With a year of uncertainty now behind us, we look ahead to what promises to be another significant twelve months for pensions. So, what are the key pensions issues to look out for in 2017?
Future of DB schemes
High profile sponsor failures in 2016 raised public and political awareness of issues relating to DB schemes. While the controversial proposals for restructuring the British Steel pension scheme consulted on during summer 2016 did not come to fruition, the Work and Pensions Committee report on DB pensions (which arose out of the collapse of BHS) was published on 21 December 2016. Among the recommendations made in the report are a Pensions Regulator power to impose punitive fines for avoidance (the so-called “nuclear deterrent”), mandatory Regulator clearance for certain transactions, changes to the rules on indexation of pensions, a reduction in the time limits for valuations and consolidation of some small schemes.
It will be interesting to see which of the Committee’s suggestions are reflected in the government’s green paper on the sustainability of DB schemes due to be published early this year (though there is of course no guarantee that proposals in a green paper will go on to become law).
Some had hoped Brexit would mean that the thorny issue of GMP equalisation would be allowed to wither on the vine. However, the publication in November 2016 of the DWP’s consultation paper on the subject seems to be a tacit confirmation on the part of the government that it remains committed to its previous position, namely that schemes are required to equalise scheme benefits so as to remove the inequalities inherent in the statutory GMP framework. The consultation (which includes a methodology that seems a significant improvement on the “gold plated” one consulted on in 2012) closes on 15 January 2017 and proposals may then take some time to finalise. In any case, this does mean that GMP equalisation will be firmly back on schemes’ agendas for 2017 and beyond.
Separately, the Treasury issued a consultation paper on proposals designed to provide equal and fully inflation-proofed GMP entitlements for male and female members of public service pension schemes. That consultation closes on 20 February 2017.
With pension freedoms having opened up new avenues for pension scammers over the last couple of years and the Money Advice Service reporting that there could now be up to 8 scam calls every second, the DWP and Treasury issued a consultation paper in December 2016 on measures to tackle the problem. Proposals include a ban on cold calling, limiting the right to transfer to some occupational schemes and making it harder to open fraudulent schemes. The consultation closes on 13 February 2017 but the timetable for implementing any changes is not currently clear - the government acknowledges that tackling pension scams is a “challenging proposition”.
This will continue to generate headlines during 2017 but the direct legal effect on pensions from Brexit developments this year is likely to be minimal. Even if Article 50 is triggered by the end of March as is currently planned, EU law will still continue to apply in the UK until formal exit. And post-exit, the “Great Repeal Bill” is expected to preserve existing EU law as part of domestic law unless and until Parliament decides to make changes. Nevertheless, trustees and employers will need to continue to monitor the economic impact of Brexit and the effect on sponsor covenant.
IORP II Directive
The European IORP II Directive (which, among other things, introduces new governance and communication requirements and relaxes cross-border pension rules) has now been adopted by the Council of the European Union. It is likely to come into force in early 2017 and member states will then have two years during which to transpose it into national law. Will the UK adopt the Directive? This is still not clear - the deadline for implementation is close to the currently anticipated timing of Brexit and it may well be that the UK will adopt some or all of the Directive, particularly as it had a central role in negotiating it.
In December 2016, the PPF published provisional PPF levy rules for 2017/18. It will publish the final levy rules by 31 March 2017. Save for the possible addition of material relating to eligible schemes that cease to have a substantive employer after a restructuring, it is the PPF’s “firm intention” that there will be no other changes to the provisional levy rules and it says schemes should “feel able to take appropriate steps based upon the provisional rules”.
The PPF’s strict levy deadlines for the 2017/18 levy year are set out here. Trustees and employers wishing to reduce their scheme’s 2017/18 levy will need to take action early in 2017, especially if they wish to put in place contingent assets for the first time or recertify existing contingent assets.
DC transfers - In December 2016, the DWP issued a call for evidence on how the process of DC bulk transfers without consent can be improved. It looks in particular at whether the actuarial certification requirements and the relationship test for transferring and receiving schemes can be simplified. The closing date for submissions is 21 February 2017.
DB transfers - An arguably even more pressing issue; the inability to transfer accrued DB contracted-out rights without member consent to a scheme that has never been contracted out, has not yet been addressed by the DWP. This has caused problems on scheme mergers and other consolidations since the abolition of DB contracting-out in April 2016. The DWP confirmed (in its November 2016 GMP equalisation consultation paper) that it is working on the problem but any changes to legislation “will not be introduced before autumn 2017”.
Tax changes and the reduction in the money purchase annual allowance (MPAA)
The most significant pensions surprise in the November 2016 autumn statement was the announcement of a reduction in the MPAA from £10,000 to £4,000 in April 2017. (The MPAA is the annual amount individuals can contribute tax efficiently to DC pensions if they have previously accessed a pension flexibly.) The Treasury issued a consultation, which seeks views on whether the level of MPAA would either affect the roll out of auto-enrolment or disproportionately affect particular groups - this is open until 15 February 2017.
As usual, the 2016 autumn statement was preceded by rumours of radical change to the system of tax relief for pensions – on this occasion they proved to be unfounded. It remains to be seen whether major pensions tax reform will remain off the government’s agenda for 2017.
The DWP has announced that it will carry out a review of auto-enrolment during 2017. The report will consider, among other things, auto-enrolment criteria and thresholds, existing coverage of the policy and the needs of those not currently benefiting (such as those with multiple jobs and the self-employed). It will also review the charge cap. Terms of reference are to be published in early 2017, with the report and recommendations expected by the end of the year. In addition, the review will look at evidence about the appropriate level of future contributions, although the government does not expect to make policy decisions on this during 2017.
Accounting for pensions
The International Accounting Standards Board has been consulting on changes to IFRIC 14, the accounting protocol that determines whether a company can recognise rights to pension surplus on its balance sheet. Depending on the final wording, this could potentially result in companies having to report additional pension liabilities. The final version is likely to be published in mid-2017 and come into force from 2019.
The Financial Reporting Council has also announced that during 2017 it will undertake reviews of certain aspects of companies’ corporate reports and audits where it believes there is scope for improvement – this includes pensions disclosures.
FCA’s asset management market study
In November 2016, the FCA released an interim report on its concerns arising from evidence of weak competition in certain areas of the asset management industry. It identified specific issues relating to the market for investment consultancy services and has come to the view that this needs further investigation by the Competition and Markets Authority (CMA). The FCA is currently consulting on this (representations must be made to the FCA by 20 February 2017) and, if the reference goes ahead, the CMA will have 18 months to conduct an in-depth review of the market.
21st century trusteeship
The Regulator recently published a response to its discussion paper on 21st century trusteeship and governance. A targeted education and enforcement drive will begin in spring 2017. Although it does not appear that mandatory qualifications will be introduced for trustees, during 2017 we can expect more clarity around the standards expected of professional trustees and chairs, a focus on governance reporting, streamlining of Regulator guidance and further discussion around mandatory consolidation of small DC schemes.
Other issues to look out and prepare for in 2017 include:
- VAT on pension scheme costs - HMRC has extended the current 70:30 split approach to 31 December 2017 and further guidance is expected before that
- Lifetime ISAs - due to be launched in April 2017. It remains to be seen how popular Lifetime ISAs become during 2017 and what their effect will be on pension savings, in particular auto-enrolment
- Pension Schemes Bill - includes a new regulatory regime for master trusts. It is continuing to progress through the House of Lords, with a third reading due on 16 January 2017
- Finance Bill 2017 - currently contains draft provision on the tax treatment of foreign pensions and a new £500 income tax exemption for pensions advice (due to take effect from 6 April 2017). Consultation on current draft clauses closes on 1 February 2017 and the contents of the Bill are due to be finalised in the 2017 Budget
- 2017 Budget - the Chancellor announced that the government will publish its next spring Budget on 8 March 2017. After that, Budgets will be delivered in the autumn.
Key pensions cases
Some significant pensions cases (and judgments in cases heard recently) are due in 2017, including:
- Steria v Sopra Steria (heard by High Court in December 2016, judgment awaited) - considering the requirement to obtain a “section 37” certificate in relation to a scheme amendment
- British Airways PLC v Airways Pension Scheme Trustee Limited (heard by the High Court in late 2016, judgment expected early/mid 2017) - looking at discretionary pension increases
- Bradbury v BBC (due to be heard in February/March) - considering a pensionable pay cap arrangement
- Walker v Innospec (due to be heard in March) - considering a scheme rule that restricts the spouse's pension payable to a surviving civil partner so that it reflects only the period of the member's pensionable service since 5 December 2005
- IBM v Dalgleish (due to be heard in May) - appeal on breach and remedy issues around a benefit change project
- Hampshire v PPF (timing to be confirmed) - the Court of Appeal referred questions to the Court of Justice of the European Union on whether limits on PPF compensation are consistent with the EU Insolvency Directive.