CONTENTS Introduction: BREXIT: THE IMPLICATIONS FOR UK PENSIONS 1 Statement from the Pensions Regulator 1 Legislative Change 2 Reliance on European Court Judgments 2 Other Implications for Pensions 2 Section 1: THE UK STATE PENSION SCHEME State Pension Age 3 State Pension from 6 April 2016 4 Entitlement to State Pension 4 State Pension System to 5 April 2016 4 Basic State Pension, State Earnings Related Pension, State Second Pension 4 Contracting Out 5 Transitional Arrangements 5 Payment and Deferral of State Pension 6 Increases to State Pension 6 State Pension Credits 6 Information on State Pension 7 Section 2: SCHEME DESIGN AND BENEFITS Types of Pension Benefit Money Purchase 8 Trust-based occupational pension schemes 8 Personal pensions, retirement annuity contracts, stakeholder pensions 8 Types of Pension Benefit Defined Benefit: Final salary 9 CARE, cash balance and retirement balance 9 Types of Pension Benefit Other: Hybrid schemes 10 Shared risk and collective benefits 10 Other Issues affecting Scheme Design: Automatic enrolment 11 Registered pension schemes 11 Options at retirement, normal minimum pension age 11 Interaction with State benefits 12 AVCs, death benefits, pension increases in payment 12 Pension salary sacrifice 13 Scheme modifications 13 Consultation by employers 14 Inalienability of occupational pension 15 Cross-border activities 15 page
Section 3: AUTOMATIC ENROLMENT EMPLOYERS OBLIGATIONS When do the Obligations Start? 16 Who do the Duties Apply to? 16 Workforce Categorisation 16 Earnings Definitions 17 Automatic Enrolment Process 17 Postponement 18 Transitional arrangements for defined benefit and hybrid schemes 18 Corporate restructuring 19 Opting Out, Opting In, Automatic Re-enrolment 19 Maintaining Active Membership 20 Contractual Enrolment 20 Compliance by Employers 21 Protection of employment rights 21 Compliance by Trustees 22 Auto-Enrolment Staging Dates 22 Section 4: AUTOMATIC ENROLMENT QUALIFYING SCHEMES Money Purchase Schemes 23 Contribution requirements during transitional periods 24 Defined Benefits and Hybrid Schemes 24 Defined benefits schemes 25 Hybrid schemes 26 Formerly contracted-out schemes 26 Certification: Money purchase schemes 27 Defined benefits and hybrid schemes 27 Non-UK Schemes 28 Section 5: AUTOMATIC ENROLMENT INFORMATION REQUIREMENTS Information to be Provided in relation to Eligible Jobholders who are not Scheme Members and to Opt-ins 29 Enrolment information to be provided to the jobholder 30 Terms and conditions information to be provided to the jobholder 30 Jobholder information to be provided to the pension scheme 31 Information about Opting In and Joining 31 Information when Using Postponement 32 Notice of Deferral under a Transitional Period for Defined Benefit and Hybrid Schemes 33 Opt-out Notice 33 Section 6: NEST AND MASTER TRUSTS NEST: Maximum contributions, transfers, benefits 35 Charges, investment options 36 Governance 37 Master Trusts 37
Section 7: SCHEME GOVERNANCE 8 Trusts and Trustees: Trust law 38 What is a trust? Why use a trust? 38 Who can be a trustee? 39 The trust deed and rules 39 Duties, responsibilities and rights of a trustee 40 The Bribery Act 2010 43 Decision making 44 Internal dispute resolution procedure 44 Independent Governance Committees 45 The Pensions Regulator s Role 45 Internal controls 46 Conflicts of interest 46 Good scheme administration 47 Trustee Knowledge and Understanding 47 Investment Governance 48 Governance of Money Purchase Schemes 49 Regulating money purchase pension schemes 49 Minimum governance standards 49 Master trusts 50 Charge controls, transparency 50 The Role of the Employer 51 The Role of the Actuary: Responsibilities of the scheme actuary 52 Other actuarial advice 52 The Role of the Auditor 53 The Role of the Administrator 53 Section 8: THE PENSIONS REGULATORY SYSTEM The Role of the Pensions Regulator 54 Scheme returns 54 Codes of practice, guidance and other material 54 Notifiable and reportable events 55 Late payments by employers 57 Acting against avoidance 57 Intervention 58 The Role of the Financial Conduct Authority 59 The Role of the DWP 60 The Role of HMRC 60 The Role of EU Regulation 60 The Pensions Advisory Service (TPAS) 61 The Pensions Ombudsman (TPO) 61 Occupational Pension Scheme Levies: General Levy, Fraud Compensation Levy, Financial Reporting Council Levy 62
Section 9: PENSIONS TAXATION REGISTERED PENSION SCHEMES Contributions: Employer contributions 63 Member contributions 64 Authorised Pensions Payable to Members 64 Minimum age from which pension may be paid 64 Drawdown pension, lifetime annuity, scheme pension 65 Period of payment, pension errors and arrears 65 Authorised Lump Sums Payable to Members 66 Pension commencement lump sum 66 Uncrystallised funds pension lump sum, serious ill-health lump sum 66 Short service refund lump sum 66 Trivial commutation and other small lump sums 67 Winding-up lump sum 67 Lifetime allowance excess lump sum, refund of excess contributions lump sum 67 Scheme administration member payment 68 Authorised Pensions Payable on Death 68 Authorised Lump Sums Payable on Death 69 Defined benefits lump sum death benefit 69 Uncrystallised funds lump sum death benefit 69 Pension/annuity protection lump sum death benefit 70 Drawdown pension fund/flexi-access drawdown lump sum death benefit 70 Charity lump sum death benefit 70 Trivial commutation lump sum death benefit 70 Unauthorised Payments 70 Unauthorised payments charge, scheme sanction charge 70 Transitional Protections: Protection from unauthorised payments charges 71 Lifetime and Annual Allowance Issues 71 Money purchase annual allowance 72 Tapered annual allowance for high-income individuals 72 Lifetime Allowance Charge 72 Annual Allowance Charge 73 Pension input amount, pension input periods, scheme pays 73 Transitional Protection against the Lifetime Allowance 74 Primary protection, enhanced protection 74 Fixed protection and fixed protection 2014 75 Individual protection 2014 76 Fixed protection 2016 and individual protection 2016 76 Other transitional protections 76 Registration and Reporting to HMRC 77 Overseas Aspects: Scheme membership 77 Migrant member relief 78 Other Matters: Investment 78
Surplus 78 Pre-6 April 2006 Tax Regimes 78 Section 10: THE LIFETIME ISA Overview 79 Saving 79 Bonus 79 Withdrawals 80 Help to Buy: ISAs 80 Automatic enrolment 81 Section 11: EMPLOYER-FINANCED RETIREMENT BENEFIT SCHEMES AND DISGUISED REMUNERATION Background 82 Taxation of EFRBS 82 DWP Legislation, Preservation and EFRBS 84 Tax Treatment of EFRBS 85 Section 12: LEAVING SERVICE BENEFITS Preservation 86 Payment of short service benefits 86 Leavers with three months pensionable service but without preserved benefits 87 Automatic transfer of small money purchase pots 87 Revaluation 87 GMPs 88 Deferred pension revaluation percentages 89 Transfer Values 89 Section 13: TRANSFERS Advice Requirement s 90 Right to a Cash Equivalent 91 Non-statutory Transfers 91 Calculation of Transfer Values the Initial Cash Equivalent 91 Paying More or Less than the Initial Cash Equivalent 92 Transfers of Contracted-out Benefits 92 Disclosure, Payment and Information 93 Tax Considerations 94 Pension Scams 94 Overseas Transfers 95 Section 14: MONEY PURCHASE RETIREMENT OPTIONS AND ADVICE Introduction 97 Options at Retirement 97 Flexible retirement options 97 Transferring to access the flexibilities 98
Communicating retirement options 98 Providing retirement risk warnings 99 Pensions Guidance and Advice 99 The right to financial guidance (Pension Wise) 100 Overhaul of financial guidance providers 100 Improving financial advice 101 Creating a pensions dashboard 101 Other Developments: 101 Capping early exit charges 102 Levels of retirement income 102 Section 15: DISCLOSURE OF INFORMATION Summary of Disclosure Requirements for Occupational Pension Schemes 103 Basic Scheme Information 109 Benefit Statements: Active and deferred members with non-money purchase benefits 110 Pension credit members with money purchase benefits 111 All members with money purchase benefits 111 Summary Funding Statements 111 Trustees Annual Report 112 Money purchase governance statement 113 Automatic Disclosure in Special Circumstances 113 Schemes Exempt from Disclosure 114 Electronic Provision of Information 114 Member Communications 115 Section 16: EQUAL TREATMENT General Principles of Equal Treatment by Sex 116 Equal benefits, equal access 116 Role of trustees, employers and the courts 117 Application of Principles of Equal Treatment by Sex to Occupational and State Pensions 117 Member contributions, pension age and benefit accrual 117 Bridging pensions and State pension offsets 117 Transfers, actuarial factors and insurance premiums 118 Contracting-out problems 118 Time limits for bringing claims and backdating membership 119 Maternity, adoption and paternity leave 119 State pension ages 120 Equal Treatment for Part-timers 120 Equal Treatment for Fixed-term Workers 120 Equal Treatment and Sexual Orientation 120 Equal Treatment and Race, Religion or Belief 121 Equal Treatment and Disability 121 Equal Treatment and Age 122
Section 17: PENSIONS AND DIVORCE Pension Sharing: Provision of information 123 What rights may be shared? 123 What triggers pension sharing? 124 Rights to be provided to ex-spouse, basis of calculation for sharing 124 Pension credit benefits and pension debits 124 Timing of implementation, expense charges and tax treatment 125 Section 18: PENSION SCHEME FUNDING Actuarial Valuations 127 Ongoing valuation 127 Solvency valuation 128 Scheme Funding under the Pensions Act 2004 128 Statement of funding principles 129 Employer covenant 129 Calculation of technical provisions, recovery plan and schedule of contributions 130 Regulator s approach 130 Disclosure to members, alternative financing 131 Refunds of surplus 132 Monitoring Funding 132 Section 19: LONGEVITY Longevity Risk 134 Assumptions 135 Mortality rates, base tables and future improvements 135 Looking Ahead 136 Managing the Risk 137 Section 20: THE PENSION PROTECTION FUND AND LEVIES Admission 138 The assessment period, closed schemes 138 Compensation: The admissible rules, members and dependants benefits 139 The compensation cap, revaluation and indexation, options 140 Money purchase benefits 141 Adjustments by the PPF 141 Valuations 141 Levy valuation, entry valuation 141 Levies 142 Pension Protection Levy general, up to 2011/12, 2012/13 onwards 142 PPF Administration Levy 144 Financial Assistance Scheme 145 Fraud Compensation Fund 145
Section 21: LIABILITY MANAGEMENT Member Options: Transfer incentive exercises 146 Pension increase exchange exercises 147 Non-incentivised transfers 148 Other Ways of Amending Liabilities 149 Investment Solutions to Manage Liabilities 149 Liability-driven investment 149 Longevity swaps 149 Insurance Approaches 150 Section 22: CEASING ACCRUAL IN FINAL SALARY SCHEMES Considerations for Employers: Business case 151 Design of future benefits, design of accrued benefits 152 Consultation and communication with employees 153 Legal issues 154 Other protections for employees 155 Considerations for Trustees: Trustees duty 155 Scheme funding implications, benefit changes 155 Administration and communication 156 Section 23: SCHEME CLOSURE AND WIND-UP Commencement of Wind-up 157 Winding-up Procedure 157 Appointment of an Independent Trustee and Role of the Pensions Regulator 158 Debt on the Employer 158 Discharging Scheme Liabilities 158 Priority Order 159 Deficiency, Surplus 159 Disclosure and Reporting Requirements 160 Scheme Operation during Wind-up, Operating as a Frozen Scheme 160 Section 24: BULK ANNUITIES 161 Buy-in 162 Buy-in with additional security 163 Buy-out 163 Partial buy-out 163 Other Related Products: Medically underwritten bulk annuities 164 Synthetic buy-in 164 Section 25: SALES, PURCHASES AND CORPORATE ACTIVITY Pricing Pensions in the Deal 165 Acquisition of Whole Scheme 165
Bulk Transfer Arrangements 165 Trustee considerations, member consent or actuarial certificate 166 Employer Covenant 167 Potential Debt on Employer 167 The Pensions Regulator, Moral Hazard and Clearance 168 TUPE 169 Section 26: PENSION COSTS IN COMPANY ACCOUNTS Accounting for Pension Costs under IAS 19: Requirement to use international standards, coverage 170 Application to multi-employer schemes 170 A. Defined Contribution Schemes 171 B. Defined Benefit Schemes: Overview, benefits to value, actuarial assumptions and methodology 171 Balance sheet, pension cost 172 Summary of calculation of pension cost 173 Disclosure 174 Future developments 175 Accounting for Pension Costs under FRS 102 175 Related Party Disclosures (IAS 24) 176 Disclosure of Directors Pensions 177 Unquoted company disclosures, quoted company disclosures 177 Section 27: FINANCIAL SERVICES LEGISLATION AND PENSION SCHEMES Implications for Pension Schemes 178 Definition and Management of Investments 179 Governance Standards, Charging Restrictions, Advice and Guidance 180 Communication with Members 180 Other Activities of the Financial Conduct Authority 181 Role of the Pensions Regulator 181 The Financial Services Compensation Scheme (FSCS) 182 Section 28: RECENT DEVELOPMENTS 183 Section 29: SIGNIFICANT PENSION DATES Auto-enrolment 185 Disclosure and Accounting 185 Divorce 186 Equal Treatment 186 Protecting Members 187 State Schemes and Contracting Out 189 Taxation 191 Transfers, Preservation and Revaluation 192 Unapproved Benefits/EFRBS 193
Section 30: UK PENSIONS CASE LAW Trusteeship 194 Employers 196 Benefits and Contributions 197 Winding Up and Company Insolvency 200 Surplus and Deficits 201 Equal Treatment 201 Advisers and Professionals 204 Taxation 204 Errors and Disputes 205 General and Miscellaneous 206 Section 31: INTERNATIONAL 208 Economic Indicators and Social Security Information 209 High Level Overview: Cost of employment; employment terms and conditions; social security and other required benefits; taxation of compensation and benefits; recent developments; for the following countries: Australia 215 EU 221 The Netherlands 229 Belgium 216 France 223 Russia 230 Brazil 217 Germany 224 Spain 231 Canada 218 India 226 Switzerland 232 China 220 Japan 227 USA 234 Reference Section 1: ECONOMIC & DEMOGRAPHIC DATA Retail Prices Index 2012 2016; RPI Inflation 236 Consumer Prices Index 2012 2016; CPI Inflation 236 Trends in Average Earnings and the Households Savings Ratio 237 Population Data by Nation, Sex and Age, Mid-2015 238 Population projections 238 Expectations of Life 239 UK Working Population 240 Reference Section 2: INVESTMENT DATA UK Annual Inflation, Investment Yields and Interest Rates 241 UK Investment History: RPI, CPI, AWE, Cash, Gilts, Equities 242 UK Investment History: Historic Yields and Returns 243 UK Investment Returns and Inflation 243 Cumulative Index Returns to 31 March 2016 244 Pension Fund Asset Distribution 244 Long-term Performance on All Funds Universe over Cumulative Periods ending 31 March 2016 245
Reference Section 3: PENSION STATISTICS Notes on Sources Used 246 Percentage of Employees with a Workplace Pension 247 Percentage of Private Sector Employees with a Workplace Pension 247 Typical Current Retirement Ages 248 Accrual Rates 248 Contribution Rates 248 DC Pension Scheme Membership by Scheme Status 249 Pension Scheme Membership by Benefit Type 249 Pension Scheme Membership By Age and Sex, 2015 249 The Largest UK Pension Funds 250 Overall Funding 251 Section 179 funding levels by scheme size 251 Section 179 funding levels by scheme maturity 251 Reference Section 4: UK SOCIAL SECURITY BENEFITS AND TAX RATES Introduction 252 Social Security Benefit Rates and Eligibility Rules: Retirement benefits 252 Widow s/widower s benefits 253 Maternity 254 Sickness 256 Other Social Security Benefits 256 Basic State Retirement Pensions 256 National Insurance Contribution Rates and State Scheme Earnings Limits 257 Tax on Pension Schemes 258 Tax Allowances and Rates 258 Reference Section 5: CONTRACTING OUT What did Contracting Out Involve? 260 Contracted-out Deductions from State Additional Pension 260 Salary-related Contracting Out: Guaranteed Minimum Pensions (GMPs) 261 The Reference Scheme Test (RST) 262 Amending scheme rules following the end of contracting out 262 Contracting back in and bulk transfers 263 Money Purchase Contracting Out 263 COMP schemes, APPs and COMB schemes 263 State Scheme Premiums 264 Fixed Rate GMP Revaluation Factors 265 Section 148 Orders: Revaluation of Earnings Factors 266 APPENDICES Appendix 1: Abbreviations in Common Use 267 Appendix 2: Glossary of Terms 271 Appendix 3: Compound Interest Tables 297
Appendix 4: Annuity Factors 300 Appendix 5: Useful Websites 301