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:

• New Legislation
• Pensions Institute publishes good practice principles in modelling DC pension plans
  
• OFT agrees on reforms to DC pensions market
  

New Legislation

The Occupational and Personal Pension Schemes (Automatic Enrolment (Amendment) Regulations 2013

These regulations bring into force the ban on consultancy charging in automatic enrolment schemes.

With effect on and from 14 September 2013, in order to qualify as an auto-enrolment scheme a DC arrangement must not include a provision which allows for any amount to be deducted from contributions or investment returns, or for the value of a jobholder’s rights to be reduced by any amount, where the amount is to be paid to a third party under an agreement between the employer and the third party.

Explanatory memorandum 

The Pensions Act 2004 (Codes of Practice) (Reporting Late Payment of Contributions) Appointed Day Order 2013

This Order brings TPR’s revised Codes of Practice on reporting late payment of
contributions to occupational pension schemes (No.5) and personal pension schemes (No.6) into force with effect on and from 20 September 2013.

The Local Government Pension Scheme Regulations 2013

At the June 2010 Budget, the Government invited Lord Hutton to chair the Independent Public Service Pensions Commission. The purpose of the Commission was to carry out a “fundamental structural review” of public service pension provision, and to make recommendations on pension arrangements that are “sustainable and affordable in the long term, fair to both the public service workforce and the taxpayer and consistent with the fiscal challenges ahead, while protecting accrued rights”.

The main recommendation from the Commission’s final report was that the current final salary public service pension schemes should be replaced by new schemes which would continue to be DB schemes with pension entitlement linked to salary, but rather than being linked to an employee’s final salary, pension benefits would be linked to career average earnings.

These regulations set up a new legal regime for the Local Government Pension Scheme which will come into force on 1 April 2014. The new legal regime will provide for benefits to accrue on a “career average revalued earnings” basis rather than on a “final salary basis” and for the normal retirement age at which a member can draw benefits without actuarial reduction to be the same as the age at which the person is entitled to draw the state retirement pension.

Explanatory memorandum

Pensions Institute publishes good practice principles in modelling DC pension plans

The Pensions Institute has published a discussion paper which outlines 15 good practice principles that can be applied to modelling DC pension plans. The principles cover issues such as modelling member choices, modelling longevity risk and modelling the post-retirement period.

OFT agrees on reforms to DC pensions market

The OFT has reached agreement with business and TPR on a set of reforms to the £275 billion market for DC workplace pensions after its market study(published on 19 September) identified issues which mean some savers do not get value for money.

Findings

Overall, the OFT found that competition alone cannot be relied upon to drive value for money for all savers in the DC workplace pension market. This arises from the combination of two factors:

• the complexity of the product. The complexity makes it difficult to make the right choices about pensions, for individual savers and employers; and

• Employers, who have the responsibility of deciding which pension scheme to choose for their employees, may often lack the capability or the incentive to assess value for money.

The OFT has found that these weaknesses have already created a risk of savers losing out in two parts of the market.

• old and/or high charging schemes. Around £30 billion of savings in old and/or high charging contract and bundled-trust schemes may not be value for money; and

• small trust-based schemes. Around £10 billion of savings in smaller trust-based schemes are at risk of delivering poor value for money due to low levels of trustee engagement and capability.

In addition, the OFT is concerned that similar problems might occur in the future without measures to improve the governance and scrutiny of pension schemes of behalf of savers and the quality of information available.

OFT recommendations

To improve this market, the OFT secured agreement with the industry and TPR to important steps in tackling these problems:

• dealing with old and/or high charging schemes. To address the OFT’s concerns about old and high charging contract and bundled-trust schemes, the Association of British Industries (ABI) and its members have agreed to an immediate audit of these schemes, aimed at ensuring savers are getting value for money. This will be overseen by an independent project board;
• dealing with issues with small trust based schemes. To address the OFT’s concerns about small contract-based schemes, TPR has agreed to take rapid action to assess which smaller trust-based schemes are not delivering value for money. The DWP has agreed to consider whether TPR needs new enforcement powers to tackle the problem;
• Improving governance. To address the OFT’s concerns about lack of independent scrutiny of contract based schemes, the ABI has agreed that their members will establish independent governance committees. Committees should recommend changes to providers and escalate issues to regulators where they see risks of poor outcomes for savers. The OFT recommends that the key elements of this governance solution should be embedded by the Government in a minimum governance standard that will apply to all pension schemes;
• Improving the quality of information available on costs and charges. The OFT recommends DWP consult on improving the transparency and comparability of information about the charges – including whether providers could disclose a single Annual Management Charge and investment transaction costs – and quality of schemes in order to make employers’ initial choice of scheme easier; and
• Preventing future risks of detriment. The OFT recommends the DWP consult on preventing schemes being used for auto-enrolment that contain in-built adviser commissions or that penalise members with higher charges when they stop contributing into their pensions.

Possible referral to the Competition Commission

The OFT has provisionally concluded that the legal test for making a Market Investigation Reference (MIR) to the Competition Commission is met.

However, in light of the fact that there are steps in place to address the competition concerns that it has identified, the OFT has provisionally concluded that an MIR would not be appropriate in this instance.

The OFT is consulting on this provisional decision and responses should be emailed to:pensions@oft.gsi.gov.uk by 5:00pm on 31 October 2013.

Comment from Nick Salter, President-Elect of the Institute and Faculty of Actuaries 

NAPF comment