension Age at the date of entry into the PPF assessment period, and was not receiving an ill health pension from the scheme at that date. In these circumstances, their compensation is subject to a 10% reduction. Should a member s compensation exceed the compensation cap, then their benefit is limited to the level of the cap, before the 10% reduction is applied. Pensions News 2-13

16 The cap varies, depending on a scheme member's age, and the PPF publishes agerelated factors to apply to members benefits. However, no account has been taken of a member s length of service in their scheme, which means that long-serving members can be disproportionately affected by the cap. To remedy this, the Pensions Act 2014 provides that the maximum level of capped PPF compensation will be increased by 3% for every year of service over 20 years. There will still be a cap on PPF compensation for long-serving members, although it is to be double the standard cap that applies for members with less than 20 years service. 24B11) Call for evidence on quality standards for workplace DC schemes In 2013, the DWP published a call for evidence setting minimum standards of quality for DC schemes. The DWP is focusing on four areas that can influence the size of a member s final DC pot. The areas that the call for evidence focused on were: Scheme governance Investment and default options Administration and record keeping Scale i.e. the size of schemes The call for evidence ran until 9 September In March 2014, the DWP published the government response, which confirmed that there will be new minimum quality standards for DC workplace pension schemes. This, and stronger requirements on trust-based schemes, will improve accountability and ensure compliance with the quality standards. This DWP is to consult further on these quality standards June 2014

17 3 2BOther current issues 25B1) DWP consultation on default fund charging The DWP has confirmed that a cap will be imposed on the charges for members in default funds of DC schemes that are qualifying schemes for automatic enrolment. The cap, to come into force from April 2015, will be set at 0.75% of funds under management and will apply to all management charges, but exclude transaction costs. Consultancy charges will also be banned in qualifying schemes from this date. In 2017, the government will examine the level of the cap and consider whether some or all transaction costs should be included within it. Member-borne charges incompatible with automatic enrolment will be eliminated. Adviser commissions and active member discounts will be banned in qualifying schemes from April There will be a step change in the way transparency operates in workplace schemes. From April 2015, trustees will have new duties to consider and report on costs and charges. The government will then introduce new requirements to make standardised disclosure of all pension costs and charges mandatory. This information will be disclosed to trustees, in a format that enables comparison between schemes, and made available to employers, scheme members and the Regulator. 26B2) GMP reconciliation service ahead of April 2016 Contracting out for defined benefit schemes is ceasing from 6 April 2016, when the new single-tier state pension comes into effect (see section 2.9). In advance of this, HMRC is offering a Scheme Reconciliation Service to assist administrators and trustees in the reconciliation of their membership and guaranteed minimum pension (GMP) data for all non-active members against HMRC records. The service provides a list of contracted out periods and GMP data for members who have left contracted-out employment. This includes early leavers, pensioners, widows, widowers and surviving civil partners. Although schemes are under no obligation to use this service, it represents an ideal opportunity to ensure the accuracy of scheme data ahead of April Trustees that intend to use the service should submit a request to do so as soon as possible, as HMRC are dealing with cases in the order they are requested and there is already a delay of several months in receiving this data from HMRC. Pensions News 3-15

18 27B3) Defined ambition schemes The drive for defined ambition schemes stems from the desire to bridge the gap between defined benefit (DB) and defined contribution (DC) schemes. The DWP recognises the need for some middle ground, due to the costs involved with DB schemes and the lack of guarantees inherent in DC schemes. In conjunction with pensions industry, the DWP has been considering the designs that defined ambition schemes could take. Different models have been proposed, which can be summarised as: Flexible DB schemes where employers are not necessarily subject to all of the requirements currently imposed on DB schemes. Guaranteed DC schemes where some security is provided for members against investment risks. Collective DC schemes where members funds are pooled, rather than invested individually. This year s Queen s Speech confirmed that a Pensions Bill will provide for defined ambition schemes, including collective DC schemes. 28B4) Pension liberation There has been a marked increase in possible pension liberation schemes since the start of last year and Buck/GBA is carefully monitoring suspicious transfer cases involving such arrangements in conjunction with the Pensions Regulator, HMRC and the Financial Conduct Authority (FCA). In October 2013, HMRC changed its registration procedures for new schemes which had inadvertently made it easier to establish liberation schemes. Applications for registration of pension scheme are now subject to a two-stage process and all applications will be reviewed before deciding whether a scheme can be registered. Until that point, any transfers made to the scheme will be treated as unauthorised payments. HMRC is also now more receptive to queries from transferring schemes about the registered status of a suspicious receiving scheme, before a transfer is made. (It should be noted that there is a long backlog of these requests, and HMRC are not currently responding for several months.) This year s Budget announced further changes, with HMRC being able to consider if those behind a scheme are fit and proper with regard to registration and deregistration of a scheme (see section 2.5). Where it is felt that a transfer request cannot be complied with, trustees will be informed. A cross-industry group is being established (which has been acknowledged by the DWP and includes representation from the Regulator) to draw up a code of practice for scheme transfers as a barrier against fraudulent transfer activity June 2014

19 There are currently some 41 pension liberation cases lodged with the Pensions Ombudsman. Of these, the majority relate to member complaints about trustees blocking transfers to suspicious receiving arrangements. The first determinations from the Ombudsman on these cases are due in the next couple of months. 29B5) The imposition of VAT on investment management costs In July 2013, the Court of Justice of the European Union (CJEU) ruled that an employer setting up a DB pension fund as a separate entity, is entitled nevertheless to deduct the VAT it has paid on services relating to the management and operation of the pension fund, provided that the existence of a direct and immediate link is apparent from all the circumstances of the transactions in question. This means, that any VAT incurred on costs relating to the management of a pension fund is recoverable by the employer at its overhead VAT recovery rate, where those costs are not passed on to the pension fund. This will apply both to on-going day to day management and the management of investments. In February 2014, HMRC published its response to this CJEU judgment. Previously, HMRC had allowed employers to deduct VAT on expenses incurred in relation to the general management of an occupational pension scheme but not in relation to the costs of managing scheme investments. HMRC announced an immediate change in policy. It now accepts that the VAT on investment-related services, which go further than management of the investments, may be recoverable by an employer. However, HMRC warns that specific investment management costs are not general costs of the employer and so cannot be recovered. The supply must be received by the employer. HMRC has also announced the end to its 70/30 rule. Where a fee could not be divided into general management and investment activities, employers could assume that 70% of activities were management and the remaining 30% were investment. Use of the 70/30 rule will still be allowed until 3 August HMRC appears to have interpreted the CJEU judgment very narrowly. It remains to be seen whether HMRC will be challenged over these changes. In a separate case, the CJEU has, followed the Advocate General's opinion given last year, held that defined contribution pension schemes may be "special investment funds" for VAT purposes, with the consequence that management services provided to them would be exempt from VAT. HMRC has held extensive discussions with industry representatives on how to its new policy will apply. It is now reviewing the VAT treatment of pension scheme administration and fund management services to take account of both CJEU decisions and to consider whether any further changes are required to its stated policy. Further HMRC guidance is expected this autumn. It is unclear whether the 70/30 rule can continue to be used after 3 August 2014, until HMRC updates its guidance further. Some of the services which HMRC s guide classified as investment management fall according to this latest CJEU judgment to be classified as general Pensions News 3-17

20 management. It will be difficult, in the face of this latest CJEU judgment, for HMRC to refuse to treat UK defined contribution schemes as special investment funds. 30B6) New IORP Directive In March 2014, the European Commission published its long-awaited proposal for a new, revised IORP (Institutions for Occupational Retirement Provision) Directive. (IORP is the term used by the Commission for pensions.) The proposals requiring a formal review of the solvency requirements for IORPs by the Commission following entry into force of the Directive have been watered down from earlier drafts. However, the proposed Directive does contain extensive new governance and communications, which will significantly impact UK occupational pension schemes. These include requirements for IORPs to: Implement effective risk management, internal audit and actuarial functions Produce and maintain a risk evaluation report Be run by people with adequate professional qualifications, knowledge and experience (which could potentially signal the end of lay trustees) Produce and maintain a remuneration policy Provide prescribed information to members, including detailed requirements regarding the format and contents of pension benefit statements Appoint a depository to safeguard plan assets, where members and beneficiaries fully bear the investment risk (which will be the case for most UK DC occupational pension schemes) Notify their national regulator before any activities are outsourced The Directive also proposes a relaxation of some of the regulatory requirements for cross-border schemes. Unfortunately, however, the requirement for cross-border schemes to be fully funded at all times remains, despite the Commission recently citing this as one of the key barriers to the establishment of such schemes. The proposed Directive states that Member States will have to implement the new requirements by 31 December It remains to be seen how achievable this timescale is. 31B7) NAPF Annual Survey 2013 The NAPF s 39 th Annual Survey has now been published. This is one of the main benchmark industry surveys, covering all scheme types and sizes. This year s survey includes sections on DB schemes, DB funding and investment, DC schemes and scheme governance June 2014

21 The key findings in the report include: The closure rate for DB schemes slows but challenges remain. Membership in DC schemes has grown as a result of automatic enrolment and the average annual management charge for these schemes is low at 0.46%. In investment strategy trends - there has been a steady move from equities to alternative assets. Pensions News 3-19

22 4 3BRecent Pensions Regulator publications 35B1) Consultations 41BFunding defined benefits revised code of practice and guidance The Regulator has consulted on a new DB code of practice and its approach to regulating DB schemes. The proposed evolution of the Regulator s approach to these schemes looks to strike a balance between employers DB funding obligations and their ability to invest in sustainable business growth. The consultation also reflects how the Regulator s approach has evolved since the code of practice was first published in The consultation covers: A draft code of practice that provides practical guidance to help trustees to meet the requirements of scheme funding legislation A draft regulatory strategy summarising the Regulator s risk-based approach to tackling issues in DB schemes A draft funding policy describing in more detail the Regulator s intended approach to regulating DB funding issues The revised code of practice emphasises the importance of pension trustees and employers working collaboratively to establish viable, long-term funding plans, and encourages trustees to take an integrated approach to managing key scheme risks: namely funding, investment and the employer's ability to meet its obligations to the pension scheme. The consultation period closed on 7 February 2014 and it is anticipated that the new code will be in force by July It is expected that the final version of the code may well be somewhat shorter than the draft that was consulted on. 36B2) Definitive guidance 42B2014 analysis of valuation and recovery plan data In May 2014, the Regulator published its latest annual analysis of UK defined benefit and hybrid schemes. Most of the data relates to schemes in deficit on a technical provisions basis, with this latest update being primarily based on what the Regulator refers to as Tranche 7 schemes (with a valuation falling between 22 September 2011 and 21 September 2012) June 2014

23 4B Launch 45B Code 43B2014 scheme governance survey In May 2014, the Regulator published the report on its 8 th annual scheme governance survey. The survey results span DC, DB and hybrid schemes with 12 or more members. Key findings include: Half of schemes had not reviewed their Statement of Investment Principles (SIP) in the last three years. DC schemes used for automatic enrolment are more likely to have done this. Schemes administered by a third-party administrator are more likely to receive an assurance report, compared to those administered by an insurer. Schemes that have documented their internal controls are more likely to receive an assurance report, compared to those which have not. More than half of DB and hybrid schemes say that they fully integrate the management of risks relating to scheme funding, scheme investments and the employer covenant; with just over a quarter doing this to some extent. Large schemes are more likely to be aware of pension liberation than small schemes. Among the schemes aware of pension liberation, more three-quarters of schemes have processes in place to combat pension liberation, with one in seven having suspected such activity in transfer requests. Over a quarter of schemes surveyed are being used, or planned to be used, for automatic enrolment. These schemes are more likely to demonstrate a number of positive governance traits. of DB pension costs research and comparison tool In April 2014, the Regulator published the findings of research examining how DB schemes of different sizes are impacted by administration and other running costs. It shows that nearly a quarter of trustees of private sector DB pension schemes could not identify what they were paying in investment charges, even though these represent the second largest expense for such schemes. The study also reveals how small DB schemes pay on average nearly four times as much per member in running costs, compared to large schemes. The Regulator has developed a charges checklist and a web tool to help trustees assess how the costs of their scheme compare with those of a typical scheme of a similar size. The information it provides should offer a starting point for trustees who wish to assess the value they get from their providers. of practice and guidance on the administration and governance of work-based DC schemes In November 2013, the Regulator published its new code of practice for defined contribution (DC) pension schemes. This sets out the standards it expects trustees to meet in order to comply with their legal obligations. The code applies to trustees of all trust-based DC schemes with more than one member (of any type). It also applies to trustees of schemes that are not pure DC schemes but provide money purchase AVCs, hybrid schemes with DC sections or DC schemes with defined benefit underpins. Pensions News 4-21

24 46B Strategy 47B Governance Unlike other codes of practice that the Regulator has published, this does not concentrate on one specific subject. Instead it is designed to provide trustees with a central point of reference for areas of DC governance. These areas are addressed by the Regulator s DC quality features, which DC schemes are expected to display, and underpin this code of practice. The quality features describe the activities, behaviours and control processes that are more likely to deliver good member outcomes. for regulating trust-based DC schemes The Regulator also published its compliance and enforcement policy in November This sets out its approach in relation to enforcement for occupational DC trustbased pension schemes: the Regulator s expectations for compliance with relevant pensions legislation and how it will enforce the law in cases of non-compliance. The policy, which inevitably works in tandem with the code of practice on DC (see above), explains in broad terms: How it identifies and assesses risk in DC schemes through its risk framework and how this forms the basis for the Regulator s operational activity The Regulator s approach to monitoring DC schemes, particularly how it will monitor the DC market to identify schemes which are not complying with their legal obligations How a DC scheme may be investigated by a case team and what happens if it is The enforcement options available to the Regulator and how it will make enforcement decisions (with illustrative examples) statements To demonstrate that their scheme exhibits the Regulator s 31 DC quality features, trustees are expected to publish a governance statement, and the Regulator has published a template statement for trustees to use. A governance statement should be made available to members and employers for example, by publishing it in the scheme s annual report and accounts, or on its website. The governance statement should be used to: Confirm that the scheme complies with the requirements of the Regulator s DC code of practice, guidance and in particular that it exhibits the quality features Explain why the scheme has adopted a different approach where a quality feature is absent or partly in place Set out what action the trustees intend to take to, correct the position where a feature is absent or, improve an existing feature June 2014

25 48B Awareness 49B Joint 50B Record To help trustees to complete the governance statement accurately, the Regulator has also published a template to enable them to assess their scheme against the DC quality features. The template, which can be adapted according to individual scheme needs, can also be used to monitor plans to improve scheme features to a 'best practice' or 'exemplar' level. This is intended as a tool to help trustees and does not need to be published, but the Regulator would expect the information to be available to employers, members and to the Regulator upon request to show how the scheme meets the quality features. of the quality features The 31 DC quality features are designed to help schemes deliver good outcomes for retirement savers. Twenty two relate directly to legislation, while the remaining nine either have a partial basis in legislation or are based on current industry good practice. In May 2014, the Regulator published the results of research it conducted earlier this year into the presence of the DC quality features among single employer DC trust-based schemes. Key findings of the survey include: Awareness of the features being highest among large DC and large hybrid schemes and lowest among small DC schemes. A variation in presence of the DC quality features by scheme size. Among the features measured, large hybrid schemes had 25 features present on average, DC large schemes had 24, medium schemes had 21, and small schemes had 15. Only 7% of small DC schemes had 24 or more of the features present. statement with the FCA on how DC schemes are regulated The Pensions Regulator (tpr) and the Financial Conduct Authority (FCA) both have regulatory responsibilities for DC pension schemes. In March 2014, the two regulators published guidance to outline each regulator s approach, and how they work together to ensure consistency. TPR s main focus for DC pension schemes is on the conduct of trustees in trust-based schemes. Both regulators will work with the DWP and other agencies to incorporate the new requirements into their regulatory activities. In order to avoid duplicity, tpr is likely to take the lead where there is a problem with an individual scheme, and the FCA where the issue is caused by the pension provider. If there are implications for both regulators, they will jointly agree who should take the lead on a case by case basis. keeping guidance Following the first deadline for measuring common data that expired at the end of 2012, the Regulator is now looking to understand the extent to which schemes have met the common data requirements. The Regulator guidance states that schemes should measure common data at least annually. It is contacting a broad sample of schemes to obtain high level details about their measurement of common data. Going forward, the Regulator will be concentrating its focus on schemes conditional data (which is dependent on scheme type, structure and system design). Pensions News 4-23

26 51B Guidance In December 2013, the Regulator published an update on scheme record keeping, urging trustees to continue the drive to improve the quality of their record-keeping by correcting errors in common data and by putting plans in place to improve the quality of conditional data. The call to action follows the Regulator s code of practice for trust-based DC schemes coming into effect (see above), and the launch of its consultation on DB regulation, including an updated DB funding code of practice (see section 4.1). The Regulator is intending to review its record keeping guidance following the passage of the current Pensions Bill and its thematic review of record keeping. In March 2014, the Regulator announced it had opened seven case investigations into scheme record keeping following its thematic review, when it published a report detailing the main findings of the review, and actions to improve record-keeping standards. The Regulator found good practice in the industry across a range of scheme types and sizes, but also found areas that caused concern and posed risks to schemes and the payment of members benefits. In particular, schemes with lower levels of engagement with their advisers, which tended to be smaller schemes, were less able to demonstrate that they had effectively tackled record keeping challenges. The review sought to identify whether schemes had met the targets the Regulator set for common data (member details common to every scheme such as name, date of birth, National Insurance number), the actions schemes were taking to manage and mitigate errors and gaps in data, and how schemes were managing data as part of their internal controls frameworks. on asset-backed contribution structures In November 2013, the Regulator published new guidance on asset-backed contributions (ABCs) which sets out its perception of the risks associated with ABC arrangements, its expectations of trustees and its approach to ABC arrangements generally. An ABC arrangement is a contractual structure entered into by trustees and entities in the sponsoring employer s group which involves a scheme being paid regular amounts for a defined period of time, with the payments being derived from an underlying asset. The guidance is clear that the Regulator expects trustees to evaluate ABC proposals robustly, take all appropriate advice and consider the interaction between that advice. The Regulator expects trustees to consider whether the same benefits could be achieved by less restrictive means, including a recovery plan alone, a contingent asset (such as a charge) and other appropriate strategies not necessarily put forward by the employer. Overall, the Regulator expects trustees to be able to demonstrate clearly why they accepted an ABC arrangement and why it is in the interests of the scheme s beneficiaries June 2014