UK: Pensions Ready Reckoner - Feb 12, 2015

Last Updated: 18 February 2015
Article by Clive Weber

A quick overview of some key pension developments in Parliament and from the FCA, TPR, the Courts and the Pensions Ombudsman



Developments in outline

DC flexibility from April 2015 for those aged 55 and over

The Taxation of Pensions Act amends the Finance Act 2004 to introduce DC flexibility from age 55 onwards from 6 April 2015. The practical effect will depend on scheme rules and trustee decisions. Accessing DC funds flexibly is by way of drawdown from the member's "flexi-access drawdown fund", or by receiving a new type of authorised lump sum namely an "uncrystallised funds pension lump sum" ("UFPLS"). Activating flexi-access or UFPLS triggers the new limited annual allowance of £10,000 for future money purchase contributions.

Member communications should be suitably caveated as the Act merely sets the tax parameters – individuals' actual benefits, including any options for DC flexibilities, depend on what trustees allow.

The Act also introduces more favourable tax treatment on death for individuals' DC pension pots, announced by the Government on 29 September 2014. Onerous HMRC reporting obligations on trustees, individuals and DC providers operating the new DC flexibilities are also prescribed.

Note that the "lifetime allowance" tax rules continue notwithstanding the new DC flexibilities.

Framework for new DC flexibilities

The Pension Schemes Bill is expected to receive Royal Assent this month. This will be followed by many related Regulations, all of which will need to be finalised and issued prior to 6 April 2015. A very tight timetable and there will be a significant impact on many types of member communications including booklets, newsletters, retirement options and benefit statements. Legal review to ensure compliance with disclosure regulations is essential. Matters covered by the Bill and its Regulations include:

(1) The framework for delivery of the "guidance guarantee" by the Treasury-designated delivery partners (TPAS and CPAS) for DC members considering using the new DC flexibilities; Treasury powers to monitor the delivery partners; and provisions making it a criminal offence to pretend to be a designated delivery partner.

(2) The requirement on trustees to check that DB members have obtained FCA authorised independent advice before transferring to a DC arrangement or converting DB rights to DC; advising on such transfers is to be an FCA-regulated activity.

(3) Amendments to the statutory transfer legislation, including DC members' new statutory right to transfer at any point up to their retirement. DB members' statutory right to transfer will, as now, cease 1 year before their normal pension date and so DB transfers within a year of NPD will continue to be non-statutory and dependent on scheme rules.

(4) Detailed amendments to the Disclosure Regulations, and new additional Regulations, so that members are properly informed about items (1), (2) and (3) and can implement their choices.

Financial Conduct Authority –  ancillary changes to the "DC flexibility" changes from April 2015

(1) The  FCA's consultation on "Retirement reforms and the Guidance Guarantee" was issued in July 2014 and closed on 22 September 2014. This consultation related to the FCA setting standards for guidance to DC members at the point of retirement; the standards themselves will be finalised shortly. Surprisingly, DC members are not required to supply any information in advance of their guidance session. (The Government has announced that the pensions guidance service for DC individuals will be called "Pensions Wise" – whether this is a wise choice of name remains to be seen!)

(2) "Rules for independent governance committees" for DC workplace pension arrangements were made by the FCA on 4 February 2015.

These changes will provide a comprehensive and heightened regulatory regime for DC contract-based arrangements. The Government announced on 27 January 2015 that pension providers must establish a "second line of defence" in pensions guidance cases: asking the customer about key aspects of their circumstances and, dependent on their answers, giving health warnings including a reminder about the Pensions Wise service.

DWP – DC trust based schemes

The DWP will implement similar changes to legislation governing DC trust based schemes to ensure DC trustees also operate a "second line of defence" in relation to DC members making choices about their benefits.

The DWP has on 4 February 2015 issued draft Regulations covering DC schemes' new obligations to elect trustee chairs and to produce annual DC scheme governance statements. On 11 February 2015 TPR issued an overview of these new requirements entitled "The essential guide to governance standards and charge controls".



Developments in outline
Pooling of risk – Collective DC arrangements Provisions are also included in the Pension Schemes Bill to enable members' DC benefits to be pooled and hence investment and longevity risks shared. These "collective benefits" arrangements will be available under both shared risk and defined contribution schemes. However tax changes will also be needed and these have yet to appear. Collectives are unlikely to be operational until April 2016 at the earliest.

Defined Ambition
(risk sharing schemes) New "risk sharing" schemes occupy the middle ground between fully promising members' benefits as with a DB scheme, or making no promise about the level of pension benefits as in a DC scheme. The Pension Schemes Bill categorises pension schemes according to the level of the employer's promise relating to benefits in the accumulation (before retirement) phase. The categories are "defined benefit schemes" OR "shared risk schemes" (defined ambition) OR "defined contribution schemes". The legislative framework for shared risk schemes will be lighter than for defined benefit schemes. The concept of schemes providing some benefits promise but not a full promise has been around for a long time; shared risk schemes extend and build on this concept.

and more minor Parliamentary matters:
Same-sex marriages

As required under the Marriage (Same Sex Couples) Act 2013, the Government's "Review of Survivor Benefits in Occupational Pension Schemes" was published in July 2014. The Government is still considering its position but looks unlikely to extend the level of survivor pensions required under present legislation unless forced to do so by Court decisions e.g. the forthcoming appeal in Innospec v Walker, see "From the Courts" below.

GMP sex equalisation
Government remains of the view that GMP sex equalisation is required. However, the draft Regulations published in January 2012 have still not been made. The Government continues to search for a simplified process for GMP sex equalisation – now presumably a present for the next Government!

and not forgetting:

Introduction of single tier state pension and abolition of DB contracting-out from April 2016
These provisions are in the Pensions Act 2014 which received Royal Assent on 7 May 2014. Employers' overriding statutory power to amend future service accrual / member contributions to help offset the cost of increased National Insurance Contributions is contained in (draft) Regulations expected to come into force before the end of this Parliament on 31 March 2015. Regulations will also be made later in 2015 automatically amending references to certain terms which will no longer apply from April 2016 e.g. "basic state pension" which is sometimes used in scheme rules as a deductible when calculating pensionable earnings. Generally on the April 2016 contracting–out changes, please see our July 2014 Bulletin.

And also not forgetting:

Reforming the law on trustees'
investment duties Following the Law Commission's consultation (October 2013) on "fiduciary duty" in the investment context and the role of environmental, ethical and social factors, the Law Commission issued their final report in July 1014.

Corporate directors Corporate directorships (often used by independent trustees) will probably still be allowed: see the Government's consultation on Corporate Transparency issued in November 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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