Our monthly round-up of the latest developments in pensions. In this edition we discuss the Select Committee's report on their inquiry into the regulation of UK pension schemes, 21st century trusteeship, and a public financial guidance review. We will also look at automatic enrolment earnings thresholds, the recast Pensions Directive, and bulk transfers of defined contribution (DC) pensions.
MPs submit wish list for Green Paper
Following the UK Parliament's Work and Pensions Select Committee's inquiry into the regulation of UK pension schemes, in the aftermath of the BHS collapse, it has published a report: 'Defined benefit pension schemes'. This makes recommendations to the Government for legislative measures intended to sustain defined benefit (DB) pension schemes and ensure that employers honour their responsibilities.
The Committee's most striking recommendation – which it refers to as a ‘nuclear deterrent’ – is to add the power to impose punitive fines to the Pensions Regulator's (tPR) existing moral hazard powers. The fines would be up to three times the amount required under a Contribution Notice or Financial Support Direction. It also makes suggestions to assist trustees in delivering good governance, puts forward proposals to strengthen tPR's powers to intervene in schemes and suggests measures to help significantly underfunded schemes where the employer’s viability is jeopardised.
The Committee's proposals will be taken into consideration by the Government which has already announced its intention to issue a Green Paper in early 2017.
21st century trusteeship and governance
Following its discussion paper in July 2016, tPR has published its response in which it sets out its next steps to drive up standards of governance and administration, including a targeted education and enforcement drive during 2017. TPR is expected to set out clearly the higher standards it expects from professional trustees (including defining what it means by ‘professional trustees’) and the specific skills and qualities it expects from chairs of trustee boards. It will also focus on key areas that it considers to be vital for good member outcomes, including investment governance, conflicts of interest, administration and record-keeping.
TPR’s intention is to produce extensive guidance on investment governance for both defined benefit and defined contribution schemes in the first part of 2017. TPR will also work with the Department for Work and Pensions (DWP) on how to encourage DB schemes to deliver good governance and value for money for their sponsoring employers, and which reporting framework could work in the DB environment.
Public financial guidance review: Consultation on a single body
Following consultation in March 2016, Her Majesty’s Treasury and DWP have opened a consultation on the model for a single financial guidance body, to be launched after Autumn 2018. The new body will bring together the Money Advice Service (MAS), The Pensions Advisory Service (TPAS) and Pension Wise and its remit will be to give pensions information and guidance, money guidance and debt advice, as well as coordinating non-governmental financial education for children and young people. Consultation closes on 13 February 2017. The intention is that MAS, TPAS and Pension Wise will continue to operate as normal until the introduction of the new body.
Last throes of European legislation?
The recast Pensions Directive was published to the Official Journal on 23 December and comes into effect on 12 January. The UK has two years to implement those requirements that are not already in covered in UK legislation. We expect this to result in changes to some areas of governance, including new requirements for schemes to appoint specified key function holders and to produce an own-risk assessment report and changes to the disclosure requirements.
Automatic enrolment earnings thresholds for 2017-18
The DWP has carried out its annual review of the automatic enrolment earnings thresholds, with an Order expected to be laid before Parliament early in 2017. For the 2017-18 tax year, the upper limit of the qualifying earnings band will be £45,000 and the lower limit will be £5,876. The earnings trigger will be frozen at £10,000.
Scope of 2017 automatic enrolment review
On 12 December, the DWP announced the scope of its 2017 review of automatic enrolment, with the aim of building on its success and looking at ways in which policy can be developed further. It will gather evidence on the existing coverage of automatic enrolment and those 'not currently benefiting from automatic enrolment', such as those with multiple jobs who do not qualify for automatic enrolment in relation to any one job, and ‘making it easier for the self-employed to save for retirement’. It will also examine the earnings thresholds and the age criteria for automatic enrolment. The review will consider the level of burden on employers and whether certain categories are disproportionately affected. Legislation also requires the review to cover the Cost of Accruals’ test for DB schemes and the DC certification tests.
As part of this review, the DWP will also assess whether the level of the charge cap on DC default arrangements should change and whether some or all transactions costs should be covered by the cap. The DWP will work with an external advisory group whose membership and terms of reference will be announced in early 2017. A report setting out policy recommendations will be published towards the end of 2017. Many commentators have expressed disappointment at the absence of a specific focus on the adequacy of the statutory minimum contribution rates in the Government’s announcement. However, the Government did say that the review ‘will be an opportunity to strengthen the evidence around appropriate future contributions into workplace pensions… We do not expect to make policy decisions on these areas during 2017.’
Bulk transfers of defined contribution pensions without member consent
The DWP has published a call for evidence on how to simplify the process for bulk transfers without consent between DC schemes, while ensuring members are adequately protected. It is interested in transfers from occupational and stakeholder pension schemes.
For occupational DC schemes, the call for evidence focuses on two existing legal requirements that have been cited as obstacles – actuarial certification and the connected employer requirement. While inclined to keep some form of certification, the DWP seeks views on how to simplify it and whether to allow someone other than an actuary to provide it. The Department also wants comments on whether the connected employer requirement serves a useful purpose or is an obstacle.
For stakeholder schemes, there are questions as to whether such transfers should be permitted where the scheme is not winding up and whether transfers should be allowed to a scheme other than another stakeholder plan – for example a group personal pension (GPP).
The call for evidence does not include the topic of transfers from one GPP to another.
The consultation closes on 21 February with policy proposals expected in 2017. Any secondary legislation that may be required is expected to be in place by April 2018.
Report finds significant progress in tackling poor value
A joint report from the DWP and the Financial Conduct Authority has been published summarising the findings of a review into industry progress in remedying poor value workplace pensions. The report finds that just over two thirds of the schemes identified as delivering poor value had either brought their fees down to 1% or less, or were on the way to doing so. However, 16% of the assets under management in contract-based schemes and 15% in trust-based schemes remained subject to high costs and charges (above 1%). The report notes the success of the role of Independent Governance Committees (IGCs) in reducing the costs and charges achieved so far. However, in specific instances, it believes that some IGCs could have been more proactive and rigorous role in driving providers to agree robust actions more quickly.
The report also outlines next steps and the key actions for pension providers, Independent Governance Committees and trustees – broadly bringing schemes within the 1% cap or justifying that they provide value for money above it and monitoring service quality where charges are reduced.