Our monthly round-up of the latest developments in pensions. In this edition we discuss the Pension Schemes Bill, the cancellation of the secondary annuity market, and the review of the State Pension age (SPA). We also look at the Financial Conduct Authority’s (FCA) review of annuity sales and proposals on transparency of transaction costs.
Master trust rules set out in Pension Schemes Bill
The Government has published a Bill that introduces a new supervisory regime for money purchase Master Trust schemes. It is likely to be of interest to those with 'single employer' trusts who are considering a move to a Master Trust.
The Bill’s provisions include a requirement for Master Trusts to be authorised by the Regulator. An application for authorisation will have to include copies of the accounts of both the scheme and its commercial provider (the 'scheme funder'), together with the scheme’s business plan and ‘continuity strategy’. The continuity strategy will set out measures to protect members' interests on the occurrence of specified triggering events – for example the insolvency of the scheme funder.
Before authorising a Master Trust, the Regulator will need to satisfy itself that:
- Those running the scheme are fit and proper persons
- There are adequate systems and processes in place
- The scheme is financially sustainable
- The scheme funder meets certain criteria
- The documented continuity strategy is adequate
Ongoing supervision will include the submission of annual accounts by both the scheme and any scheme funder, and a duty to notify the Regulator in relation to significant events that will be set out in regulations. This duty will fall on a wide range of persons involved in running the scheme or providing services to it. These measures are underpinned by tough new fining powers including a fixed penalty of up to £50,000 and escalating penalties (not exceeding £10,000 per day) for failing to comply with information requests from the Regulator.
Transitional provisions will apply to schemes operating before these provisions come into force and existing Master Trusts will have six months to apply for authorisation. The Regulator will publish a list of authorised Master Trusts.
Plans for secondary annuity market cancelled
The Government has cancelled its plans for a secondary annuity market because the consumer protections it would need would undermine the market’s development. Justifying the decision, Simon Kirby, the Economic Secretary to the Treasury, said “It has become clear that we cannot guarantee consumers will get good value for money in a market that is likely to be small and limited”.
The Government stated that it has always been clear that, for the majority of people, keeping their annuity incomes will be their best option, estimating that only 5% of the five million people who currently hold an annuity would take advantage of this reform. Ministers might have worried that the initial enthusiasm for selling annuities would have made for a fire sale, with existing pensioners selling quickly or not at all. The 'freedom and choice' enjoyed by new retirees would have then drastically curtailed the supply of disgruntled future annuitants.
State pension age review: report
John Cridland, the former Director-General of the Confederation of British Industry, is leading an independent review that will make recommendations on a suitable SPA. Mr Cridland was asked to consider 'whether a universal SPA rising in line with life expectancy best supports affordability, fairness, and fuller working lives objectives'. His interim report gives no indication as to his thinking on retaining this life expectancy link. Perhaps the clearest hint in the report is that he will not recommend replacing a universal SPA with different SPAs for different parts of the country. He notes that disparities in life expectancy within regions can be greater than inter-regional differences.
The potential implications for trustees include:
- Whether scheme rules will need updating for the revised SPA (though the changes already legislated for will be more pressing in this regard)
- Whether there are bridging pensions that need to be adjusted for changes
- How the tie-in to the minimum age for access will increase in line with the SPA
- Making members aware of how changes to the SPA will affect their retirement planning
TPAS, MAS and Pension Wise to merge
HM Treasury and the Department for Work and Pensions (DWP) have confirmed plans to develop a single public financial guidance body which will be responsible for delivering debt advice and money and pensions guidance to the public. It will replace the Money Advice Service (MAS), the Pensions Advisory Service and Pension Wise and follows a consultation about creating two guidance bodies, one for pensions and another for money guidance. Respondents indicated that a single body would provide a better service to consumers, which has led to this Government’s announcement.
The next steps will involve consulting on the best way to design a single body model, so legislation to create new public financial guidance bodies will not be included in the Pensions Schemes Bill.
PLSA publish interim report of defined benefit (DB) taskforce
The interim report from the Pensions and Lifetime Savings Association's (PLSA) DB Taskforce argues that greater attention should be given to the probability that benefits will be paid, rather than focusing on deficits. It says that investment de-risking may not reduce risks to members where reliance on the sponsor increases and thus may not be achieving a net reduction to member benefit risk but instead, at an aggregate level, may simply be moving risk around.
The paper calls for consolidation of DB schemes and for an investigation of how the flexibility to adjust benefits could help sustain schemes. The Taskforce will explore these ideas in more detail over the next six months.
FCA review of annuity sales practices
The FCA has investigated whether firms are providing customers with sufficient information about enhanced annuities. The FCA reviewed non-advised annuity sales practices looking at sales accounting for about two-thirds of the annuity market. It found no evidence of an industry-wide or systemic failure to provide customers with sufficient information in these circumstances. On the contrary, it found that many firms provided clear and comprehensive information to customers, with written communication tending to meet the standard required.
The FCA did, however, have concerns about the oral communications at a small number of firms which were likely to cause customers to buy standard annuities when they may have been eligible for an enhanced product. The FCA is investigating to see whether further action is necessary. More widely, it encourages firms to examine these findings and consider whether they can make improvements.
Regulations that amend the provision allowing a scheme pension to reduce by an amount linked to the State Pension have been published. The maximum authorised bridging pension for members reaching SPA on or after 6 April 2016 changed to twice the new single-tier State pension. The Regulations came into force on 8 November 2016, but are backdated to 6 April 2016.
FCA proposals for transparency
The FCA has published a consultation document on standardising the disclosure of transaction costs in workplace defined contribution (DC) pensions. The proposal that asset managers must disclose aggregate transaction costs is designed to facilitate the assessment of these costs on which trustees (for occupational plans) and independent governance committees (for group personal pensions) are required to report annually. Consultation closes on 4 January 2017. The FCA expects to publish its final rules in a policy statement in the second quarter of 2017. In the meantime, it also expects to publish its 'interim findings of [its] market study into the asset management sector' later this year.
Revised TM1 for SMPIs
The Financial Reporting Council has published a revised version of its Actuarial Standard Technical Memorandum 1(TM1), which specifies the actuarial assumptions and methods to be used in the calculation of statutory money purchase illustrations (SMPIs). Changes have been made to the mortality tables to align them with those used by the FCA for point-of-sale and in-force business projections in PS16/12: Pension reforms – feedback on CP15/30 and final rules and guidance. The revised standard will be effective from 6 April 2017.
Bankruptcy and DC flexibilities
Contradictory decisions by the High Court (in the cases of Raithatha v Williamson and Horton v Henry) led to uncertainty about whether bankrupt individuals can be forced by a Trustee in Bankruptcy (TIB) to crystallise their uncrystallised pension pots in order to pay their creditors. The Court of Appeal has hopefully put the matter to rest by determining, in the Horton case, that even if a bankrupt individual can elect to draw an immediate payment of an uncrystallised pension, a TIB cannot force that individual to do so and any undrawn pension assets therefore remain ‘protected’ from creditors.
Update to charge cap guidance
In March 2015, the DWP published non-statutory guidance on how the DC charge cap is to be applied and assessed and how to identify a default arrangement. It has updated the guidance to confirm which costs and charges are subject to the cap.