IN THIS ISSUE
02 Introduction 03 DC Flexibilities 05The Pensions Regulator 07 Legislation
08The End of Contracting-out 09 Other News 10 On the Horizon 11 Contact Details
Welcome to the latest edition of DLA Piper's monthly newsletter Pensions Round-Up in which we provide an overview of developments in pension legislation, case law and regulatory guidance.
In this edition we look at key developments from April 2016 including the following.
DC flexibilities: the publication of statistics by HMRC and the FCA; a Policy Statement from the FCA about changes to its rules and guidance in light of the freedoms; and the publication of consultations by HMRC, the Treasury and the FCA in relation to the secondary annuity market.
The Pensions Regulator: a consultation about draft guidance documents to support the new DC code; the publication of information about changes to the DC scheme return; reports from the Regulator about its compliance and enforcement activity in relation to automatic enrolment; updates to the detailed guidance about automatic enrolment; and the Regulator's Corporate Plan setting out its ten priorities for 2016 to 2019.
Legislation: a reminder of legislative changes which came into force on 6 April 2016 including in relation to retirement risk warnings, DC flexibilities, DC charges and governance requirements, the annual allowance, the lifetime allowance, and automatic enrolment.
The end of contracting-out: Countdown Bulletins from HMRC providing information about the GMP Checker and the Scheme Reconciliation Service; updated rules on the automatic enrolment quality requirements for hybrid schemes; and a Direction and an updated note relating to GMP increases in public service schemes.
Other news: the approval of a new EU General Data Protection Regulation; an Opinion from EIOPA about risk assessment and transparency; and the FCA's Business Plan for 2016/17.
On the Horizon: a timeline of some of the key future developments in pensions to help employers and trustees plan ahead.
If you would like further information about any of the issues raised in this edition of Pensions Round-Up, please get in touch with Cathryn Everest or your usual DLA Piper pensions contact. Contact details are at the end of this newsletter.
02 | Pensions Round-Up April 2016
FLEXIBLE PAYMENT STATISTICS
On 27 April HMRC published an updated version of its statistics about flexible payments to reflect payments made in the first quarter of 2016, meaning that the statistics now cover a year since the DC flexibilities were introduced. The figures show that since 6 April 2015, 232,000 individuals have accessed their pension savings flexibly over 4.3 billion has been flexibly accessed through 516,000 payments. For the first quarter of 2016, 74,000 individuals withdrew 820 million and the number of payments was 142,000. The data underpinning the figures comes from Real Time Information reports submitted to HMRC. However, they are not comprehensive because reporting is optional for 2015/16. It will therefore be interesting to see how the figures vary in the next update following compulsory reporting starting to apply from April 2016.
FCA MARKET DATA
In April the Financial Conduct Authority (FCA) published its latest report on retirement income market data which looks at the period from October to December 2015. The FCA surveyed 56 firm groups comprising 94 retirement and pensions providers, with the sample covering an estimated 95% of DC contract-based pension scheme assets. Findings include that 127,094 pensions were accessed by consumers for the first time in the period, which represents a 36% decrease from the previous quarter's figures. The report also provides the following summary of the ways in which these 127,094 pension pots were accessed: annuities purchased 17%; new drawdown policies entered and not fully withdrawn 29%; first partial uncrystallised funds pension lump sum (UFPLS) taken and not fully withdrawn 2%; and full cash withdrawals via UFPLS, flexi-access drawdown or small pot lump sum 52%.
CHANGES TO FCA RULES AND GUIDANCE
On 1 October 2015 the FCA published a consultation on proposed changes to its rules and guidance in light of the new pension freedoms. On 25 April the FCA issued a Policy Statement reporting on the main issues arising from the consultation and setting out the final rules and guidance.
One of the areas in which changes will be made is the FCA's rules on retirement risk warnings. The final rules and guidance will: (i) retain the FCA's core rules but
introduce flexibility to allow firms to start asking the consumer questions (to identify which risk warnings should be given) before the consumer has decided how to access their pension savings, although the risk warnings will still have to be given after the consumer has decided how to access their pension savings; and (ii) remove the requirement for a firm to go through the question and answer process of the rules where a consumer has a pension pot of 10,000 or less and where there are no safeguarded benefits attached.
Other communications issues that the final rules and guidance will cover include: preventing firms from sending application forms with wake-up packs and reminders; setting out the methodology for firms providing illustrations to customers wishing to access their pension savings flexibly; and where there is a planned pattern of regular withdrawals, allowing firms to show the age of the consumer at the date when funds will expire at each of the assumed projection rates.
The consultation also identified areas where the FCA is minded to carry out further work which included a section about transfers. Issues considered included the starting assumption that a DB to DC transfer will not be suitable unless it can be shown to be in the client's best interests, Transfer Value Analysis methodology, insistent clients, communications and enhanced transfer value exercises. The FCA reports that responses on the issue of transfers covered a wide range of issues and included a number of suggestions which it will consider in more detail as it looks at possible policy options going forward. The FCA will provide firms with a further opportunity to input into its developing thinking later in the year.
PENSIONS GUIDANCE LEVIES 2016/17
On 5 April the FCA published a consultation on its fees and levies for 2016/17 including its proposals for the levies in relation to Pension Wise. It proposes that: (i) the pensions guidance levy will be allocated across five fee-blocks, which cover the type of firm that may benefit from the provision of retirement guidance, in the same proportions as for 2015/16; and (ii) as was the case for 2015/16, the pensions guidance providers' levy will be allocated equally across the designated guidance providers. The consultation closes on 27 May 2016 and the FCA plans to publish a Policy Statement including feedback on the responses to consultation and the final rules at the end of June 2016.
SECONDARY ANNUITY MARKET
Consultations were published in April in relation to the proposal to introduce legislation to enable the development of a secondary annuity market from April 2017 so that annuity holders will have the freedom to sell their right to future income streams.
On 20 April HMRC published a consultation (which closes on 15 June) about the proposed tax framework for the market. The consultation explains that the current unauthorised payment rules will be overridden on assignment or surrender, subject to meeting a range of conditions, depending on whether the annuity has been assigned or surrendered in return for a lump sum or whether the proceeds have been paid by the buyer to a flexi-access drawdown fund or a flexible annuity. Where the various conditions are satisfied, the lump sums and payment of proceeds will be authorised payments. The following points may be of particular interest to trustees of occupational pension schemes.
The consultation states that the new tax rules will permit individuals to assign or surrender annuities payable to them that were purchased in respect of money purchase or defined benefit arrangements, regardless of whether the annuity being assigned or surrendered is treated under the current tax rules as a lifetime annuity or a scheme pension. However, the consultation goes on to state that it is not intended that the new tax rules will override any other contractual, legislative or other legal restrictions that prevent individuals from assigning or surrendering annuities that are not in their name.
The consultation states that although the new rules will apply only where the rights to receive payments under the annuity have been assigned by the individual receiving payments, it is intended that schemes should be able to assign annuities in their name to members.
The consultation also sets out proposals in relation to: the tax treatment of sellers; new information requirements on the issuer of the annuity, the entity buying the annuity and the seller; and the treatment of the payments under the annuity following the sale.
On 21 April the Treasury published a consultation on proposals for secondary legislation including to: (i) create new specified activities for firms intending to purchase annuities in the secondary market, for firms intending to act as intermediaries in the secondary market, and for annuity providers who are intending to buy back annuities they have issued; and (ii) to make it clear that those buying rights to annuity income streams in this market will always be deemed to be doing so by way of business and will therefore always be subject to the requirement to be authorised or exempt. The consultation closes on 2 June 2016. Also on 21 April, the FCA published a consultation setting out the rules it plans to apply to the three new regulated activities.
For trustees of occupational pension schemes a key point to note is that it has previously been stated that annuities held in their name are out of scope of these reforms. Trustees may find that they start to receive enquiries from members trying to establish whether annuities are held in their name. The reference to schemes being able to assign annuities in their name to members is also notable as trustees could find that once the legislation is in place they receive requests from members to do so.
04 | Pensions Round-Up April 2016
THE PENSIONS REGULATOR
DC `HOW TO' GUIDES
In November 2015 the Regulator published an updated draft DC code of practice for consultation. The draft code is considerably shorter than the current version and the Regulator stated that there would be a series of supporting `how to' guidance documents. On 13 April a consultation was published on those draft `how to' guidance documents.
There are six guides, one for each section of the draft code.
The trustee board which covers appointing new trustees; the role of the chair; board composition; and board meetings.
Scheme management skills obtaining and improving knowledge and skills; working well with advisers, providers and employers; conflicts of interest; and risk management.
Administration working with your administrator; working with the employer; administration reporting; administrator training and experience; quality assurance and continuity; disaster recovery and business continuity planning; core financial transactions; accuracy data and record-keeping; and accuracy calculations and communications.
Investment governance the trustee board's role; financial and non-financial factors; designing investment arrangements (including default arrangements); strategy and performance monitoring and review; changing investment funds; and security of assets.
Value for members illustrative approach to assessing value for members; ongoing monitoring and evaluation; and restrictions on costs and charges.
Communicating and reporting knowing your members and seeking their views; communicating with members, which includes the Regulator's views on the process of giving retirement risk warnings; and reporting, which includes information about the new requirement for an annual governance statement signed by the chair.
The consultation explains that the guides are being kept separate from the code to enable the Regulator to keep pace with best practice in the market as it evolves and to issue new or revised guidance as the need arises or in response to industry demand. In particular, the consultation notes the Regulator's current work about what a 21st century trustee should be like, which could potentially lead to changes.
Trustees of schemes where the only DC benefits are AVCs should note that the draft code and draft guidance are relevant to those DC benefits. The consultation states that such schemes should consider the risks to members in the context of the value of AVCs relative to members' overall benefits in the scheme, and apply a proportionate approach.
The final version of the new DC code is expected to be laid before Parliament in May and to come into force in July. The Regulator aims to publish the final versions of the guidance documents in July.
Once the new code and the guides are in final form, trustees of schemes providing DC benefits should consider reviewing their governance and administration processes against them and, if necessary, making any changes. The documents are generally not prescriptive and therefore there will be some need for trustees to consider what is appropriate for the circumstances of their scheme.
THE PENSIONS REGULATOR
DC SCHEME RETURNS
On 18 April the Regulator issued a press release reporting that it will be sending out revised DC scheme returns from July 2016 and calling on trustees to prepare for changes in the return or risk being fined for failing to comply with the law. The Regulator also published an example scheme return and a checklist highlighting the new information required which includes: (i) confirmation as to whether or not the scheme has produced the annual chair's statement; (ii) where the scheme is required to have a chair of trustees, the chair's details; and (iii) confirmation of whether the scheme has been compliant with the charge controls which came into force on 6 April 2015.
On 21 April the Regulator published a press release and a report in relation to compliance activity which saw an employer issued with fines worth a total of 22,900 after it failed to comply with its automatic enrolment duties. In this case the employer was initially issued with a Compliance Notice but it failed to comply with this and there were several further delays. As a result, the Regulator's intervention escalated from a focus on remedial action to one of enforcement action. As well as the fines, the employer had to pay outstanding contributions of 13,613.39.
On 28 April the Regulator issued its latest quarterly compliance and enforcement bulletin which covers the period 1 January to 31 March 2016. The Regulator reports that, as expected, the number of Escalating Penalty Notices issued is increasing, in line with the rise in small employers reaching their staging dates. During the period the Regulator issued: 3,057 Compliance Notices (taking the total to 7,834); 187 Unpaid Contributions Notices (total 409); 806 Fixed Penalty Notices (total 2,234); and 96 Escalating Penalty Notices (total 127).
On 26 April the Regulator announced that it is to publish a list of GPPs open to any employers seeking to comply with their automatic enrolment duties. It also published the criteria for joining the GPP list which are intended to mirror, as far as possible, the criteria for master trusts to appear on the list of independently reviewed master trusts.
In April the Regulator published updated versions of its detailed guidance on automatic enrolment to reflect recent changes including: (i) the increase in the upper limit of the qualifying earnings band; (ii) the introduction of further exceptions turning the automatic enrolment and re-enrolment duties into powers in relation to directors and in relation to members of limited liability partnerships who are not employees for tax purposes; (iii) amendments so that there is only one deadline (rather than two) for completing the re-declaration of compliance; (iv) changes to the DB quality requirements in consequence of the end of contracting-out; and (v) a recent case about the application of the duties to peripatetic workers. The Regulator has also updated the section of the guidance on inducements as a result of its experience since 2012 in regulating potential inducement breaches.
On 14 April the Regulator published its Corporate Plan 2016-2019. The Plan looks at some key emerging risk areas that the Regulator has identified which include economic and market outlook, quality of governance and administration, DC market development, and cyber crime. It also sets out the Regulator's ten priorities for the period which include: protecting consumers from poorly governed master trusts; effectively regulating DB schemes; effectively regulating public service pension schemes; maintaining confidence in pensions; improving the quality of scheme governance; extending its regulatory influence; and increasing member engagement with pensions.
06 | Pensions Round-Up April 2016
A number of legislative changes came into force on 6 April 2016 and we set out below a summary of some of the key changes.
The end of contracting-out. The new State Pension was introduced for those who reach State Pension age on or after 6 April 2016. As a consequence, it ceased to be possible for schemes to contract out of the State Pension. You can read more about the issues for employers and trustees to consider in relation to the end of contracting- out in our Pensions Alert dated 4 March 2016.
Retirement risk warnings. Amendments to the Disclosure Regulations introduced statutory requirements to provide retirement risk warnings at the decumulation stage to members with flexible benefits. You can read more about these requirements in our Pensions Alert dated 24 March 2016.
DC flexibilities. A number of miscellaneous amendments were made to legislation in consequence of the DC flexibilities introduced in April 2015. These include amendments to the pension sharing on divorce legislation and the Pension Protection Fund legislation.
DC governance. Some amendments were made to the DC governance requirements introduced in April 2015 including: (i) to put beyond doubt that multi-employer group schemes are excluded from the additional governance requirements that apply to "relevant multi-employer schemes"; and (ii) to allow a person appointed by the trustees to act as the chair in the interim period to sign the annual governance statement if it needs to be signed at a time when there is no chair of trustees.
DC schemes charges. A ban on active member discounts contained in the April 2015 regulations on DC charges and governance came into force. A ban on member-borne commission arrangements in certain DC qualifying schemes was implemented which applies to new commission arrangements entered into on or after 6 April 2016 and existing arrangements if they are renewed or varied on or after 6 April 2016.
Taxation of death benefits. Changes to the taxation of death benefits which will apply to lump sums paid on or after 6 April 2016. These amendments change the tax rate from 45% to the recipient's marginal rate for cases where the person was 75 or over at the date of death, unless the recipient is a "non-qualifying person".
Annual allowance. The tapered annual allowance came into force which, in summary: (i) applies to those who have an annual income over 110,000 and an "adjusted income" (which includes pension savings) of over 150,000; and (ii) operates so that for every 2 of adjusted income over 150,000, the annual allowance will reduce by 1 to a minimum of 10,000.
Lifetime allowance. The lifetime allowance reduced from 1.25 million to 1 million subject to transitional protections in the form of fixed protection 2016 and individual protection 2016. The legislation to give effect to these changes is in the Finance Bill which is currently progressing through Parliament, although provisions were included in Budget resolutions passed in March.
Automatic enrolment. The automatic enrolment legislation has been amended including to: (i) introduce further exceptions which will turn the automatic enrolment and re-enrolment duties into powers in relation to jobholders who hold office as a director of the company, and jobholders who are members of a limited liability partnership but who are not employees for tax purposes; (ii) simplify the position on deadlines for submitting the re-declaration of compliance; and (iii) introduce a transitional easement to the cost of accruals quality requirement in light of the end of contracting-out.
Audited Accounts. From 1 April 2016 the Audited Accounts Regulations have been amended including changes to the investment disclosure information in light of changes to the financial reporting framework in the UK.
THE END OF CONTRACTING-OUT
HMRC COUNTDOWN BULLETINS
HMRC published two further editions of its Countdown Bulletin in April.
Countdown Bulletin 15 provides information about the new GMP Checker (formerly referred to as the GMP Micro-Service) which became available to all pension scheme administrators from 6 April 2016. The GMP Checker can be used by administrators to obtain GMP calculations, contributions and earnings information in respect of individual members of their scheme. The Bulletin provides information about how to access the Checker and how to query the GMP amount. However, HMRC makes it clear that the GMP Checker cannot and should not be used to reconcile scheme memberships as this should be done via the Scheme Reconciliation Service (SRS).
Countdown Bulletin 16 provides some information on the SRS. It notes that the 5 April cut-off date to register expressions of interest in using the SRS has passed but states that HMRC will consider late expressions of interest where there are exceptional circumstances. The Bulletin provides information about how to make such an application and states that applications will be considered on a case by case basis taking into account the
circumstances leading to the late submission. HMRC also reports on some of the themes that emerged in queries about the SRS raised at its recent forums. The responses on these themes include that HMRC is now working towards returning all queries within three months.
Bulletin 16 also contains a reminder that HMRC will no longer track contracted-out rights after 5 April 2016 and therefore schemes will not need to advise it of any movements of membership that take place after that date. It will be the responsibility of schemes to continue to track such movements.
GMP reconciliation is one of the key tasks for trustees to consider following the end of contracting-out. As a first step, trustees should check with their administrators that an expression of interest to use the SRS was made in advance of the deadline and, if not, consider making a late application. Trustees should also consider liaising with their administrators more generally to ensure that an action plan is in place to complete GMP reconciliation by December 2018 at the latest when HMRC will issue pension statements to individuals.
The Hybrid Schemes Quality Requirements Rules 2016 took effect on 6 April 2016. These rules set out the detailed quality requirements that a hybrid pension scheme must satisfy in order to be used to meet an employer's automatic enrolment duties. This 2016 version of the rules updates the previous version published in 2015 to remove references to DB schemes being contracted-out.
PUBLIC SERVICE SCHEMES
As we reported in the March 2016 edition of Pensions Round-Up, on 1 March the Treasury issued a news story explaining that the Government's current practice is to fully price protect the GMP of public sector workers where the Additional State Pension uprating rules do not apply, and stating that the Government will continue with this practice and fully index public service pensions for workers who reach State Pension age from April 2016 to 5 December 2018. On 7 April the Treasury issued: (i) an updated Direction which requires public service pension schemes to index the GMP of public service workers reaching State Pension age during this period; and (ii) an updated note on the operation of pensions increase legislation for public service pension schemes which incorporates the policy announcement made on 1 March.
08 | Pensions Round-Up April 2016
Significant changes are on the horizon in relation to data protection following the approval by the European Parliament on 14 April of a new EU General Data Protection Regulation (GDPR). The GDPR aims at enhancing the level of data protection for individuals whose personal data is processed and increasing business opportunities in the digital single market. The GDPR will be directly applicable in all Member States (meaning that there is no need for national implementing legislation) from 25 May 2018.
The Information Commissioner's Office (ICO) issued a statement on 14 April reporting that many of the principles in the new legislation are much the same as those in the current law but there are important new elements and some things will need to be done differently. The ICO also published "Preparing for the
General Data Protection Regulation (GDPR) 12 steps to take now" which notes some of the differences in the new legislation. For example, one of the changes is that there are additional things that organisations will have to tell people when they collect their personal data such as the legal basis for processing the data, data retention periods, and rights of individuals to complain to the ICO.
As data controllers of scheme members' personal data, trustees will need to be aware of the changes to the legislation and ensure that they are compliant in time for May 2018. The first action noted in the ICO's guidance is "awareness" and therefore as an initial step trustees should consider engaging with their administrators to ensure that they are aware of the changes and that they are putting in place an action plan to address this issue.
Full details of the impact of the new rules on employers more generally are in DLA Piper's Be Aware alert of 14 April 2016.
On 14 April the European Insurance and Occupational Pensions Authority (EIOPA) issued an Opinion addressed to the European Parliament, Council and Commission which recommends strengthening the European regulation applicable to IORPs with a standardised risk assessment, analysing the impact of a set of common pre-defined stress scenarios on the balance sheet. The assets and liabilities on the balance sheet would have to be valued on a market-consistent basis and include all available security and benefit adjustment mechanisms, such as sponsor support, pension protection schemes and benefit reductions. However, EIOPA states that, at this point in time, it does not advise on harmonising capital or funding requirements.
For some time now EIOPA has been looking at the issue of solvency including considering a "holistic balance sheet", the aim of which would be to make the valuation of assets and liabilities more comparable and transparent across Europe. There has been concern that such a measure could significantly increase the deficits of UK DB schemes and therefore it will come as a relief to many sponsoring employers and trustees that EIOPA is not advising on harmonising capital or funding requirements. Whether the recommendations in this Opinion about risk assessment result in any changes to legislation will depend on the view taken by the EU institutions.
FCA BUSINESS PLAN
On 5 April the FCA published its 2016/17 Business Plan which lists pensions as one of its priorities. The FCA's planned activities on pensions include: the launch of the Retirement Outcomes Review which will consider the impact of the pension reforms on competition and switching in the market; a consultation about early exit
charges; continuing its review of firms' disclosure to existing customers about enhanced annuities through their non-advised sales processes; a review of the effectiveness of Independent Governance Committees; and co-ordinating its intelligence and activities on pension scams and unsuitable advice, and continuing to run its ScamSmart campaign.
ON THE HORIZON
Autumn 2015 2016
July 2016 Summer 2016 End of 2016 End of March 2017 April 2017 2017 6 April 2018 May 2018 2019
A consultation on revised regulations about equalising GMPs is expected in this Parliament.
The reforms in relation to Defined Ambition, Collective Benefits and automatic transfers of small DC pots will be revisited once the market has had time and space to adjust to the other reforms underway.
A draft updated IORP Directive is under consideration. The current draft states that Member States would have 18 months after the Directive comes into force to transpose provisions into national law.
Further developments were expected on proposals for transparency of costs and charges.
A final response is expected from the Board of the UK Statistics Authority in relation to the June consultation on consumer price statistics.
The Regulator intends to review its guidance on transfers.
The Regulator intends to publish guidance on DB scheme investment strategy.
A consultation is expected on extending the ban on member-borne commission payments in certain DC qualifying schemes to existing arrangements. The ban already applies to new arrangements entered into on or after 6 April 2016 and existing arrangements that are varied or renewed on or after 6 April 2016.
The Finance (No. 2) Bill is expected to receive Royal Assent. The Bill is currently before Parliament and includes provisions on: the reduction of the lifetime allowance to 1 million, fixed protection 2016 and individual protection 2016; and some changes announced in the Budget 2016 to ensure the DC flexibilities work as intended.
An updated version of the DC Code is expected to come into force and the final version of supporting guidance (currently subject to consultation) is expected to be published.
A new requirement will be introduced for trust-based schemes to report regularly on their performance in processing transfers.
The transitional period in which employers and schemes may continue to use the VAT treatment in VAT Notice 700/17 ends on 31 December 2016.
The Government will place a duty on the FCA to cap excessive early exit charges. The FCA intends to implement its duty before the end of March 2017. In parallel, the Government will consider how existing powers to limit pension charges can be used to implement a comparable cap for trust-based schemes.
Legislation to enable the development of a secondary annuity market is expected to be introduced.
The measures on DC charges and governance standards will be reviewed.
The lifetime allowance is due to be indexed annually in line with CPI.
The new EU General Data Protection Regulation will apply.
The Government will ensure the industry designs, funds and launches a pensions dashboard by 2019.
10 | Pensions Round-Up April 2016
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