7 days

7 Days is a weekly round up of developments in pensions, normally published on Monday afternoons. We collate this information from key industry sources, such as the DWP, HMRC and TPR.

In this 7 Days

• Revaluation of State Pension debits and credits
• Public sector pension increases
• Centre for Policy Studies publishes report on ensuring financial protection for pension savers
• Department of Health publishes responses to NHSPS consultations
• DWP publishes two reports analysing the future of the State Pension Age
• DWP updates State Pension fact sheets
• FRC publishes proposals to improve FRS 102
• HMRC updates Pension Schemes Newsletter 85
• HMRC publishes new contracting-out Countdown Bulletin
• House of Commons Library briefing papers
• PPF publishes third Levy Triennium consultation
• TPR publishes blog on the importance of data in a digital economy
• TPR consults on standards for trustees and governance
• Mr N v Clerical Medical (PO – 1 February 2017)

Revaluation of State Pension debits and credits

The State Pension Debits and Credits (Revaluation) Order 2017, which is due to come into force on 10 April 2017, will provide for the revaluation by reference to the general level of prices of the credits and debits that arise when a pension sharing order is made by the courts.

Although the Additional State Pension (which was sharable on divorce) was withdrawn on the introduction of the new single tier State Pension, transitional arrangements provide that people with pre-commencement qualifying years who have an amount in excess of the full new State Pension at 6 April 2016 will receive that amount at SPA. The amount, known as the “protected payment”, is sharable in divorce proceedings where those proceedings start from 6 April 2016 and the transferor reached SPA on or after that date.

More information on divorce and the State Pension is available from Pension wise.

Public sector pension increases

The Pensions Increase (Review) Order 2017 (and an equivalent Order for Northern Ireland) makes provision for the annual increase of “official pensions” (broadly, public sector pensions). The Order provides for all official pensions (except those which have been in payment for less than a year, which will receive a pro-rata increase) to increase by 1% from 10 April 2017.

The Order is due to come into force on 10 April 2017.

Centre for Policy Studies publishes report on ensuring financial protection for pension savers

The Centre for Policy Studies published a report (on 23 March 2017) which proposes the introduction of “auto-protection” to complement automatic enrolment.

The idea of auto-protection is to reduce exposure to financial risks in later life, including the premature exhaustion of savings, which in turn would help to protect the State. The report notes that auto-protection would ensure that savers reaching the age of 55 (generally speaking, the minimum age at which benefits can be paid under the tax rules) would not be “left to wallow in indecision when pondering the complexities of decumulation”.

The report suggests that auto-protection should have two distinct components:

• “auto-drawdown” at private pension age (currently age 55, but the report recommends raising this to 60), in the form of an income drawdown default of between 4% and 6% of an individual’s pot assets per year. Providers “should be encouraged to provide a low cost, diversified default fund for undrawn assets”, with economies of scale helping to deliver larger retirement incomes than otherwise, and
• “auto-annuitisation” of residual pots at age 80. The report notes that this “would facilitate the collective hedging of individuals’ exposure to the unquantifiable risks of longevity”. It would also remove exposure to investment market risks and, with indexation, cost of living inflation.

The report’s author, Michael Johnson, notes that this should not be compulsory and that it does not in any way undermine the retirement freedoms that were introduced from April 2015.

Department of Health publishes responses to NHSPS consultations

On 24 March 2017, the Department of Health (“DoH”) published its responses to two consultations on the NHS Pension Scheme.

Its consultation on the National Health Service Pension Scheme (Amendment) Regulations 2017 proposed changes to the NHSPS rules to support the development of NHS England’s new models of care, as well as putting forward certain technical corrections and clarifications to improve the operation of the NHSPS.

As the proposed amendments were generally supported, the draft regulations will be updated with a view to becoming effective from 1 April 2017.

Proposals to introduce a scheme administration levy for the NHSPS from 1 April 2017, to be payable by all employers who participate in the scheme (of which there are more than 9,000), are also set to proceed. A levy of 0.08% of pensionable pay will be charged and collected at the same time as the standard employer contributions. The DoH notes that, in practical terms, the introduction of the levy will have the effect of increasing the standard employer contribution rate from 14.3% to 14.38%. The NHS Business Services Authority (which administers the NHSPS) is to contact employers about the necessary administration arrangements.

DWP publishes two reports analysing the future of the State Pension Age

The DWP has published two reports which are intended to help inform the Government’s review of the State Pension Age, which is due in May 2017.

The final report by John Cridland CBE follows his independent review of arrangements for the SPA after 2028. This follows an interim report (with questions) which was published in October 2016.

The final report recommends a timetable for increasing SPA to age 68 over a two-year period, starting in 2037 and ending in 2039. It also recommends that SPA should not increase more than one year in any ten- year period, “assuming that there are no exceptional changes to the data”.  In addition, the final report focuses on the wider factors that need to be taken into account when setting the SPA, including affordability in the long-term and fairness to current and future generations of pensioners. It also suggests removing the “triple lock” (the Government’s current commitment to raise the State Pension in line with the higher of prices, earnings or 2.5%) in the next Parliament.

The second report is one by the Government Actuary, whose analysis considers scenarios where a specified percentage of adult life will be spent in retirement. One scenario is that if adulthood starts at the age of 20, and the percentage of retirement is calculated at 32%, then SPA could rise to 69 between 2040 and 2042. However, if the percentage is calculated at 33.3%, SPA could rise to 69 between 2053 and 2055.

The DWP notes that no new changes to SPA will come into effect before 2028, and that the Government is “committed to maintaining a State Pension that is fair for all generations and helps to provide for the cost of living in retirement”. Part of this commitment to fairness includes providing 10 years’ notice of any changes to SPA.

DWP updates State Pension fact sheets

The DWP has updated its fact sheets on the State Pension, in relation to the Contracted-Out Pension Equivalent, to make sure they are accurate for the new financial year.

FRC publishes proposals to improve FRS 102

The FRC has published proposals for incremental improvements and clarifications to FRS 102, the Financial Reporting Standard applicable in the UK and Republic of Ireland.

Paul George, the FRC’s Executive Director for Corporate Governance and Reporting, is of the view that while FRS 102 is working well in practice, “there are a small number of areas where a significant improvement could be made to the cost-effectiveness of FRS 102 without loss of useful information.”

Responses to the proposals, which have been set out in Financial Reporting Exposure Draft (FRED) 67, should be submitted by 30 June 2017.

HMRC updates Pension Schemes Newsletter 85

HMRC has updated Pension schemes newsletter 85, to provide clarification and further information about the changes to the pension tax rules relating to overseas pension schemes.

HMRC publishes new contracting-out Countdown Bulletin

Countdown Bulletin 24, the latest in HMRC’s series to help schemes with the end of DB contracting-out and transitional issues, has been published today (27 March 2017).

Among other things, the bulletin covers the timeline for submitting queries to HMRC, ahead of the December 2018 deadline for completing all scheme reconciliation activity, and includes some scheme reconciliation “hints and tips”.

House of Commons Library briefing papers

The House of Commons Library has updated two briefing papers:

• its briefing paper CBP-7874 on the Pension Schemes Bill, which focuses in particular on the regulation of master trusts, and
• briefing paper SN06348, which looks at the development of survivors’ pensions for opposite sex cohabiting couples, particularly in public service pension schemes and the recent decision of the Supreme Court on the application for judicial review by Denise Brewster.

PPF publishes third Levy Triennium consultation

On 23 March 2017, the PPF launched a consultation on how it intends to develop the PPF levy for the next three-year period (or “triennium”) starting in 2018/19. The consultation involves a detailed set of proposals, together with supporting roadshows and webinars.

The proposals have been developed in partnership with Experian, following engagement with stakeholders over the last three years. Alongside a number of wider suggested developments, the proposals focus on two ways in which the PPF plans to develop the approach to measuring insolvency risk. The consultation:

• outlines proposals to revise how employers are allocated to scorecards, introduce two new scorecards and to rebuild existing scorecards where the predictive power has been weaker. These changes aim to improve the predictive power and ensure scorecards are better tailored to company size resulting in SMEs and “not-for-profit” organisations paying levies that better reflect their risks
• proposes to adopt the use of credit ratings for some of the largest employers and a specific methodology for regulated financial services entities. The aim is to ensure the best possible assessment of insolvency risk for some of the largest levy payers.

The consultation document also seeks views on a number of other areas including those suggested by the Work and Pensions Select Committee in its 2016 report, such as the possibility of a levy discount for good governance, and reducing the administrative burden for smaller schemes.

David Taylor, PPF General Counsel, said: “This consultation sets out our proposals to improve the way we calculate levies for the next three years starting in 2018/19. We know that stability is important to our levy payers, so we have only proposed changes where we believe there is a compelling case to do so. This reflects our view – supported by feedback – that overall the current levy framework is working well. Nonetheless, we have conducted our own detailed review, and carefully evaluated all the feedback received from levy payers and other stakeholders, including the important points raised in the recent Work and Pensions Select Committee report. This process has led us to propose a number of important improvements on which we are keen to receive views from stakeholders.”

The deadline for submissions is 5pm on 15 May 2017. A second consultation is due to follow in the autumn.

TPR publishes blog on the importance of data in a digital economy

TPR has published a guest blog by Margaret Snowdon OBE, Chair of PASA and Non-Executive Director of TPR, discussing how data is “the new oil in the digital economy”.

Ms Snowdon highlights the fact that data is a vital commodity, and that administrators and trustees must improve their systems. She writes: “TPR’s most recent survey of scheme data quality revealed some very disappointing trends. We’ve known for years how low down the agenda data sits with trustees, unless something happens to trigger a rush to bring it up to spec.”

She goes on to pinpoint the Pensions Dashboard (which is due to be up and running in 2019) as “Next to de-risking, the biggest catalyst for data cleansing”.

TPR consults on standards for trustees and governance

TPR has published a consultation on its draft policy for monetary penalties, alongside a revised description of a “professional trustee”.

The revised description forms part of TPR’s “21st century trustee” initiative, which seeks to raise standards of governance and administration and to protect member benefits by being clearer about what it expects trustees to do.

TPR considers that remuneration alone is not necessarily determinative of whether someone is acting in the capacity of professional trustee and that it is more appropriate to consider whether a trustee is acting in the course of the business of being a trustee.

The proposed revised description therefore includes any person, whether or not incorporated, who:

• acts as a trustee of the scheme in the course of being a trustee
• is an expert, or holds themselves out as an expert, in trustee matters generally.

TPR notes that the terms “independent trustee” and “professional trustee” are often used interchangeably and that there is some confusion over the difference between the terms. TPR has not included “independence” in the description, as it does not consider it to be determinative of whether a person is a professional trustee.

TPR’s Executive Director for Regulatory Policy Andrew Warwick-Thompson said: “By consulting on our monetary penalties policy we are inviting views on our approach to applying fines on trustees and other scheme managers, but we are also sending a clear message that we are getting tougher on poor governance. We want trustees to understand that action may be taken where they fall short of expectations. We have shown that we will act where trustees are not complying even with their basic duties.”

The consultation closes on 9 May 2017.

Mr N v Clerical Medical (PO – 1 February 2017)

The PO has not upheld a complaint from a member that he had lost out on a large financial gain because the administrator refused to transfer the value of his benefits to another scheme.

The PO was satisfied that it was reasonable for the scheme administrator to withhold the transfer value due to its concerns over the receiving scheme but, in light of the decision in Hughes (broadly, earnings from any capacity, not just from a scheme employer, are sufficient to give rise to a statutory right to transfer), they should now review their position.

Please see our case report for further details.