Pension professionals are dealing with a perfect storm of legislation that all seems to have arrived at once.
The world of pensions legislation is becoming ever more complex. We look at the most important changes that industry professionals should be aware of.
The deadline of the 25th May is rapidly approaching. We are pleased to say that at least one client has been congratulated by a leading professional on how prepared the trustees are, with our help. We have what we feel is a robust procedure, suite of documents and if you want to use us, a cost effective solution.
2. Disclosure of DC charges
Defined contribution schemes have until their first renewal date after 6th April 2018 plus seven months to make available new information. The Chairman’s Statement is becoming more comprehensive with the requirement to publish more detail on charges and transactions costs, including projections, not only for the default fund, but for every other fund the members can access. In addition the information must be published on a web site which is open to the public.
Our best guess at the moment is that employers will need to add a link to their company website that anyone can follow and also advise scheme members that it is there. While this will add to existing transparency, we are not sure what real use members will be able to make of the information as it will measure only one aspect of the investment picture without reference to investment returns, volatility or risk within the funds covered.
3. The lifetime allowance: now up to £1,030,000
The lifetime allowance for the 2018/19 tax year is £1,030,000 which is an increase from the previous £1,000,000. Trustees should ensure that the new allowance is reflected in their administrative processes and consider whether any scheme literature such as the booklet or information on the scheme's website needs to be updated to reflect the change.
4. Bulk transfer of DC funds
At long last the regulations have been eased. Trust schemes can bulk transfer members to another trust scheme although ceding trustees are still required to take independent advice from an unconnected adviser. Once master trusts become authorised, that advice will not be required where the receiving scheme is an authorised master trust.
5. Section 75 debt
This is another piece of legislation that has made it difficult to rationalise the employers participating in a DB scheme. There have been ways of dealing with this but new legislation brings in the possibility of a deferred debt arrangement. While a deferred debt arrangement is in place, the indebted employer will be treated as though it is employing at least one active member and will still be an employer for scheme funding purposes.
The disputes resolution activities of the Pensions Advisory Service have been taken over by the Pensions Ombudsman. Ultimately TPAS will be absorbed, along with Pension Wise into the forthcoming Single Financial Guidance Body.
We have seen a number of individuals who have been caught by the legislation on annual allowance, coupled with tapering. We have no doubt that members are being caught by surprise, because of the complexity and the fact that all income and pensions need to be combined to get a true picture. We anticipate that this will begin to attract a higher profile as it may catch public sector employees who receive an above inflation pay rise. Perhaps then we will see some easing or simplification of excess taxation.
8. Auto enrolment
Well it has happened, the first increase in auto-enrolment contributions to a new minimum of 5%, up from 2%. Interestingly it is argued that the increase in employee contributions will be offset by changes in tax and National Insurance, which will make it more palatable for lower earners. Members will realise the impact at the end of April, and allowing for inertia it will probably be June before we find out whether members have ceased contributions totally to avoid the increase.
9. Master trusts
The Regulator has now published the new legislation that will affect all master trusts, which will need to apply for authorisation between 1 October of this year and 31 March of next year. As authorisation calls for the highest standards, there are significant costs involved for master trusts that wish to continue to operate. The legislation will undoubtedly result in consolidation and less market choice. The positive outcome will be that those that remain will be providers who have robust procedures, systems and governance in place.
10. Money laundering
HMRC regard trustees who invest in assets that produce taxable income or capital gains charged on the trustees as beneficial owners of the asset and require them to complete a registration process.
11. Defined benefit white paper
This has been published proposing a tougher regime on companies and directors who commit ‘wilful or grossly reckless behaviour in relation to a pension scheme’ and at the same time would give greater powers to the Regulator to investigate and impose sanctions in response to such behaviour. Interestingly the Work and Pensions Committee under Frank Field has announced it will carry out its own investigation into these proposals to assess their effectiveness and also the effectiveness of the Regulator whose past activities have been criticised as inadequate by the committee.
12. Pension transfers
The publicity on Tata and other cases has already resulted in regulation from the Financial Conduct Authority in relation to DB to DC transfers. The subject of transfers remains a very emotive and difficult area and a mis-selling review may well follow. In the meantime new requirements have also come into force for DC schemes that provide safeguarded flexible benefits – money purchase benefits that carry some sort of additional guarantee, such as a guaranteed annuity rate – to send members more detailed information about the guarantees associated with these benefits when certain trigger events take place, for example, the member making a written request for a valuation of their benefits. All aimed at improved member protection so avoiding inappropriate transfers.
13. GMP reconciliation
The industry has done a huge amount of work on this area which will we are sure continue for many months to come.