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

• Autumn Statement 2016
• The Occupational Pensions (Revaluation) Order 2016
• Consultations published on GMP equalisation
• Consultation: The Occupational and Personal Pension Schemes (General Levy) (Amendment) Regulations 2017
• FCA publishes consultations
• HMT publishes responses to secondary annuity market consultation
• PLSA and PPI report considers adequacy in retirement
• Work and Pensions Committee questions TPR on its powers
• Parris v Trinity College Dublin (CJEU), 24 November 2016

Autumn Statement 2016

On 23 November 2016, Philip Hammond delivered his first Autumn Statement as Chancellor of the Exchequer. Key announcements in relation to pensions were as follows:

• In order to limit the extent to which pension savings can be recycled to take advantage of tax reliefs, the money purchase AA of £10,000 (which applies to individuals who have flexibly accessed their pension savings) is set to be reduced to £4,000 with effect from April 2017. The Government has published a consultation to seek views on its proposals. The consultation closes on 15 February 2017.
• With a view to tackling the problem of pension scams, the Government intends to consult on various options to address the issue, including a ban on cold calling, greater powers for firms to block suspicious transfers, and making it harder for scammers to abuse small self-administered schemes.
• Whilst tax savings on salary sacrifice and benefits in kind are generally set to be axed, salary sacrifice arrangements relating to pensions will be spared.
• The tax treatment of foreign pensions is set to be more closely aligned with the UK’s domestic pensions tax regime by bringing foreign pensions and lump sums fully into tax for UK residents, to the same extent as domestic ones.
• The “triple lock” pledge will remain in place – for the duration of the current Parliament.

For further details, please see our Alert.

The Occupational Pensions (Revaluation) Order 2016

When a person leaves a final salary pension scheme before normal pension age, with a preserved pension, that pension is likely to have lost value due to inflation by the time it is put into payment.  Revaluation provisions, introduced for those who left schemes after 1 January 1986, were therefore designed to provide a measure of protection against inflation where there is at least one full year between the member leaving the scheme and reaching their normal pension age.

The Occupational Pensions (Revaluation) Order 2016 was laid before parliament 21 November 2016, and is due to come into force on 1 January 2017. The Order sets out the revaluation required (for that part of a pension in excess of GMP rights) for people who will reach their scheme’s normal pension age in 2017.

Pensions based on pensionable service before 6 April 2009 must be increased at least in line with the lower of the increase in the general level of prices over the whole period of deferment or 5% per annum.  The Pensions Act 2008 reduced the 5% cap to 2.5% compound per year for pensions based on service from 6 April 2009.

Since 2010, the Secretary of State has considered CPI to be the most appropriate measure of inflation to use for this purpose.  As the CPI figure for the year to 30 September 2016 was 1%, the revaluation figure has been set at 1%.

Consultations published on GMP equalisation

The Government has today published a consultation seeking views on:

The draft Pensions (Schemes that were Contracted-out) (Miscellaneous Amendments) Regulations 2017 

The aim of these draft Regulations is to help improve scheme administration and provide clarity for schemes which were contracted-out on a DB basis before 6 April 2016 (the date on which DB contracting-out was abolished).

In particular, the consultation refers to the regulatory restrictions which mean that a formerly contracted-out scheme cannot make a bulk transfer without member consent to a receiving scheme which has never been contracted-out.  Since the abolition of DB contracting-out, it is no longer possible to deploy a workaround whereby the receiving scheme contracts out for a short period so as to enable the bulk transfer to take place.  The consultation makes clear that the Government is “working with stakeholders on this issue but any changes to legislation will not be introduced before autumn 2017.”

A proposed methodology for equalising GMPs

Back in January 2012,  having concluded that schemes are obliged to equalise overall scheme benefits “for the effect” of GMPs which accrued between 17 May 1990 and 5 April 1997 inclusive, the Government published a proposed method for doing so.  It also made clear that, in its view, under EU law there is no need for an opposite sex comparator when considering any inequality in GMPs.  But the Government’s proposed method was not well received by the industry as it required schemes to compare on a year by year basis the position of a male against a female and pay the better of the two benefits.  Many at the time pointed out that this approach would “not only be administratively expensive, but would also result in both men and women receiving equalised pensions that would be higher than either a man or a woman would otherwise have received”.

In 2013, an industry working group was established to consider how the GMP conversion process might be used to equalise scheme benefits for the effects of unequal GMPs and to “seek a solution that would allow schemes to provide equal benefits, but without imposing overly onerous burdens on those schemes”.  In summary, the proposed method now put forward by this group involves a one-off calculation and actuarial comparison of the benefits a man and woman would have, with the greater of the two converted into an ordinary scheme benefit under the legislative facility for converting GMPs in this way.

The Government is at pains to stress that it is not placing any obligation on schemes to use the proposed method, that it does not “comprise legal advice to schemes on how to equalise” and that the method “simply describes one way of equalising for the effect of the GMP legislation which the Government believes meets the equalisation obligation derived from EU law”.  Comfortingly, it also states that trustees who are “content that they are providing equal pension benefits…need take no further action”.

Impact of UK’s decision to leave the EU

Finally, the consultation also seeks to clarify the position on the requirement to provide equal pensions following the UK’s decision to leave the EU.  As the terms of Brexit have yet to be negotiated, the Government’s position is that “the UK remains a full member of the European Union and all the rights and obligations of EU membership remain in force”.  The Government will therefore continue to apply EU legislation during this period.

The consultation period runs until 15 January 2017. Please see our forthcoming Alert for further detail.

Public service pension schemes

At the same time, the Government released a consultation on the indexation and equalisation of GMP in public service pension schemes.

Under the arrangements that previously applied, the public service pension and the additional State Pension (“S2P”) system worked in tandem, providing a mechanism that fully indexed and equalised pension payments. However, with the removal of S2P from 6 April 2016, the mechanism no longer works. An inequality in the payment of public service pensions between men and women may result if no action is taken.

On 1 March 2016, the Government announced that public service pensioners reaching SPA after 5 April 2016 and before 6 December 2018 would have the GMPs earned in public service fully indexed by the public service pension scheme. This ensured that men and women reaching SPA in that period continued to receive equal pension payments.

The Government is now considering how public service pension payments should be increased in future (in particular those who have accrued a GMP and reach SPA after 5 December 2018). The consultation considers various options for addressing the issues of equalisation and indexation following the state pension reforms.

The Government states that it does not consider the private sector proposals appropriate for public service pension schemes to meet their indexation and equalisation obligations.

This consultation will close on 20 February 2017.

Consultation: The Occupational and Personal Pension Schemes (General Levy) (Amendment) Regulations 2017

On 24 November 2016, the DWP released a consultation on The Occupational and Personal Pension Schemes (General Levy) (Amendment) Regulations 2017.

The general levy on occupational and personal pension schemes recovers the core funding provided by the DWP for TPR, TPAS and TPO. The consultation seeks views on the proposed rates of the levy for the financial year 2017/18 onwards.

Currently, the Government believes that it will have a surplus in respect of the general levy of approximately £13m at the end of 2016/17.  The estimated cost of running TPR, TPAS and TPO is expected to be £44m in 2017/18, with an estimated sum of £43m generated if the levy remains unchanged.

Whilst the Government expects the surplus to erode over time if the spending of TPR, TPAS and TPO begins to increase, this could take “a considerable time”.  It is therefore considering whether or not to alter the levy rates from 2017/18 in order to take account of the surplus that has accumulated. The options it is pondering are:

• Option 1 – make no change
• Option 2 – reduce the levy rates for all schemes in order to eliminate the surplus
• Options 3 – reduce the levy rates for very large schemes in order to eliminate the surplus whilst maintaining the levy rates freeze for smaller schemes.

The Government favours Option 3, as it believes that this will “balance the need to increase fairness and make the operation of very large pension schemes more economic with the need to avoid imposing an additional burden on smaller schemes”.  On current assumptions, Option 3 would be expected to reduce the surplus to “a negligible level” by 2020.

Comments on the proposals should be submitted by 18 January 2017.

FCA publishes consultations

The FCA published two consultations on 25 November 2016.

The FCA has previously found that 60% of customers were not switching providers when they bought an annuity and that up to 80% of these customers could get a better deal on the open market. In order to address this, the FCA’s Retirement Income Market Study recommended that an “annuity comparator” be established in order to encourage shopping around.

The FCA is proposing that this comparator takes the form of an “information prompt” before an annuity is purchased. It has therefore published a consultation paper on proposed changes to its rules relating to the purchase of annuities. The changes would require firms to inform consumers how much they could gain from shopping around and switching provider before a potential annuity purchase.

The FCA also published a consultation on its proposal to introduce two formal regulatory returns to collect data about the retirement income market from providers of retirement income products (replacing the current ad hoc return used since the introduction of the retirement freedoms). The proposals aim to help the FCA secure “an appropriate degree of protection for consumers” and promote “effective competition in the interest of consumers”, with firms being required to report on the types and volumes of products they are selling.

Both consultations close on 24 February 2017.

HMT publishes responses to secondary annuity market consultation

Following a Freedom of Information request, HMT published responses to its consultation on the creation of a secondary annuity market on 24 November 2016. The FOI request response collates those responses which had previously been made publicly available, and those which had not been published.

PLSA and PPI report considers adequacy in retirement

On 24 November 2016, the PLSA published new research it had commissioned from the PPI, analysing the incomes that different UK generations can expect in retirement, “Retirement Income Adequacy: Generation by Generation’.

The report shows that, while the introduction of automatic enrolment is making a “real improvement in the retirement outcomes of millions of people in the UK”, of 25.5 million people in employment, 1.6 million are still at high risk of falling short of a “minimum income standard” in retirement, with a further 13.6 million still at risk of not meeting their “target replacement rate”.

The report recommends that, to ensure the next phase of automatic enrolment builds on the success of the first, the Government should create an independent commission with a remit to review existing measures of adequacy and make recommendations for a national standard, or standards, which reflect the changing nature of retirement.

Work and Pensions Committee questions TPR on its powers

TPR’s Chief Executive Lesley Titcomb appeared before the Work and Pensions Committee on 23 November 2016 to answer questions on how TPR’s regulatory powers “can and should be used” to avoid another “BHS pension fund disaster”. Ahead of the session, Chairman of the Committee Frank Field wrote to TPR with a separate set of questions concerning TPR’s existing powers to seize assets other than cash as part of any enforcement action seeking redress for pensioners. The Committee published a response from TPR, outlining the action it has taken regarding the wider Arcadia pension schemes.

Pensions Minister Richard Harrington also appeared at the Committee for the first time to lay out the Government’s position on the future of DB pension schemes and how to address the major ongoing issues surrounding them. He said that he hoped that the expected green paper would be published “in the winter”.

Parris v Trinity College Dublin (CJEU), 24 November 2016

The CJEU has found that a provision in a scheme’s rules which required members to marry before the age of 60 for full survivors’ benefits to be payable did not constitute discrimination on the grounds of age or sexual orientation. This was despite the fact that it was legally impossible for the claimant to enter into a civil partnership or same sex marriage before reaching that age.

Please see our case report for further details.