Email: bridging.pensionsconsultation@dwp.gsi.gov.uk Nick O Neill Department for Work and Pensions Caxton House 6-12 Tothill Street London SW1H 9NA Our Ref: JM/JB 4.7 September 29 th 2017 Dear Mr. O Neill, PUBLIC CONSULTATION: DRAFT REGULATIONS TO ALLOW THE PENSION PROTECTION FUND TO TAKE ACCOUNT OF BRIDGING PENSIONS We welcome the opportunity to comment on the above consultation document. INTRODUCTION TO THE SOCIETY OF PENSION PROFESSIONALS (SPP) SPP is the representative body for a wide range of providers of advice and services to work-based pension schemes and to their sponsors. SPP s Members profile is a key strength and includes accounting firms, solicitors, insurance companies, investment houses, investment performance measurers, consultants and actuaries, independent trustees and external pension administrators. SPP is the only body to focus on the whole range of pension related services across the private pensions sector, and through such a wide spread of providers of advice and services. We do not represent any particular type of provision or any one interest - body or group. Many thousands of individuals and pension funds use the services of one or more of SPP s Members, including the overwhelming majority of the 500 largest UK pension funds. SPP s growing membership collectively employs some 15,000 people providing pension-related advice and services. This consultation has been considered by SPP s Actuarial, Administration, and Legislation Committees, which comprise representatives of actuaries and consultants, pension administrators, pension lawyers and product providers. GENERAL COMMENTS We support the policy view, that it is not equitable for a bridging pension to become a permanent part of the compensation paid from the PPF. We have provided detailed answers to the specific questions below, which explain our concerns that the proposed approach could result in significant detriment and hardship to those already in receipt of, or close to drawing, benefits and planning on a bridging pension being paid as expected. We also consider that the PPF should consider addressing the increase to benefits arising from GMP step-ups. Individuals affected by this will also have made plans, and this benefit is a fundamental part of the promised pension. This is important, as the lack of coverage by the PPF on this benefit is not widely known to pension scheme members. RESPONSES TO THE CONSULTATION QUESTIONS Question 1: Do you have any evidence on how many schemes are offering bridging pensions as part of their defined benefit pension scheme? Are bridging pensions typically offered as an option, where scheme members opt in to take their benefits in this way, or as an automatic right? We cannot offer any numerical evidence, but our commentators experience would suggest that schemes which offer bridging pensions are by no means rare, even if not the majority. https://thespp.sharepoint.com/17/lc 4.7/13 Ltr Nick O'Neill DWP.docx The Society of Pension Professionals Quantum House, 22-24 Red Lion Court, London EC4A 3EB T: 020 7353 1688 F: 020 7353 9296 E: info@the-spp.co.uk www.the-spp.co.uk A company limited by guarantee. Registered in England and Wales No. 3095982
Page 2 On the question of whether bridging pensions are typically offered as an option or as an automatic right, the experience of our commentators is that, where provided, bridging pensions are usually part of the standard benefit structure. It is much rarer for a bridging pension to be offered as an option, and rarely exercised when it is offered. This experience is contrary to the understanding expressed on page 9 of the consultation document, that the more usual scenario is that members have an option to receive a bridging pension. An example of a typical approach is the following- Your pension is reduced to make allowance for the Basic State Pension (BSP) prevailing in the month you reach State Pension Age. The reduction is calculated as 1/32 nd of a single person s Basic State Pension (which is currently x,xxx) for every complete year and month of pensionable service. The actual method of determining the reduction will vary from scheme to scheme, but it is not unusual for it to refer to the BSP or the Lower Earnings Limit. Question 2: Do you agree that the smoothing approach is an appropriate way to deal with an individual s bridging pension under the PPF? While we understand why the smoothing approach is attractive to the government, there would be serious consequences for members, whose benefits are already in payment. For many the bridging element is a major component of income, upon which they rely, and plan to receive until reaching the appropriate age. The situation could be particularly acute for people who had lost their job late in working life and were now faced with a significant short term cut in pension, and those who have financial commitments assuming their existing level of income. The aim, that affected members would expect to receive broadly the same total amount over their lifetime as they would have done if the compensation had reflected the step-down structure, will be of little relevance in situations where these members experience a serious reduction in their current shortterm income. Although it is very clear from the consultation document, that the government does not wish to pursue it, option 2 (mirroring existing scheme rules) would, in fact, be a much better option for this group of members. Consequently, we suggest that consideration is given to alternatives which would mitigate the detrimental impact of any changes. :- Introduce a bridging pension specific to PPF, payable to State pension age, or Limiting the duration of a bridging pension to, say, ten years after the scheme has entered PPF, or Adopting smoothing as the default, but incorporating an option to move back to a bridging pension in the type of situation which we have described. Question 3: Are you aware of any potential unintended consequences, for individuals or scheme administrators, of smoothing PPF member s compensation amounts in future? We have largely considered this in our response to question 2. Where a member s pension is being paid for the balance of a guaranteed period after their death to a spouse / dependant, smoothing as proposed would appear to also reduce that pension. Even if the smoothing approach is only adopted for those not currently in receipt of a pension, a change adopting this approach will still affect many who were expecting, and had been planning on, the bridging pension being available. Many may have taken and paid for financial advice and made decisions about jobs and expenditure, which would have taken that into account. Question 4: What administrative tasks would need to be undertaken by schemes or sponsoring employers to provide PPF with the additional information needed to reflect step-downs? We would also be interested in any evidence that schemes or sponsoring employers can provide on the estimated cost of providing this additional information as well as estimated costs incurred through any additional actuarial calculations. The need to carry out a one-off calculation at the PPF assessment date, which would not be built into automated processes, would give rise to additional cost. We envisage that the PPF would need to be provided with details of the bridging pension provided in the scheme, how much is currently in payment, the date it is due to end and the period of service to
Page 3 which it relates, so that post retirement increases can be correctly applied. This is data already in scheme databases and where it can be readily extracted, the cost of doing so might well be minimal. Other pensions have cease dates, such as pensions paid to children, so this could be straightforward for administrators and the PPF alike. Question 5: Would schemes or sponsoring employers incur any other direct or indirect costs associated with the proposed change? There would inevitably be additional costs in communicating the proposed change. This would affect schemes, sponsoring employers, financial advisers and TPAS. Where schemes reduce transfer values due to underfunding, if the smoothing approach were introduced, this would affect the calculation of that reduction and costs would be incurred by the schemes which could least afford them. Question 6: The regulations, as currently drafted, do not cover active members as the PPF already has the discretion to calculate compensation for this group. We believe that this is sufficient to deal with bridging pensions for active members, but would welcome respondent views on this matter, and any evidence, which they can provide on how active members accrual rates are defined in scheme rules, where there is an automatic right to a bridging pension. As regards active members with a prospective entitlement to a bridging pension, it would be necessary for the PPF to disclose how its discretion would be exercised. Without this, how would actuaries be able to place a value on the compensation, which would apply were the scheme to fall into the PPF? Question 7: If the government were to proceed with the smoothing approach, do you agree that the regulations, as currently drafted, meet the policy intent? And, if not, we would welcome evidence or comments on the changes required. We consider that the draft regulations will achieve the smoothing approach. However, we are not convinced that the smoothing approach is in line with the policy intention since, as recognised in the consultation document itself, the outcome will be less favourable overall than at present for those who die earlier than assumed in the actuarial calculation embodied in the smoothing approach. It could also result in significant hardship for the expected period of the bridging pension for a number of people. The impact of that hardship may have wide reaching effects and financial impact on a number of other parties. As a general point, as a prerequisite to the proposed amending regulations coming into force, there will first need to be a Commencing Order, bringing into force paragraph 15 of Schedule 8 to the Pensions Act 2008 (and section 122 of that Act in so far as it relates to that paragraph). This is because it is paragraph 15, which amends paragraph 33 of Schedule 7 ( Pension Compensation Provisions ) to the Pensions Act 2004, by making the existing provision sub-paragraph (1) and by inserting additional subparagraphs, which, inter alia, define variable-rate schemes. Question 8: Do the regulations, as currently drafted, enable PPF compensation to reflect all bridging pension arrangements, which you are aware of? Our commentators are not aware of any arrangements which could not be dealt with under the regulations as drafted. Question 9: Do you have any views on how many people are affected by the issue of GMPs and PPF compensation? We are not able to suggest numbers, but our commentators experience would suggest that for significant numbers of schemes, particularly those with substantial numbers of early retirements, this will be a major issue. Due to the high rates of GMP revaluation in deferment for leavers in the 1990s we are aware of increasing numbers of people becoming subject to step-ups. Question 10: Do think that PPF compensation should take account of increases in the member s scheme pension, which would have taken place at GMP age (60/65) in respect of the GMP requirements, in future? If so, we would welcome evidence for your views. We cannot see any legitimate reason for part of a benefit not to be paid when it is within the compensation cap. GMP steps ups are by definition within the compensation cap and are a valuable part of the total benefit. In the same way that the payment of a bridging pension beyond a reasonable
Page 4 date pays a windfall to some members, it does not seem right that GMP step ups which are a standard and widespread feature of member benefits, and which arise from contracting out, are not recognised and the PPF is able to make a windfall. Additionally, in cases where a large part of the pension due to the member will be paid only after the step-up, the present PPF compensation regime provides quite limited protection to members where the step-up is after the beginning of the assessment period. The government might wish to consider the implications of the Court of Appeal decision in Hampshire vs PPF in such cases. Members, particularly those who have drawn benefits before normal retirement date, will have been advised of the step up in pension and can reasonably be expected to have made plans around this. For example, members may have drawn defined contribution funds to cover the period to age 60/65, when the defined benefit pension was expected to increase. Other expenditure may have been incurred or decisions made. Many may have taken and paid for financial advice and made decisions about jobs and expenditure, which would have taken that into account. RESPONSES TO CERTAIN UN-NUMBERED QUESTIONS IN THE CONSULTATION DOCUMENT On page 12, the consultation emphasises a point later included in question 6. The government would be keen to see examples of how bridging pensions are written into scheme rules. One of our commentators has offered three examples. Example 1 Some schemes rules include a specific temporary pension paid until a particular date. For example, In addition, if retirement is before State Pension Age, the Additional Temporary Pension will be payable until State Pension Age. In this case Additional Temporary Pension was a fraction of the Basic State Pension for each year of service, plus a Graduated State Pension (apparently a legacy benefit from an older scheme, presumably broadly equivalent, to rather than the literal State benefit). State Pension Age was as defined in the relevant legislation. In one particular case, exceptionally unusually, there was provision for ill-health retirees before the age of 50 only to receive the Additional Temporary Pension between the ages of 50 and State Pension Age. Example 2 Another scheme referred to an Age Allowance, being paid until the member s 65th birthday. This is the sum of an Additional Adjustment and a Basic Adjustment. The Basic Adjustment is a function of the member s service, and the average basic state pension over that period of service. The Additional Adjustment is a complex function of pay and service relative to the Basic Adjustment. Example 3 A number of schemes make use of the concept of a Deductive Component. In these schemes, a Normal Component of pension is paid from the member s retirement, but at the Deductive Component Pension Age the pension is reduced by the Deductive Amount. The Deductive Amount is generally a function of past service and final earnings between the Lower Earnings Limit and the Upper Earnings Limit, with certain revaluation. These schemes were usually contracted-in throughout the SERPS/S2P period and the Deductive Component was originally designed to offset the additional State pension members were accruing. However, over time the scheme s deductive component accrual terms have rarely been amended, and thus become increasingly approximate relative to the actual additional State pensions accrued by members. In some schemes the offset was originally intended to be fairly accurate, using a different accrual rate for each tax year of birth; more often a single accrual rate is used for all members. The Deduction Component Pension Age also varies between schemes, and by membership category. Some schemes use actual State Pension Age defined by legislation, and some will define State Pension Age in their rules as a particular age. Some will define a Deductive Component Pension Age at a specific age, usually 60 or 65 and occasionally 60 for women and 65 for men, particularly for pre- May 17 th 1990 service (i.e. pre-barber ). These scheme do not talk about bridging pensions but the effect is materially the same.
Page 5 It is worth noting that schemes with bridging pensions written into the rules would tend to have a normal retirement age before State Pension Age. Hence this benefit would tend to be paid to the majority of members rather than a small section of early retirees. On page 13, the consultation asks The government would welcome any evidence or information that respondents can provide about whether the proposed changes to PPF compensation in respect of bridging pensions, and adopting option 1 as described above, could have particular impacts in relation to individuals who share certain protected characteristics. Since some schemes bridging pensions end at a later date for men than women (either because of State Pension Age inequalities or the 60/65 rule), men will tend to be disproportionately affected by the bridging pension, and therefore by any step-down in income on entering the PPF. Similarly, because of differences in GMP ages, the GMP anti-franking rules are particularly likely to require step-ups for men at age 65, where their normal retirement age was at an earlier date. Where these men enter the PPF before their step-up date, the lack of PPF compensation in respect of that step-up, means they may be particularly disadvantaged under the current compensation system. In both cases (the proposed smoothing for step-down benefits and the ongoing lack of step-up compensation) we think lower income men will be particularly adversely affected. We would be happy to discuss any aspect of this response in more detail, including at a meeting with Committee members closest to the issues raised by the consultation. Yours sincerely John Mortimer Secretary