24th July 2008 Issue No: 31 Pensions Bulletin Pensions Regulator issues record-keeping consultation The Pensions Regulator has launched a consultation on record-keeping requirements in work-based pension schemes in which it expresses a view that it is a fundamental requirement of good administration that members can be told the value of their pension rights. This is dependent on accurate records being maintained. The consultation, which is aimed at those responsible for scheme record-keeping such as trustees as well as those who actually administer schemes such as third party administrators, is intended to result in good practice guidelines being issued. The Regulator acknowledges that some schemes and administration providers achieve high standards but there are some that do not. A number of factors make record-keeping particularly important for pension schemes including the length of time that pension records need to be kept and the number of transactions that may occur in respect of a particular member (especially for defined contribution schemes). The consultation (see also the supplementary details) contains much to motivate trustees and scheme sponsors to pay attention to scheme administration and anecdotal commentary about the state of pension scheme administration in the UK. These include statements that: Poor data can add 5% to the cost of buy-out given the trend for this, scheme sponsors currently considering a buy-out of liabilities should be keen to ensure that their scheme s records are accurate and pay for a cleaning exercise if it is not; Failure to maintain good records only defers cost, it does not eliminate it if good data is not kept then the cost of cleaning it at a later date is likely to be higher and also will probably come at a point when there is little time to implement an effective data cleaning exercise such as at wind-up or buyout. Consequently, the Regulator pre-empts, and appears to have little sympathy for, the argument that this guidance will increase the costs of running a work-based pension scheme; Many trustees do not monitor administration performance effectively The Regulator believes that administration is not included on many agendas for trustee meetings and that even when it is, it is normally discussed after investment, actuarial/ funding and legal matters resulting in discussion about it frequently being curtailed if time runs out at the meeting; and Fewer than 15% of administrators employed by [third party administrators] have a relevant formal qualification this is a concern in a sector dealing with matters of considerable financial complexity. The Regulator s main proposal is that each scheme should measure a set of core data that comprises 19 data items for each member which are completely fundamental to the proper administration of all schemes. The consultation also suggests ways that the results of this data measurement could be presented including in a diagram akin to an efficiency rating diagram as seen on domestic appliances. The Regulator also proposes that trustees should identify and measure additional information required to administer their particular scheme and if necessary, develop a plan which will obtain this additional information. As part of this it asks whether it should consider, at a later date, benchmarks for the presence of additional information. www.lcp.uk.com
Comment This consultation document brings to the fore the often neglected topic of scheme administration an often overlooked but fundamental fact is that if a scheme is not administered properly then members do not get paid the right benefits. The analysis contains little that will surprise those working in pensions administration but it may act as a wake-up call for those further removed from the coal-face. Despite being over 40 pages long the Regulator s only big idea is that schemes hold core data items for all members. By itself, this will not act as a panacea to cure all problems with pensions administration. And there have to be concerns that the data measurement proposed by the Regulator will be no more than a tick-box list that adds to bureaucracy but effectively achieves very little. The Regulator does partially acknowledge this concern by stating that good administration consists of more than teaching to the test of this standard, but the results will be seen in time. In introducing this consultation document the Regulator repeats its mantra educate, enable, and if necessary at a later stage, to enforce. The Regulator clearly is reserving the right to deploy its full regulatory powers against those schemes who do not address recordkeeping problems. It will be down to respondents to this important consultation to judge whether the Regulator has delivered the right balance at this stage. Pensions Regulator will not backdate effect of longevity trigger The Pensions Regulator has announced that the longevity trigger will not be backdated when it settles its good practice guidelines when choosing funding assumptions, with a special focus on mortality. The Regulator consulted on draft guidance, which included a trigger for mortality improvement, in February (see Pensions Bulletin 2008/08). In February the intention was for the trigger guidance to apply to scheme funding valuations with effective dates from 1st March 2007. The guidance, which apparently is going ahead in some form, will now apply only for valuations with effective dates starting from September 2008. Comment The announcement is silent on the Regulator s conclusions on the consultation exercise. It is considering carefully the more than 80 responses to its consultation and promises to set out its final version of its new approach later in the summer. Pensions Regulator Governance survey In its third occupational pension schemes governance survey the Pensions Regulator claims that schemes are clear about the aspects that contribute to raising governance standards. In a generally positive assessment of the level of scheme governance, overall ratings were generally consistent with last year s survey (see Pensions Bulletin 2007/29) having improved markedly since the first survey in 2006. However, there remains a variation in governance standards between small and large schemes with particular areas for improvement for small schemes including documentation of internal controls, addressing trustee learning gaps and ensuring a high standard of member communication. Page 2
Comment The survey is a useful resource for those interested in governance issues with the possibility of the answers to some of the questions being used in benchmarking exercises. Once again, the survey demonstrates the extent to which small schemes fail basic measures that could be fulfilled relatively cheaply by their advisors. It is not clear whether this failure is due to a lack of understanding or engagement or a conscious effort to save money. Pensions Bill progress The Committee stage in the House of Lords has now ended with all Government amendments now in the Bill and most opposition amendments rejected. The Bill, as amended, remains in abeyance in the summer recess and will move to report stage on 7th October before returning to the Commons later in the autumn. In the final Committee Day, the House of Lords: Accepted the Government s proposals for the extension of the moral hazard powers but the Government has promised to consult extensively before invoking these powers and intends to propose amendments to address the considerable concerns voiced by opposition peers. Debated trivial commutation limits. As part of this the Government has undertaken to examine its approach to those individuals with stranded pots that are too small to be economically attractive to annuity providers but when combined with the value of other funds are not eligible for trivial commutation. It believes that allowing such individuals to transfer their personal accounts funds to and from the scheme could promote the consolidation of pension saving while keeping with its commitment to focus the scheme on the target market. Consultation is promised over the summer in advance of developing regulations for consultation in March 2009. Amendments were also passed that will allow regulations to be made enabling the Department for Work and Pension to share information on pension credit recipients with energy suppliers so that the latter can identify those to whom they can provide assistance with the cost of their fuel bills. National Insurance Contributions Bill Royal Assent The National Insurance Contributions Bill has received Royal Assent having completed its passage through Parliament on 21st July 2008. The full Act is now also available. Although the Bill had been amended and was subject to last-minute Parliamentary ping-pong between the Lords and Commons, the final Act is identical to the Bill as introduced last November. The main effect of the Act is to remove, for tax years 2009/10 and beyond, the restrictions on the setting of the Upper Earnings Limit (UEL) and to bring forward to the 2009/10 tax year the Upper Accrual Point (UAP). The Act sets the UAP as 770 pw ( 40,040 pa) and from 6th April 2009 the accrual of the State Second Pension ceases at this point. Unlike the UEL (which tends to increase in line with price inflation), the UAP is frozen. See Pensions Bulletin 2007/47 for further details of the Act. Page 3
Finance Bill Royal Assent The Finance Bill has received Royal Assent having completed its passage through Parliament on 21st July 2008. The full Act is now also available. The Act contains a number of measures in relation to pension tax simplification that were flagged in this year s Budget (see Pensions Bulletin 2008/14 and Pensions Bulletin 2008/11). Pensions Ombudsman Annual report and accounts 2007/08 The Pensions Ombudsman, Tony King, reports that the back log of cases under investigation has continued to reduce, stating in his first annual report since taking over from David Laverick in September last year (see Pensions Bulletin 2007/22), that for the third year in a row the number of cases closed has outnumbered those taken on in. The report also looks in some detail at the subject matter of the complaints that the Ombudsman investigates with issues regarding ill-health pensions topping the list with 151 complaints. The report summarises a number of the cases that the Ombudsman has been involved with and the reasons for his conclusions. Tony King also acts as Ombudsman for the Pension Protection Fund (PPF) as well as reviewing decisions of the Financial Assistance Scheme (FAS). The report highlights that in all five completed cases brought against the PPF and in all three against the FAS the decisions of these bodies were upheld. Pensions Regulator Annual report and accounts 2007/08 In its third annual report and accounts the Pensions Regulator claims it has completed all of the steps necessary to build the capacity and capability required to successfully discharge [its] current statutory functions. The report documents the key achievements the Regulator has made over the period (at a cost of around 30 million to levy payers), and shows a high level of customer satisfaction in its services (95% good/very good for the trustee toolkit, 92% satisfaction with published guidance and 8.1 out of 10 for overall satisfaction with the Corporate Risk Management team, who deal with the clearance process and take action in cases where it is believed employers have sought to avoid their pensions liabilities). The report also announces that the final guidance on conflicts of interest (see Pensions Bulletin 2008/09) will be published in the summer. However there is no mention of the publication date for the trustee guidance on transfer values (for the new regime starting on 1st October) or the employer guidance for debt apportionment involving the Regulator (the new regime for which started on 6th April). Pensions tax simplification Newsletter 34 HM Revenue and Customs (HMRC) has published its 34th and last pensions tax simplification newsletter. The newsletter is to continue but the words tax simplification have been dropped. Page 4
The newsletter states that general queries in relation to pensions tax simplification can continue until the Finance Bill 2010 receives Royal Assent. Had the normal practice with other tax legislation been followed, HMRC would have stopped answering such Code of Practice 10 queries last summer. They are also introducing a new clearance procedure for businesses where there are issues of material commercial significance to a business. It also states that before raising any scheme sanction charges on the scheme administrator, HMRC is going to carry out a review to look at the process and the practical issues around this and the administrator obtaining a deduction against the charge for the tax paid by the member on the unauthorised payment. It is hoping to complete its review by the end of the summer. A specific contact has been given to discuss cases in the meantime. Internal dispute resolution Code of practice An Order has been laid before Parliament confirming that the Pensions Regulator s Code of Practice No. 11, Dispute resolution reasonable periods will come into effect on 28th July 2008. The new optional one-stage regime, which this code addresses, has been in force since 6th April 2008 (see also Pensions Bulletin 2008/16). This Pensions Bulletin should not be relied upon for detailed advice or taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you. Page 5