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:

• Annual allowance and block transfers: draft order published
• Council of the European Union agrees negotiating stance on revised IORP Directive
• New longevity risk methodology developed for insurers and pension schemes
• FCA publishes the findings of its work into annuity sales practices and retirement income market
• Updated notes on new pensions flexibilities
• TPR announces five million workers have been automatically enrolled into a workplace pension scheme
• Shepherd (Pensions Ombudsman) – 2 October 2014

Annual allowance and block transfers: draft order published

The Finance Act 2004 (Registered Pension Schemes and Annual Allowance Charge) (Amendment) Order 2015 was published on 12 December 2014.

The changes to be introduced by the Order aim to ensure that the AA legislation which was introduced by the Finance Act 2011 works as intended.  They include provisions to:

• ensure that pension scheme administrators do not normally have to test deferred benefit rights against the AA
• address unintended outcomes for the ‘scheme pays’ facility and the treatment of certain transfers of pension pots
• ensure that the legislation applies fairly to individuals who may be subject to an AA charge.

The DWP announcement states that Order will come into force after it has been laid before and approved by the House of Commons.  It will have retrospective effect from 6 April 2011.

A number of mergers are currently on hold while we wait for the Order to come into force.

Council of the European Union agrees negotiating stance on revised IORP Directive

On 10 December 2014, the Council of the European Union agreed its negotiating stance on a draft directive aimed at facilitating the development of occupational retirement savings and better protecting pension scheme members and beneficiaries.

The draft directive revises the existing directive on the activities and supervision of institutions for occupational retirement provision (IORPs).  It is intended to improve the governance and transparency of these institutions and facilitate their cross border activity, thereby strengthening the internal market.

This agreement enables negotiations with the European Parliament, with the aim of adopting the directive at first reading.

The latest draft of the compromise text:

• re-inserts the requirement for cross-border IORPs to be fully funded at all times (the September 2014 draft had relaxed this requirement by requiring that an IORP’s technical provisions to be fully funded at the start of cross-border activities)
• revises the “fit and proper person” test for those running an IORP.  The latest wording requires the “qualifications, knowledge and experience” of those effectively running an IORP to be “collectively adequate in relation to the activities performed for the institution”.

New longevity risk methodology developed for insurers and pension schemes

On 8 December 2014, an Institute and Faculty of Actuaries  and Life and Longevity Markets Association jointly commissioned research project published a new methodology which will allow insurers and pension schemes to assess Longevity Basis Risk.  It is intended to enable the use of simpler, more standardised and easier to execute index-based longevity solutions.  There are also broader applications for insurers and pension funds in managing their capital requirements relating to longevity risk.

Index-based longevity swaps allow pension schemes and insurers to offset the risk of increased liabilities resulting from members living longer than expected.  Until now, it has been difficult to assess how well the index-based longevity swap can reduce the longevity risk for the particular pension scheme or insurance book.  The methodology developed in this research advances the thinking on how this is assessed. The framework has been designed to be applicable to both large schemes (which can use their own data in their models) and smaller schemes (by capturing demographic differences such as socio-economic class and deprivation).

While the cost and complexity of longevity swaps means they have often been the preserve of large schemes, this research could make longevity swaps more accessible to smaller schemes and insurers in managing longevity risk.

FCA publishes the findings of its work into annuity sales practices and retirement income market

On 11 December 2014, the FCA published the findings of its work into annuity sales practices and the retirement income market.

In February 2014 the FCA found that the annuities market was not working well for most consumers and launched a market study to look at the entire retirement income market.  As a result of the new pension freedoms announced in the 2014 budget (see our Alert for details), the scope of the market study was changed to look at how the market might develop, as well as gathering evidence on how it works today.  A separate piece of work was undertaken to look at annuity sales practices.

The market study confirms that competition is not working as well as it could for consumers, with many continuing to miss out on a higher income by not shopping around.  However, FCA analysis suggests that for people with average-sized pension pots and low risk appetite, the right annuity purchased on the open market offers good value for money relative to alternative drawdown strategies.

The FCA has identified future risks and has set out what they will be looking for as the market develops.  The FCA’s principal recommendations are:

• Requiring firms to make it clear to consumers how their quote compares relative to other providers on the open market.
• The introduction of a behaviourally trialled alternative to the current system of wake-up packs. This would build on work already underway and feed into our work considering how we will replace the ABI Code with FCA regulation.
• Recommending that the pension guidance service and firms take account of the findings of the market study on consumer behaviour when designing tools to support decision-making.
• In the longer term, recommending the development of a ‘Pensions Dashboard’ which would allow consumers to view all their lifetime pension savings in one place.

The FCA is seeking views on its initial findings and will consult at a later date if any potential rule changes are needed.

The review of annuity sales practices found evidence indicating that these practices are contributing to consumers not shopping around and switching, and significant improvements are required now.

The FCA identified particular areas of concern in relation to enhanced annuities, where customers are often not informed of shopping around or encouraged to do so to get a higher income and where some firms are failing to tell customers other providers may offer enhanced annuities for medical conditions that they do not underwrite.

The FCA is asking the majority of firms involved in the review to do further work under FCA supervision.  This work is to determine if the findings in relation to enhanced annuities are indicative of a more widespread problem.  This will cover the period since the Financial Services Authority’s previous thematic work on Open Market Options in 2008.  At this stage, this will be a sample of relevant sales since May 2008 rather than a full review and will involve individual firms gathering more evidence to determine whether customers with certain medical conditions or lifestyle factors missed out on a higher retirement income.  Following this work the FCA will take a decision on whether further action is needed.

Updated notes on new pensions flexibilities

At Budget 2014, the Chancellor announced radical changes to the way individuals will be able to take their private pensions.  From April 2015, people will be able to access their DC savings as they wish at the point of retirement, subject to their marginal rate of income tax and scheme rules.

The tax changes which are needed to give effect to this policy are being legislated for through the Taxation of Pensions Bill 2014.  This briefing note gives an overview of the measures included in the bill and aims to explain in a simple way what the bill does.

HMRC has also published a revised note on the 2015 flexibilities.

TPR announces five million workers have been automatically enrolled into a workplace pension scheme

On 11 December 2014, TPR revealed that more than five million workers have been automatically enrolled into a workplace pension scheme.

This month’s automatic enrolment declaration of compliance report shows that more than 42,700 employers of all types from charities to supermarkets, football clubs and decorators have now automatically enrolled their workers.

Shepherd (Pensions Ombudsman) – 2 October 2014

In this case, an individual who had transferred his benefits out of a pension scheme was incorrectly informed by the provider that he might be eligible to take a trivial commutation lump sum.  However, his claim that he relied on this information to his financial detriment was not upheld by the PO.

Please read more about this case here.