Regulatory Update January 2013

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1 Regulatory Update Pensions Regulator, DWP, Pension Protection Fund, and HMRC State Pension Reform The Government has published a White Paper confirming its intention to move away from the current two-tiered state pension (the basic state pension and the earnings-related state second pension) to a single tier state pension (about 144 per week in today s terms). To qualify, National Insurance contributions must be paid for a minimum of 7 to 10 years, and the full pension will be available after 35 years of contributions (compared to the current 30). It is intended that these changes will apply to individuals reaching State Pension Age from 2017 at the earliest. The abolition of the state second pension will mean that schemes will no longer be able to contract out, resulting in active members of contracted-out salary related schemes and their employers paying higher National Insurance contributions. Employers affected by the change are to be given power, for a limited period, to amend their schemes rules as required, in order to offset the additional NIC liability, without the need to secure the trustees agreement. They will however need to consult their employees about any planned reduction in accrual rate or increase in member contribution (but not about the cessation of contracting out itself). nn The White Paper also confirms plans for raising the State Pension Age to reflect increasing longevity. Under current legislation, men and women's SPAs will be equalised by November 2018, and will rise to 66 by October The Government intends to phase in an increase to 67 between 2026 and It is intended that the State Pension Age will then be reviewed every five years with the guiding principle of maintaining the proportion of adult life spent in receipt of state pension. Action Employers and Trustees with active members of contractedout schemes will need to consider the long term implications and plan appropriate changes. Transfer Incentives The DWP has published a draft Pensions Bill. This focusses mainly on the state pension reforms but also includes a provision to give the Government power to make regulations to prohibit the use of transfer incentives. It is expected that the Government will make use of this power only if the principles of the voluntary industry code, published in June 2012, are not observed. Scheme Funding The DWP has published a call for evidence to gather views on whether there is a need for legislation to allow the smoothing of asset and liability values in pension scheme valuations; and whether the Pensions Regulator should have a new statutory objective to consider the long-term affordability of deficit recovery plans for sponsoring employers. The Government has noted that there are differing opinions within the pensions industry on the complex issues in these areas, and that any changes may ultimately affect pension scheme members, sponsors, the Pension Protection Fund (PPF) and the wider economy. The Pension Regulators Purple Book shows that the aggregate funding deficit in UK defined benefit pension schemes had risen to billion at 31 March 2012, up from 1.2 billion the year before. This position calculated on the s179 basis that is used for the PPF levy represents a fall in the funding level from approximately 100% to 83%. their own schemes. 1

2 Regulatory Update Pensions Newsletter 56 HMRC has published Newsletter 56 which includes: Encouragement to personal pension providers to make customers aware of how to claim any higher-rate tax relief that may be due to them. A summary the key pension changes announced in the Autumn Statement and/or included in the Draft Finance Bill An invitation for comments about the possibility that a personalised protection option will be available in connection with the planned reduction to the lifetime allowance, as an alternative (or in addition) to fixed protection Plans to introduce legislation effective from April 2013 to align the tax rules on the payment of bridging pensions with the forthcoming increases to State Pension Age. Framework for Regulating work-based defined contribution pension schemes The Pensions Regulator has begun consultation on a framework for regulating work-based defined contribution (DC) pension schemes. The Regulator is seeking comments on its proposed regulatory approach, a draft code of practice, and additional regulatory guidance, designed to improve the governance and administration of DC schemes. The consultation covers a new code of practice and regulatory guidance for the trustees of trust-based DC schemes, which build on the six DC principles and DC quality features that are central to the Regulator s strategy. Auto-enrolment update In a change to its guidance, HMRC has confirmed that in certain circumstances it will be possible for scheme rules to unwind membership of a scheme and for tax purposes treat an individual who has opted out as having never been a member. This will give welcome flexibility for employers who contractually enrol their employees into a pension scheme. The new guidance will be of particular relevance to those with fixed or enhanced protection who may otherwise have lost their tax protection, even if they were enrolled into a scheme for a very short period. To take advantage of this change an occupational scheme must have a suitable opt-out rule that treats an individual who opts out as having never been a member. General Issues Employers and Trustees using contractual enrolment should ensure that a suitable optout rule is in place. OFT Study of Workplace DC The Office of Fair Trading (OFT) has launched a study of the market in defined contribution (DC) workplace pension schemes. Working with the Pensions Regulator, DWP and the FSA, the OFT will be considering whether competition will work in the best interests of savers to deliver low cost, high quality schemes. The study will focus on the value for money provided to members and the size of the pension pot that savers will end up with at retirement. No change to RPI On 10 January the Office for National Statistics announced its recommendation for no major change to the calculation of the Retail Prices Index (RPI). This followed the consultation on proposed changes as reported in our Regulatory Update of October last year. This came as a major surprise to the markets and led to a fall in index linked gilt yields of around 0.3% p.a. immediately following the announcement. The market had anticipated that the recommendation would lead to future RPI inflation moving closer to the Trustees should consult with their own schemes. 2

3 Regulatory Update (generally lower) Consumer Prices Index (CPI) measure of inflation. However, the overwhelming response to the public consultation was against any change. Schemes benefit payments linked to RPI will therefore remain unaltered. From an investment perspective, the announcement removed uncertainty and will enable pension schemes to move ahead with their hedging programmes. Any inflation hedging trigger levels that were lowered because of an expectation that the RPI calculation was going to change will need to be reconsidered in the light of this outcome. Although RPI will be retained, a new RPIJ index, which meets international standards, will be published from March This will be more in line with CPI (although based on the RPI basket of goods). However, at this stage it is not entirely clear what this new index might be used for. their investment advisers with regard to hedging programmes work/consumer-prices-advisory-committee/cpac-papers/cpac-summary-note---january pdf Civil Partnerships possible extension of rights It has been commonly accepted that there is no requirement to equalise benefit provision between civil partners and spouses for periods of pensionable service arising before 5 December the date on which section 1 of the Civil Partnership Act 2004 came into force. However, in Walker v Innospec, which follows European Court of Justice (ECJ) case law, an Employment Tribunal found that civil partners should be provided with the same benefits as spouses under the rules of an occupational pension scheme - regardless of whether the pensionable service/right awarded relates to the period before or after 5 December This decision could also lead to challenges in other areas of discrimination protection and the backdating of non-discriminatory benefit provision. The decision is not binding on other courts and is subject to appeal. monitoring NAPF Annual Survey The NAPF s 2012 Annual Survey was published on Monday 28th January. As in previous years the Survey provides comprehensive insight into workplace pensions in the UK, covering over 1000 Defined Benefit, Defined Contribution and Hybrid schemes, across the private sector, local authorities and other parts of the public sector, including universities and charities aspx their own schemes. 3

4 Regulatory Update December 2012 Pensions Regulator, DWP, Pension Protection Fund, and HMRC PPF Freezes 2013/14 Levy The Pension Protection Fund (PPF) has published a draft determination for its 2013/14 levies announcing that the levy estimate is 630 million. This means that the total levy to be collected from April 2013 to March 2014 is expected to be similar to the amount currently being invoiced in respect of the 2012/13 year. Individual schemes can thereore expect stability in their levy invoices for 2013/14. More detailed guidance has also been provided on evaluating the strength of the guarantor for Type A contingent assets. Action Recovery Plan Reporting Changes From 26 November 2012 onwards, the Pensions Regulator has to be provided with additional (via its online Exchange system) when a recovery plan is submitted for a defined benefit scheme that has a funding deficit. The additional details required from 26 November are: up to 20 years annual recovery plan contributions (up to four years' Recovery Plan contributions are required at present); whether independent employer covenant advice was obtained (yes or no answer required); the statement of funding principles in PDF; and the statement of investment principles in PDF. ent.pdf 2012 Purple Book Purple Book 5 is available. This looks at the risks faced by private sector defined benefit schemes in the year ending March It is based on the provided by the scheme returns of 6,316 schemes, covering 11.7 million members. Annual Allowance Charge Amendments HMRC has issued a draft Order that would amend elements of the annual allowance charge. The draft Order is intended to ensure the legislation works as intended. Inflation Indices the OOH Factor In March 2013, the Office for National Statistics (ONS) will introduce an additional version of the Consumer Prices Index (CPI) that takes into account owner-occupiers housing (OOH) costs. their own schemes. 4

5 Regulatory Update Changes to Statutory Money Purchase Illustrations (SMPIs) The Financial Reporting Council (FRC) has proposed changes to the actuarial standard that governs the production of annual statutory money purchase illustrations (SMPIs). The changes proposed by the FRC are: to remove the cap of 7% on the investment return assumption, and replace it with a requirement to provide members with justification (on request) of the assumption adopted; and to specify a particular way for blending a unisex mortality assumption, based on separate mortality tables for men and women. Flexible Parental Leave The Department for Business, Innovation and Skills (BIS) has plans for a new system of flexible parental leave that will allow parents to reallocate the mother s statutory maternity leave (and any associated statutory maternity pay) between them, in whatever pattern they choose (subject to some restraints). The Government intends to introduce the new type of leave in administrator and payroll provider to consider. PAYE Treatment of Commutation Lump Sums As part of its Real Time Information (RTI) project under which PAYE payments will be reported as they are made, rather than in an annual return HMRC is proposing to change the tax code that is applied by pension payroll operators to commutation payments. administrator and payroll provider to consider. The last date for the submission of comments about the proposals is Pension Schemes Newsletter 55 HMRC has published its 55th Pensions Newsletter containing details of changes to the Pension Schemes Web site, an update on the relief at source project and new contact details for those concerned about pension liberation schemes.. Pensions Tax-relief Further reductions have been announced to both the Annual Allowance (from its current level of 50,000 to 40,000 from 6 April 2014) and the Lifetime Allowance. The reductions announced are likely to bring more employees into the scope of the pension taxation regime. Employers and scheme administrators will therefore be more involved in helping employees keep pension benefits within these lower thresholds. Also from 6 April 2014, the Lifetime Allowance will be reduced to 1.25 million (from its current level of 1.5 million). those with pension savings over 1.25 million on 5 April 2014, the Government wishes to offer a personalised protection regime and will be discussing the feasibility of this with interested parties in the months ahead. comm cation to members likely to be caught by the new restriction to allowances so they can do effective tax planning. their own schemes. 5

6 Regulatory Update State pension increases The additional state pension will continue to be uprated in line with prices. The basic state pension will increase by 2.5% in April 2013 (higher than both average earnings and inflation).. New statutory objective for Pensions Regulator The Department for Work and Pensions will consult on providing the Pensions Regulator with a new statutory objective to consider the long-term affordability of deficit recovery plans. The DWP will also consult on whether to allow companies undergoing valuations in 2013 or later to smooth asset and liability values. Minister s announcement The Minister announced a review of the PPF compensation cap in a House of Commons debate on 4 December He commented: Over the two and half years I have had this role I have become increasingly concerned that the cap for those who have not reached scheme pension age is acting in a penal way, not on the people that it was intended to effect, which is the fat cats who might have had a moral hazard issue, but simply on long serving workers. There are currently no details available relating to the timetable for this review. General Issues Unisex rates From 21 December 2012 insurers are no longer permitted to charge differential premiums as between men and women for annuities or life cover.. Introduces a more heightened focus on this area in covenant review discussions?. Consider as part of compliance with tprs principles for good work based DC especially the principle dealing with compens tion available to members Solvency 11 The European Commission has issued a quantitative impact study (QIS) across Europe to assess the impact of the extra funding demands through the Solvency 11 requirements. Nine European countries are taking part. The European Insurance and Occupational Pensions Authority (EIOPA) will co-ordinate the responses and publish its report on the outcome by May Solvency II also has the potential to affect the pricing and availability of bulk and individual annuities.. UK Stewardship Code 2012 consultation The Financial Reporting Council ( FRC ) recently announced a number of revisions to the UK Stewardship Code ( the Code ). These changes, which came into effect on 1 October. their own schemes. 6

7 Regulatory Update 2012, aim to improve the quality and transparency of corporate governance in the UK. New automatic enrolment thresholds for 2013/14 On 14 December 2012 the DWP published the revised thresholds for the 2013/14 tax year. The earnings trigger at which automatic enrolment duties start to apply will increase to 9,440pa. Contributions will be payable on the band of earnings between 5,668pa and 41,450pa.. their own schemes. 7

8 Regulatory Update November 2012 Pensions Regulator, DWP, Pension Protection Fund, and HMRC Scheme data The Regulator expects schemes to have made significant steps in improving their data to enable them to meet the December 2012 target to have in place: 100% of common data for member data created from the beginning of June 2010 and 95% of member data created before Advise TPR if significant difficulty in making target is anticipated Action December meeting agenda item. Continue data improvement plans into 2013 TPR estimate of impact on pension funding of EIOPA proposals The EU pensions regulator (EIOPA) has proposed a new Directive on Institutions for Occupational Retirement Provision (the IORP Directive). Monitor and discuss implications with sponsor. It involves the implementation of the holistic balance sheet for occupational pension scheme funding purposes. This would require pension scheme liabilities to be balanced by a mixture of assets, contingent assets, sponsor support and possible access to compensation. A report from the Pensions Regulator (TPR) has found that this could increase the deficits of UK defined benefit schemes by 150 billion, plus an additional 250m, which would be required by a new Solvency Capital Requirement. These proposals would be devastating for UK occupational pensions. Significant efforts are being made by government and UK institutions to gain the support of other unaffected EU countries to vote against the proposals. The Chairman of the EIOPA is seeking to extend the powers of that organisation to include all personal pensions and to also seeks to significantly increase the resources it employs. Monitoring Contributions There are new codes of conduct for trust and contract based arrangements. The scheme administrator should monitor the pension promise to members (e.g. percentage of pensionable pay due and definition of pensionable pay) and reconcile against payroll records to ensure that all payments are made in full. NAPF is conducting a short survey to determine current practice in relation to frequency of reconciliation of member contributions: HMRC Tax code operated on 'trivial commutation' and similar lump sum pension payments From April 2013 the tax code operated on these one-off lump sum pension payments will change from the emergency code (on the non-cumulative or week1 / month 1 basis) to the basic rate (BR) tax code. Draft amendments to the PAYE regulations have been published for consultation. The consultation ends on 9. Ensure administrator reconcile contributions each pay period for each member against the payroll. Ensure administrator monitors this change and makes necessary amendments DWP paper outlines "Defined Ambition" On 22 November 2012, the Government unveiled its strategy for "Reinvigorating workplace their own schemes. 8

9 Regulatory Update pensions". The proposals build on the Coalition Agreement commitment to put in place "arrangements that result in the provision of high quality pension schemes people can trust and take confidence in". The DWP paper outlines a number of so-called "Defined Ambition" arrangements, much promoted in recent months by Pensions Minister, Steve Webb, as a means of ensuring greater sharing of risk between employers and members. As well as putting forward DA arrangements as alternatives to traditional DB and DC models, the paper also suggests possible improvements to existing arrangements. The proposals consider the role of the pensions industry, both in developing new products and in strengthening existing ones. Acknowledging the continuing importance of DC, good governance is also high on the Government's agenda, as is the need to engage individuals during their pension savings journey /2014 PPF levy consultation The PPF's consultation document sets out the basis on which it intends to charge the Pension Protection Levy (the "Levy") for the 2013/14 levy year. The Levy estimate for 2013/14 is 630 million, up from 550 million last year. A further rise is expected for 2014/15. The guidance for contingent assets will be revised to reflect the PPF's recent experience, particularly in relation to the certification of guarantor strength by trustees. document.pdf General Issues Financial Reporting Council (FRC) propose changes to Standard Money Purchase Illustration (SMPI) assumptions The FRC is consulting on the standard for pension scheme projections, to consider how pension providers should set assumptions about future investment returns in the illustrations they give to scheme members. Monitor and review status prior to issue of next SMPI s FRC want to see projections that reflect the nature of member s investments, tailored to savers circumstances. They propose dropping the maximum 7% cap on assumed investment returns They believe that the 7% has at times been used as the default assumption in the belief that this ticks a regulatory box. The consultation closes on 15 December NAPF Stewardship Policy Launched The NAPF launched its Stewardship policy, which gives pension funds a clear roadmap of how they can address their stewardship responsibilities in relation to asset management. It sets out the six best practice principles that the NAPF advises its members to follow. These include: o setting mandates for asset managers which explicitly cover stewardship responsibilities and o reporting to the members of the pension schemes on how their policy has been implemented. Review internal policies in line with NAPF policy and consider if changes required their own schemes. 9

10 Regulatory Update Association of Professional Pension Trustees (APPT) The APPT was officially launched on 29 th November. It emerged from the Pensions Management Institute s Independent Pension Trustee Group, in response to the growth in number and increasing importance of independent trustees and the need to create a body that can act as a voice of the sector. The new code of conduct for professional trustees will cover the following topics: Governance and compliance Fitness and propriety Education, experience and training Independence and conflicts of interest Operating practices Risk management and financial controls Systems and controls. their own schemes. 10