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 2015
• Occupational Pensions (Revaluation) Order 2015 published
• DCLG publishes LGPS consultation, response and draft guidance
• FCA publishes update on pension and retirement income activities
• PPI report: Automatic Enrolment contribution scenarios post 2017
• TPR consults on revised DC Code of Practice

Autumn Statement 2015

George Osborne steered clear of announcing any major changes for pensions in his Autumn Statement on 25 November 2015. But some new measures were revealed, alongside updates on a number of previously announced measures. Amongst other things:

• it was confirmed that the outcome of the consultation into the future of pensions tax relief (announced in the Summer Budget 2015) will not be known until next year’s Budget.  The Government received several hundred responses to the consultation
• in order to “simplify the administration of automatic enrolment for smaller employers”, the phasing in of the two planned increases in minimum contributions to DC qualifying schemes (scheduled for October 2017 and 2018) will be aligned to the tax year.  Instead of increases taking place in October, they will now occur in April of the following year
• the starting point for the full new single tier State pension, which will take effect in April 2016, was confirmed as £155.65 per week. The Government’s State Pension factsheets have been updated in light of this
• the Government will increase the (current) basic State Pension by the triple lock for 2016-17, meaning that a full basic State Pension will rise to £119.30 a week, an increase of £3.35 (“the biggest real terms increase to the basic State Pension since 2001”)
• the Government states that it remains concerned about the growth of salary sacrifice arrangements and that it is considering what action, if any, is necessary. It will gather further evidence, including from employers, on salary sacrifice arrangements to inform its approach (a similar statement was made in the Summer Budget 2015)
• guidance has been published in relation to the pooling of LGPS Fund assets into up to six British Wealth Funds (see below for further details), each containing at least £25 billion of assets. The Government invites administering authorities to come forward with their proposals for new pooled structures in line with the guidance
• legislation will be introduced in the Finance Bill 2016 to simplify the test that takes place when a Dependant’s Scheme Pension is payable
• inheritance tax and undrawn pension funds in drawdown pensions: the Government will legislate in the Finance Bill 2016 to ensure that a charge to inheritance tax will not arise when a pension scheme member designates funds for drawdown but does not draw all of the funds before death. This will be backdated to apply to deaths on or after 6 April 2011 (the date from which the requirement to purchase an annuity at age 75 was removed and the option to enter drawdown instead was introduced; see our Alert for details)
• following the introduction of the single tier State pension from 6 April 2016, legislation will be introduced in the Finance Bill 2016 to enable the pensions tax rules on bridging pensions to be aligned with DWP legislation and the new single tier rate
• the Government will remove the barriers to creating a secondary market for annuities, allowing individuals to sell their annuity income stream. Further details on this measure, including the framework for the consumer protection package, will be set out in the Government’s consultation response this December, with the measures set to be included in the Finance Bill 2017
• the Government also stated that it intends to consult on further cross-public sector action on exit payment terms (following their earlier consultation on public sector exit charges), to “reduce the costs of redundancy pay outs and ensure greater consistency between workforces”
• finally, the Autumn Statement contained a warning in relation to disguised remuneration, noting that “the Government intends to take action against those who have used or continue to use disguised remuneration schemes and who have not yet paid their fair share of tax”. The Government will consider legislating in a future Finance Bill to close down any further new schemes which are aimed at avoiding tax on earned income with any amendments potentially being backdated to 25 November 2015 (the date of the Autumn Statement).

The draft Finance Bill 2016 is expected to be published on 9 December 2015.

Occupational Pensions (Revaluation) Order 2015 published

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 2015 was laid before Parliament on 24 November 2015, and is due to come into force on 1 January 2016. 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 2016.

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 2015 was -0.1%, the revaluation figure has been set at 0%.

DCLG publishes LGPS consultation, response and draft guidance

Consultation on draft investment regulations

On 25 November 2015, following the publication of the Autumn Statement, the DCLG published an open consultation which proposes to revoke and replace the regulations that currently govern the management and investment of funds in the LGPS.

The proposed changes  include:

• removal of some of the existing prescriptive means of ensuring that investments are suitably diverse, instead making administering authorities responsible for determining the balance of their investments and taking account of risk
• the introduction of safeguards to ensure that the more flexible legislation being discussed is used appropriately
• a requirement to take account of guidance on asset pooling (see below)

The consultation closes on 19 February 2016.

Guidance for administering authorities on asset pooling

The DCLG has invited LGPS administering authorities to come forward with proposals for investing their assets through pools of at least £25 billion, by which it hopes cost savings and benefits of scale will be achieved. Guidance setting out the criteria that should be met when developing proposals for pooling assets was also published on 25 November 2015. Administering authorities’ proposals will be assessed against the criteria set out in this guidance.

The Government hopes that asset pooling will enable administering authorities to improve their capacity and capability of investing in large scale infrastructure projects.

Initial proposals should be submitted to the DCLG by 19 February 2016.

Response to consultation: LGPS opportunities for collaboration, cost savings and efficiencies

Alongside the new consultation (see above), the DCLG also published the Government’s response to the Local Government Pension Scheme: opportunities for collaboration, cost savings and efficiencies consultation, which opened in May 2014.

City of London Collective Investment Vehicle

Meanwhile, a collaborative venture established by London Councils on behalf of the 32 London boroughs and the City of London Corporation, “London CIV” – a collective investment vehicle for LGPS funds – has become the first such scheme to be fully authorised in the UK by the FCA.

Sackers’ Public Sector briefing

Please look out for a detailed update on developments in relation to the LGPS in our December 2015 Public Sector briefing.

FCA publishes update on pension and retirement income activities

As the pensions and retirement income market is undergoing significant change following the introduction of significant pension reforms in April this year, on 25 November 2015 the FCA issued an update on its current projects in the area.

Alongside reporting on their ongoing work, such as data collection in relation to the market and new freedoms, and its continued monitoring of Pension Wise, the FCA notes two immediate areas of interest:

• A request for information on pensions decumulation charges: the FCA is asking a range of firms which offer access to flexible pension products about the level of charges faced by consumers in the decumulation phase, and the circumstances in which consumers are required by firms to take advice in relation to those products.

This data collection exercise is intended to help the FCA establish whether there is significant variation between firms for similar products and services, as well as the extent to which the charges that consumers face may be complex and difficult to understand. The FCA will also analyse whether higher charges are concentrated among particular pension pot sizes.

Firms are asked to respond to this request by 15 February 2016. The FCA intends to publish a summary of its findings in summer 2016 and feed the results of the exercise into its retirement outcomes review for further analysis.

• Retirement outcomes review: the Retirement Income Market Study published in March 2015 identified a number of future risks as the market adapts and develops in light of recent reforms.

A “retirement outcomes review” was planned as a follow-up to this, which the FCA had hoped to launch in early 2016. The FCA’s latest update states that this review will now be launched in the second quarter of 2016, to sit better with developments in the market since the introduction of the pension reforms, other FCA work and wider initiatives, and the feedback the FCA has received from stakeholders.

PPI report: Automatic Enrolment contribution scenarios post 2017

On 26 November 2015, the PPI published a paper on Automatic Enrolment contribution scenarios post 2017. The TUC commissioned the PPI to model a selection of scenarios that vary contribution levels and methods of increasing contributions, and to consider their impact upon aspects such as the size of the accumulated pension pot and the amount of income available in retirement for an individual. Each scenario is applied to four individual profiles, identified by the TUC.

The research does not make recommendations as to the appropriate direction of future policy, but is designed to provide independent evidence to allow policy development to be well informed.

TPR consults on revised DC Code of Practice

On 24 November 2015, TPR issued a consultation on a revised Code of Practice on the governance and administration of occupational DC trust based schemes (“the Draft Code”).

The purpose of the Draft Code is to “set out the standards of conduct and practice that [TPR expects] trustee boards to meet in complying with their duties in legislation”.

The Draft Code is much shorter than the current DC code and takes into account changes to legislation, such as the minimum governance standards and charges measures (see our Alert for details) which have occurred since the publication of the original (see our Alert for details).

Unlike the current DC code, the Draft Code is only aimed at DC AVCs in DB schemes “insofar as the relevant pensions legislation applies”.

If trustees are not confident that, as a board, they are conversant with the legislation relevant to running a DC scheme, TPR urges them to consider whether they are meeting the TKU requirements and to undertake appropriate training and seek professional advice.

References to the “DC quality features” have been removed. Instead, the Draft Code will be supported by a number of pieces of guidance, designed to help trustee boards with running a high quality scheme. The guidance will set out (and clearly distinguish between) recommended good practice and suggested approaches that trustee boards may choose to take, where appropriate, to suit the circumstances of their scheme.

In the consultation document, TPR confirms that it will no longer expect trustee boards to produce a voluntary governance statement demonstrating how their scheme has performed against the DC quality features.

This consultation will be followed by a further consultation on new related guidance next year.  The new code and guidance are then intended to come into force in July 2016.  For full detail, please see our recent Alert.