Pensions news (UK) - February 2015

28 On the Horizon 30 Contact Details 22 Legislation 24 Public Service Pension Schemes 27 Other News 03 Budget Reforms 10 DC Charges and Governance 18 Department for Work and Pensions PENSIONS NEWS FEBRUARY 2015 IN THIS ISSUE 02 | PENSIONS NEWS Welcome to DLA Piper’s Pensions News publication in which we report on developments in pensions legislation, guidance and case law, as well as keeping you up to speed on what to look out for in the coming months. This edition brings you the developments from February 2015 including the following. ■ Budget reforms: a consultation from the Pensions Regulator on draft guidance about DB to DC transfers; the publication of draft regulations making amendments to pensions regulations including in relation to disclosure; the latest HMRC newsletter providing further information about operating PAYE in relation to the new flexibilities; and the publication of draft legislation about the taxation of death benefits in relation to annuities. ■ DC charges and governance standards: the Government response to the October 2014 consultation and the draft regulations being laid before Parliament; and the FCA’s final rules about Independent Governance Committees. ■ Department for Work and Pensions: an update about progress with the introduction of a system of automatic transfers; and a consultation about amendments to the investment regulations. ■ Legislation: a Commencement Order in relation to the Pensions Act 2014; the final form of regulations about the PPF administration levy, and the lifting of restrictions on NEST. ■ Public service pension schemes: a consultation on the Regulator’s compliance and enforcement policy; a response to consultation about amendments to the disclosure regulations; and the final form of regulations and a GAD announcement about the NHS Pension Scheme. ■ Other News: a newsletter from HMRC about steps to combat pension scams; an announcement about the appointment of a new Pensions Ombudsman; and FAQs about the PPF levy. If you would like to know more about any of the items featured in this edition of Pensions News or how they might affect you, please get in touch with your usual DLA Piper pensions contact or contact Cathryn Everest. Contact details can be found at the end of this newsletter. PENSIONS NEWS INTRODUCTION 03 | PENSIONS NEWS BUDGET REFORMS DB TO DC TRANSFERS – CONSULTATION ON GUIDANCE Background The Treasury’s July 2014 response to consultation about the Budget reforms confirmed that members of DB private sector schemes will be permitted to transfer to DC schemes in order to take advantage of the flexibilities, but subject to safeguards in the form of an advice requirement and updated guidance from the Pensions Regulator. On 12 February the Pensions Regulator issued a consultation on draft guidance about DB to DC transfers and conversions which aims to: help trustees ensure they have appropriate processes in place to manage transfer requests; prompt trustees to consider the impact of transfer values as part of an integrated approach to risk management of their scheme; and require trustees to provide clear information for members so that they can get independent advice on the best option for them. In this article, we set out some of the key points from the draft guidance. General points ■ The Regulator believes it is likely to be in the best financial interests of the majority of members to remain in their DB scheme. However, the ability to access pension flexibilities may lead some members, in the light of their individual circumstances, to seek to transfer same scheme, and it applies to transfers made under the cash equivalent legislation as well as transfers made under the scheme’s rules. (However, there will be an exception where the value of the member’s safeguarded benefits is less than £30,000.) ■ One of the steps in the process will be that trustees will have to inform members that they will be required to provide the scheme with evidence that they have received independent advice before a transfer can be arranged. ■ Requiring members to obtain appropriate independent advice does not make trustees responsible for checking what advice was given, what recommendation was made or to confirm whether the member is following that recommendation. ■ Trustees must ensure that the member has provided the scheme with a signed confirmation from their adviser which must include specified information. A check must be made by the trustees on the adviser’s details on the Financial Services Register maintained by the FCA before the transfer is made. The Regulator states that it may also be sensible for the scheme to conduct periodic additional checks. Transfer assumptions and funding ■ The statutory basis and approach for calculation of cash equivalent transfer values is unchanged. PENSIONS NEWS their benefits, and it is therefore essential that they are provided with the information needed to allow them to make informed decisions. ■ Trustees should ensure they have processes in place to implement transfer requests in a timely manner, and should maintain accurate and complete records of requests received and the transfers that have been made. ■ It is not the trustee’s role to second-guess the member’s individual circumstances and choice to transfer their benefits, and nor is it their role to prevent a member from making decisions which the trustees might consider to be inappropriate to their circumstances. ■ It will be important for trustees to monitor and understand demand from members for transfers and the subsequent impact those transfers could have on scheme funding. ■ It will also be important to monitor the potential impact on investments, particularly regarding the liquidity required to pay large numbers of individual transfers or in respect of members with a large transfer value relative to the scheme. Appropriate independent advice ■ The requirement that the member obtains appropriate independent advice before the trustees permit the transfer applies where a member wishes to transfer to a different scheme or to a different section of the 04 | PENSIONS NEWS ■ Trustees should consider the impact on their DB scheme’s funding that the number and size of transfer requests could have. ■ Trustees are expected to adopt a proportionate and integrated approach to the overall management of scheme funding risks, taking into account their view of the strength of the employer’s covenant, and should consider whether there could be a material risk to their funding assumptions as a result of their approach to transfers. ■ Where the scheme is underfunded trustees may also request an insufficiency report, and in some situations reducing transfer values for underfunding may be appropriate. In all cases, trustees should balance their responsibilities to transferring members with those remaining in the scheme. The Regulator states that achieving such balance will not be a precise science and trustees should obtain advice from their actuary, and notes that its transfer value guidance sets out the considerations needed to reach a balanced view. ■ Transfer bases can be changed at any time, informed by funding position and experience, and trustees should therefore discuss with their advisers options to respond to material changes to the scheme’s overall position and any consequential impact on the management of the scheme. PENSIONS NEWS DRAFT AMENDMENTS TO PENSIONS REGULATIONS Introduction Whilst the main legislative changes required to give effect to the Budget reforms are contained in primary legislation (the Taxation of Pensions Act 2014 and the Pension Schemes Act 2015) there are some aspects of the reforms that will be set out in regulations. On 19 February the DWP published three sets of regulations in draft form to allow the pensions industry sufficient time to plan for the changes. However, at this stage the draft regulations were subject to final legal checks and Parliamentary approval in early March 2015. All three sets of regulations are proposed to come into force on 6 April 2015 and they cover areas including the following. Consequential and Miscellaneous Amendments ■ An amendment to ensure that an occupational pension scheme which is, or has been, contracted-out since April 1997, can offer an uncrystallised funds pension lump sum (UFPLS) rather than a pension, in respect of pension accrued since April 1997 when the scheme was contracted-out. As well as this guidance, regulations are due to be finalised in March which will set out further detail about the statutory requirement for trustees to check that members have obtained appropriate independent advice before making a DB to DC transfer. DB schemes and schemes with DB sections will need to ensure that they have updated their transfer processes ready for when the Budget reforms come into effect. If you would like further information in relation to the steps that you will need to take to ensure that your processes are compliant with the new requirements, please get in touch with your usual DLA Piper pensions contact. Next steps The consultation closes on 17 March, and the Regulator will consider the responses received and prepare a response with a view to publishing the final documents as soon as possible. Looking ahead, the Regulator intends to review the guidance in 2016 in light of experience. 05 | PENSIONS NEWS PENSIONS NEWS ■ Consequential amendments to the regulations about transfer values to reflect the fact that the statutory transfer right in the Pension Schemes Act 1993 will operate at a benefit category level. Disclosure Regulations Amendments are proposed to be made to the Disclosure Regulations primarily to ensure that the Pension Wise service is signposted to members. In short, the amendments include the following. ■ Two new information requirements will be introduced for cases where the member “has an opportunity to transfer flexible benefits” and has reached normal minimum pension age or will do so in the following four months or meets the ill-health condition. – One of the new requirements will apply where the member requests information about what they may do with the flexible benefits or informs the trustees that they are considering, or have made a decision in relation to, what to do with the flexible benefits. – The other new requirement will apply where the trustees and the member communicate about what the member may do with the flexible benefits. ■ The introduction of a new power so that trustees may, with employer consent, modify the scheme by resolution for the purpose of offering options under the new flexibilities. The power lists the specific payments that modifications can be made in relation to, but broadly speaking these cover drawdown and UFPLS. Transfers ■ The introduction of a power so that trustees may by resolution modify the scheme for the purpose of providing that where a member or survivor has a right under the scheme rules to a transfer payment in relation to subsisting rights to safeguarded benefits, that transfer does not have to be paid where: – the trustees are required (under the new statutory safeguard) to check that the person has received appropriate independent advice before making the transfer; and – the trustees: (i) are unable to carry out the check by reason of factors outside their control; or (ii) have carried out the check but the check did not confirm that the member or survivor had received appropriate independent advice. ■ Amendments will be made to the existing requirements to provide information: (i) to members with rights to money purchase benefits at least four months before retirement date; (ii) in certain cases where benefits under the scheme have, or are about to, become payable; and (iii) in certain cases where the trustees are aware a member or beneficiary has died and a person may be entitled to exercise rights or options under the scheme. ■ Amendments will be made to the existing requirements to provide basic scheme information to new members, most notably to add new information where members have “flexible benefits”, and to explain the circumstances in which the member has to have taken appropriate independent advice before the trustees can make a transfer. However, it is important to note that in the case of amendments to existing requirements, transitional provisions are proposed so that where the trustees have on or before 5 April 2015 given information in accordance with the existing requirements referred to above as the regulation has effect on 5 April 2015, they are not required to provide information again in order to give the person information in accordance with the regulation as it has effect on 6 April 2015. 06 | PENSIONS NEWS PENSIONS NEWS the latest edition of its newsletter aiming to address some of the additional points raised and provide more detail on operating PAYE on payments made under the pension flexibility rules. Notable points in the latest newsletter include the following. ■ HMRC explains what payments on or after 6 April 2015 will result in the member being treated as flexibly accessing their pension, and that there are no transitional arrangements for payments requested before 6 April 2015 but paid after. By way of example, it states that if an application for trivial commutation under a money purchase arrangement is received before 6 April 2015 but the payroll system is unable to process it in time for the year end and the payment is made after 6 April 2015 and does not fall within the £10,000 small pot limit, the payment must be treated as an uncrystallised funds pension lump sum (UFPLS). ■ Normal PAYE rules should apply to these payments, and all payments should be reported on the RTI Full Payment Submission (FPS) in a similar way to annuity payments currently, but with a particular data item populated. The newsletter then goes on to address some specific scenarios and what the scheme administrator should do in them. For example, where a member has a P45 from a previous tax year and there is no existing pension source, or where the scheme administrator already has a tax code for the member and is making payments. ■ A P45 should be issued to the member at the point that the fund has been extinguished, covering the tax year in which the last payment was made (current year) as detailed in the scenarios. ■ Lump sum tax-free payments should not be reported at all under RTI. HMRC also states that whilst there is no requirement to report pension death benefits which can be paid tax free, as with all payments, it will need to be ensured that appropriate records are kept to show that the payment was entitled to be made tax-free or in other cases the correct tax has been deducted. ■ There is also a section about member’s income tax which provides links to pages on the gov.uk website where members can find more information on income tax rates and help in calculating their income tax, gives a brief description of the position on income tax and an example, provides links to more general information for members about the pension flexibilities and Pension Wise, and states that HMRC is continuing to work on guidance for scheme members and scheme administrators which will be published on the gov.uk website. It will be important for trustees to update their scheme documents and processes to ensure compliance with the new and amended requirements. We would expect the transitional provisions to be welcomed by trustees as they will mean that they do not need to revisit communications already sent to members. In any event, it would of course be useful for trustees to consider what to say about the Budget reforms in communications that they are now sending to members approaching retirement, although they will need to take care to ensure that this information is accurate and not misleading and could not be construed as financial advice. HMRC NEWSLETTER In December 2014 HMRC published a newsletter which included a section looking at some of the questions it had received about how PAYE will operate for payments under the new flexibilities. Following this, HMRC received a number of follow-up queries from pension scheme administrators and therefore on 18 February published 07 | PENSIONS NEWS PENSIONS NEWS TAXATION OF DEATH BENEFITS – ANNUITIES Background In the December 2014 Autumn Statement the Chancellor announced the Government’s decision to go further with changes to the taxation of death benefits so that from April 2015: ■ if an individual dies under the age of 75 with a joint life or guaranteed term annuity, beneficiaries will be able to receive any future payments from such policies tax free if no payments have been made to the beneficiary before 6 April 2015; and ■ where the individual was over 75, the beneficiary will pay tax at marginal rate or at 45% if the funds are taken as a lump sum (although it is intended to tax lump sums at marginal rate from 2016/17). Draft provisions On 18 February HMRC published draft provisions for the Finance Bill 2015 in relation to these changes which propose amendments to the Finance Act 2004 and the Income Tax (Earnings and Pensions) Act 2003. Key draft provisions include the following. Nominees and successors Nominees and successors will be permitted to receive as an authorised pension death benefit, payments of annuities from money purchase arrangements in consequence of the death of a member. In summary, to be a “nominees’ annuity”, the annuity can be purchased either: (i) as a joint life annuity with the member’s lifetime annuity on or after 6 April 2015; or (ii) after the member’s death, providing the member died on or after 3 December 2014 (the day of the Autumn Statement) and the nominee did not become entitled to the annuity before 6 April 2015. In addition the annuity must be payable by an insurance company and be payable until the nominee’s death or until the earliest of the nominee’s marrying, entering into a civil partnership or dying. In summary, to be a “successors’ annuity”, the annuity must be purchased after the beneficiary’s death providing this was on or after 3 December 2014 and the successor cannot become entitled to the annuity before 6 April 2015. In addition, the annuity must be purchased using “undrawn funds”, payable by an insurance company, and be payable until the successor’s death or until the earliest of the successor’s marrying, entering into a civil partnership or dying. There is a power for regulations to be made in connection with the transfer of the sums and assets that were used to provide the nominees’ or successors’ annuity to another insurance company to provide a new nominees’ or successors’ annuity. The regulations may provide the circumstances when the new annuity is treated as if it were the original annuity and when the transfer will be an unauthorised payment. The regulations can have retrospective effect where the transfer concerned occurs on or after 6 April 2015, providing that the regulations are made before 25 December 2015. Benefit Crystallisation Event 5D A new Benefit Crystallisation Event – 5D – is added which occurs when a person becomes entitled on or after 6 April 2015 but before the end of the relevant two year period to a dependants’ or a nominees’ annuity in respect of the death of a member on or after 3 December 2014, where the sums and assets used to purchase that annuity include “relevant unused uncrystallised funds”. 08 | PENSIONS NEWS PENSIONS NEWS Amendments to the tax legislation In summary, the types of annuity which can be paid tax free are proposed to be as follows. ■ A dependants’ annuity or a nominees’ annuity where the member died on or after 3 December 2014 and before age 75, and no payment to that beneficiary was made before 6 April 2015 in connection with the annuity. If the annuity was purchased using “unused uncrystallised funds”, in addition, the entitlement must arise within the “relevant two year period” (that is, the period of two years beginning with the earlier of (i) the day on which the scheme administrator first knew of the member’s death, and (ii) the day on which the scheme administrator could first reasonably have been expected to know of the death). ■ A successors’ annuity where the previous beneficiary died on or after 3 December 2014 and before age 75, and no payment to the successor was made before 6 April 2015 in connection with the annuity. ■ A dependants’ annuity or a nominees’ annuity where it was purchased with the member’s lifetime annuity, and the member died on or after 3 December 2014 and before age 75, and no payment to that beneficiary was made before 6 April 2015 in connection with the annuity. ■ Payments to a beneficiary of a lifetime annuity after the death of a member if the pension payments meet the conditions in the Finance Act for payment for a guaranteed period, the member died on or after 3 December 2014 and before age 75, and no payment to that beneficiary was made before 6 April 2015 in connection with the annuity. ■ Payments of a dependants’ short-term annuity or a nominees’ short-term annuity bought from a drawdown fund where the member died on or after 3 December 2014 and before age 75. However, there are exceptions to this in specified circumstances which essentially cover cases where payments have been made before 6 April 2015 or the funds are not designated within the relevant two year period. ■ Payment of a successors’ short-term annuity bought from a drawdown fund where the previous beneficiary died on or after 3 December 2014 and before age 75. These amendments are predominantly an issue for annuity providers rather than for occupational pension schemes. However, the introduction of nominees and successors as potential recipients of annuities is something that could have an impact on occupational pension schemes. If scheme rules restrict members to purchasing annuities to be paid to the member and to their spouse or dependants following their death, they may want to consider whether to update the rules to provide that members can purchase annuities that are payable to a nominee or successor following their death. ADDITIONAL PROTECTION Background On 26 January the Financial Conduct Authority (FCA) announced that it had written to the Chief Executive Officers of pension providers to outline plans to introduce additional protection for those accessing their DC pension pots from April 2015. On 27 February the FCA published the rules that will apply from 6 April 2015. These have been introduced without consultation on the grounds that the delay involved in consulting would be detrimental to consumers’ interests. However, the FCA plans to consult in summer 2015 on whether to retain, modify or add to these rules as part of a wider consultation it will be conducting on the rules around consumers’ interaction with providers as they approach retirement. The final rules The rules will be triggered by the consumer saying (verbally or in writing) that they want to access their savings. The first step will be that firms should ask consumers whether they have received guidance from Pension Wise or regulated advice and, if not, encourage them to do so. If the consumer has already done so, or does not want to do so, the firm moves to the next step. 09 | PENSIONS NEWS PENSIONS NEWS The next step is to identify risk factors. Firms will have to ask relevant questions, based on how the consumer wants to access their pension savings, to determine whether risk factors are present. By risk factors, the FCA means the key areas that consumers should consider in relation to the way they are choosing to access their pension savings. For example, when purchasing a single life annuity, one risk factor is whether the consumer has a partner or dependants. The FCA sets out a non-exhaustive list of risk factors as well as some examples of the type of questions that firms should ask themselves in judging whether risk warnings are required. If risk factors are present, or if it is unclear whether a risk factor is present, then appropriate risk warnings must be given. The FCA does not prescribe the content or format of the risk warnings in the rules and expects firms to develop appropriate risk warnings. The FCA also states that it would expect the risk warning to be prepared in advance but tailored where necessary to the consumer’s responses. It states that it does not believe that the provision of a simple pre-prepared fact sheet would be sufficient but the risk warnings could follow a pre-prepared format. It should be noted that the new rules do not require firms to replicate the Pension Wise service. Subject to limited exceptions, the risk warnings must be given to consumers regardless of whether they have already received guidance from Pension Wise or taken regulated advice. The impact on occupational pension schemes The FCA rules apply to those firms which it regulates, that is, firms that establish or operate personal and stakeholder pension schemes. However, the FCA states that in the spirit of treating customers fairly, it would encourage firms that it regulates that run or administer occupational trust-based DC schemes to also give the risk warnings to members of those schemes. It also notes that members of occupational trust-based DC schemes will receive the retirement risk warnings when they access their pension savings using an FCA regulated decumulation product. In terms of action points for trustees of occupational pension schemes, the key point is that the Regulator will be publishing complementary guidance for trustees which will provide clarity on the new requirements to signpost pensions guidance and set out the Regulator’s expectations of trustees in relation to the provision of information to their members on the generic risks of the decumulation options. 10 | PENSIONS NEWS PENSIONS NEWS DC CHARGES AND GOVERNANCE In February 2015 the DWP published the response to its October 2014 consultation in relation to DC charges and governance standards, and the draft Occupational Pension Schemes (Charges and Governance) Regulations 2015 (“Draft Regulations”) were laid before Parliament. In this article we provide a summary of some of the key elements of the Draft Regulations, which are proposed to come into force on 6 April 2015 (save for the provision in relation to active member discounts), and also provide some brief information about the Financial Conduct Authority’s corresponding rules in relation to governance. OCCUPATIONAL SCHEMES – DC CHARGE CAP Overview In summary the Draft Regulations impose a charge cap and restrictions on the type of charging structure for certain arrangements in DC schemes being used as qualifying schemes for automatic enrolment. The responsibility for complying with the charges measures rests with the trustees of a relevant scheme. The scope of the charge cap The first task for trustees will be identifying the extent to which the charge cap applies to their scheme which involves identifying whether the scheme is caught by the measures, and if so, what arrangements and members they apply to. The definitions in the legislation are complex but in summary the scope of the measures will be as follows. Relevant schemes ■ The charge cap will apply to occupational pension schemes under which all the benefits which may be provided are money purchase benefits, or where some but not all the benefits which may be provided are money purchase benefits, they apply to that occupational pension scheme in so far as it relates to those benefits (although as detailed below where the only DC benefits for a member relate to AVCs, they will generally not be caught). ■ However, schemes with only one member, executive pension schemes and certain small self-administered schemes are excluded from the cap. What arrangements in the relevant scheme are caught by the measures? ■ Just because a scheme is caught by the regulations, this does not mean that the charges measures will apply to all of the arrangements used by the scheme. Rather the measures will apply to “default arrangements”. ■ A default arrangement for these purposes is one which (i) on or after 6 April 2015 or, if later, the employer’s staging date is used by a “qualifying scheme” (that is a scheme used to comply with the automatic enrolment duties) in relation to at least one jobholder, and (ii) satisfies one or more of three tests. ■ One of these three tests relates to what would most commonly be thought of as a default arrangement, that is, arrangements under which the contributions of one or more workers are allocated to a fund or funds where the workers have not expressed a choice as to where the contributions are allocated. ■ However, the other two tests cover situations where the workers were required to make a choice as to where their contributions are allocated and the contributions of 80% or more of the workers who are contributing members are allocated to the arrangement. – One of these two tests is a one-off assessment on the relevant date (6 April 2015 or the staging date if later) primarily designed to capture workers who joined a scheme before automatic enrolment which is now being used as a qualifying scheme. – The other is an ongoing assessment that addresses a situation which is likely to be rare where the arrangement first receives contributions after the relevant date and the workers are enrolled into a scheme by contract joining prior to starting employment and are required to make a choice about where their contributions are invested. – The regulations provide further detail about which members to include in the assessment of the two 80% tests and about an exception to the one-off assessment. 11 | PENSIONS NEWS PENSIONS NEWS Other points to note in relation to “default arrangements” include the following. ■ Where an arrangement is a default arrangement in relation to an employer, it continues to be so regardless of whether it continues to satisfy the requirements. ■ An arrangement is not a default arrangement if at any time before a benefit comes into payment, it provides for a pensions promise to be obtained from a third party in relation to any such benefit. ■ Defined Benefit schemes which offer money purchase benefits through AVCs are not caught by the definition of default arrangement, because the AVCs are not being used by an employer to meet their automatic enrolment duties. ■ However, AVCs could be subject to the charge cap where a particular default arrangement is used by a qualifying scheme to fulfil an employer’s automatic enrolment duties in respect of at least one employee. The Government response explains that where this happens, workers of that employer who have chosen to make AVCs which are invested in the same arrangement would also be protected by the cap. Relevant members The charge cap applies: ■ to a member of a relevant scheme to the extent of the value of that member’s rights under a default arrangement; ■ beginning with the date on which the first contribution to the default arrangement is received on or after 6 April 2015 (or if later the employer’s staging date). This means that a worker who ceased contributing before this date will not be caught by the charge cap. However, if the charge cap does apply to a worker, it applies to all of their funds in the default arrangement irrespective of when the funds were accumulated, and will continue to apply to them as long as they remain invested in the default arrangement. Charging structure and the charge cap The Draft Regulations provide that the only permitted charging structures for relevant members of the default arrangements will be a single charge structure (where the charges imposed on the member are calculated solely by reference to the value of the member’s rights under the scheme) or a combination charge structure, (where the charges are calculated by reference to the value of the member’s rights under the scheme and either a percentage of the value of contributions or by reference to a period of time). The charge limit in relation to a single charge structure is 0.75% annually of the value of the member’s rights under the default arrangement. For these purposes, charges are defined as “administration charges” other than: “transaction costs”; the costs incurred complying with an order of the court where the order provides for recovery of costs by trustees; charges permitted in respect of pension sharing costs; winding up costs; and costs solely associated with the provision of death benefits. “Transaction costs” are defined as costs incurred as a result of the buying, selling, lending or borrowing of investments. An Annex to the Government’s response document sets out a non-exhaustive list of the charges which are in scope of the cap and the costs which are excluded. Where a combination charge structure is used, the cap is adjusted accordingly so that essentially: ■ in the case of a combination charge structure which uses a contribution percentage charge, that charge is capped at 2.5% of the contributions allocated under the default arrangement, and the cap in relation to the charge on the value of the member’s rights varies from 0.4% to 0.6% depending on the level of the contribution percentage charge; and 12 | PENSIONS NEWS ■ in the case of a combination charge structure which uses a flat fee charge, that charge is capped at £25 annually, and the cap in relation to the charge on the value of the member’s rights varies from 0.4% to 0.6% depending on the level of the flat fee charge. Member opt-in services It is also worth noting that the charges restrictions will not apply in relation to a service for which the member has entered into an agreement with a person for the provision of that service. The agreement must meet certain requirements such as being in writing and including a statement that the member will incur charges that may be higher than would otherwise be permitted. However, this type of agreement is not possible in relation to a service which the provider is under a statutory obligation to provide or a “core service”, with the Draft Regulations containing a non-exhaustive list of “core services”. Assessing the charge cap The charge cap applies at a member level, and the trustees can choose between two possible methods of assessing whether the charges are within the cap. The detail of the methods is complex but, in summary, they are as follows. ■ A retrospective method that involves calculating the value of the member’s rights under the default arrangement at reference points set at equal intervals during the charges year of no more than three months. The cap is breached if the charges imposed on the member annually exceed the average of those reference point values multiplied by 0.75% (or the relevant percentage for a combination charge structure). ■ A prospective method under which the cap will not be exceeded if on the first day of the charges year, the “charges regime” to be used would not result in charges exceeding the limit (calculated in accordance with a prescribed method) and that regime is applied throughout that charges year. The Government’s response document states that for schemes which rely on regular deductions to pay all administration charges, or regular deductions combined with rebates, it may be more straightforward to use this method. It notes that to comply through this method, the trustees will need to verify that, based on a member’s start and finish date and discounting any changes in fund value, the maximum charge for the year under the charging regime to be used would not exceed the cap. However, if during the year, the “charges regime” fails to meet the requirement of not exceeding the limit, the trustees will have to assess the charges for the whole year using the retrospective method. Charge limits adjustment The Draft Regulations make provision for an adjustment mechanism which can be used if: ■ the trustees have used their best endeavours to comply with the charge limits but have determined that they are unlikely to be able to comply for one or both of the current and following charges years; or ■ an event happens which is outside the control of the trustees and they have used their best endeavours to mitigate the effect of the event on the scheme but have determined that, because of it, they are unlikely to be able to comply with the charge limits for the current or the following charges year in relation to one or more members. In brief, the adjustment mechanism involves the trustees giving notice of an ‘adjustment date’ and from that date contributions are diverted into a compliant fund, and the existing arrangement is closed to future contributions and is not subject to the cap from the ‘adjustment date’. In relation to the first scenario, the mechanism is only available for six months after the regulations come into force so the ‘adjustment date’ must fall within that period. PENSIONS NEWS 13 | PENSIONS NEWS Looking ahead – Active Member Discounts The Draft Regulations also contain a provision which will not come into force until 6 April 2016 which will essentially prohibit trustees from imposing a higher charge (or permitting it to be imposed) on non-contributing members than that to which the member would have been subject had they been a contributing member. This applies to a non-contributing member provided a contribution has been made in relation to that member on or after 6 April 2016 and at least one such contribution was made when the member was a worker of the employer in relation to whose jobholders the scheme is a qualifying scheme. PENSIONS NEWS OCCUPATIONAL SCHEMES – GOVERNANCE STANDARDS The scope of the governance standards The minimum governance standards in the Draft Regulations will apply to occupational pension schemes which provide money purchase benefits, although there are a number of exceptions. Most notably, schemes which provide no money purchase benefits other than benefits which are attributable to AVCs are not caught by these standards. In summary, the other exclusions are for executive pension schemes, certain small self-administered schemes, a scheme that does not fall within paragraph 1 of Schedule 1 to the Disclosure Regulations (which, for example, includes schemes with only one member), and certain public service schemes including those covered by the Public Service Pensions Act 2013. The governance standards cover the following areas. It is also worth noting that the regulations provide that if the scheme is not a money purchase scheme, several of the requirements apply only in relation to the provision of money purchase benefits. Appointment of service providers The trust deed or scheme rules must not contain a provision that requires that the administrative, fund management, advisory or other services in respect of the scheme are provided by a person identified in any document, or that restricts the choice of person who may be appointed to provide such services. This is updated wording to that included in the consultation draft of the regulations in order to make it clear that it only covers trust deeds and rules, rather than other arrangements such as contracts. This was as a result of consultation responses expressing concern that the wording of the consultation draft could have made trustees reluctant to enter contracts with lock-in periods that can be at lower cost and offer better value, and concern that trustees could be restricted in their ability to enter into good value contracts which contain express or implied restrictions on other providers that can be used. The duty to appoint a chair There will be a requirement for relevant schemes to have a chair in place who is either an individual who is a trustee, a professional trustee body which is a trustee, or an individual or professional trustee body who is a director of a trustee company. In response to concerns that the consultation wording which stated that the trustees must appoint a chair was too restrictive because sometimes scheme rules include specific provision as to how a chair is appointed including giving the power to the employer, a drafting change was Schemes which are caught by the charges cap will need to take steps to ensure compliance from 6 April 2015. This will involve assessing which arrangements and members are covered by the cap, which charges to include in calculations and how to make the assessment of whether the cap is being complied with. If you would like further information on any of these aspects of the Draft Regulations please get in touch with your usual DLA Piper pensions contact. 14 | PENSIONS NEWS PENSIONS NEWS made, with the Draft Regulations now providing that the trustees must appoint a chair under the new provisions where a chair is not already appointed. However, it should be noted that the Draft Regulations define the chair as a person appointed under the new requirements or a person appointed by someone other than the trustees, in accordance with the trust deed or scheme rules. Schemes will therefore need to consider whether any existing chair they have in place would be regarded as a chair for these purposes or whether an appointment needs to be made. In terms of timing, there is essentially a three month period to appoint the chair from whichever is applicable of the scheme being established, a chair ceasing to hold office and the regulations coming into force. Processing financial transactions Trustees will be required to secure that core financial transactions are processed promptly and accurately. A non-exhaustive list is provided of “core financial transactions” in the Draft Regulations which refers to: investment of contributions to the scheme; transfers of assets relating to members into and out of the scheme; transfers of assets relating to members between different investments within the scheme; and payments from the scheme to, or in respect of, members. An essential guide to the new provisions published by the Regulator states that trustees will need to review the information they receive from their scheme administrator and discuss with them whether it is sufficient to enable them to meet this new standard, and should also consider whether the administration processes and controls that are in place minimise the likelihood of errors or delays in processing core scheme financial transactions. Assessments of charges and costs At intervals of no more than one year, trustees will be required to: ■ calculate the charges and, in so far as they are able to do so, the transaction costs borne by members of the scheme; and ■ assess the extent to which those charges and transaction costs represent good value for members. Whilst the requirement for trustees to calculate transaction costs includes the words “in so far as they are able”, it is worth noting that the annual governance statement which trustees will have to produce will need to indicate any information about transaction costs which the trustees have been unable to obtain and explain what steps are being taken to obtain that information in the future. In response to concerns that it will be difficult for trustees to assess whether charges and transaction costs offer good value for members, the Government states that it does not want to make the regulations more prescriptive in this area because it expects trustees, as part of their general role and fiduciary duty to members, to already have a good understanding on how they assess the value of charges and costs for their particular scheme and membership. The Government response also notes guidelines on value for money previously published by the Regulator and states that it would expect trustees to use this as a base line for consideration. Default arrangements For the purposes of the minimum governance standards, default arrangement has a similar definition as in relation to the charges provisions, although some modifications are made to the definition, most notably that it is not limited to arrangements used by qualifying schemes in respect of relevant jobholders. There are two requirements under the minimum governance standards in relation to default arrangements. ■ Trustees must prepare a statement of the investment principles governing decisions about investments for the purposes of the default arrangement, and there are certain matters which that statement must cover. 15 | PENSIONS NEWS PENSIONS NEWS ■ Trustees must review both the default strategy (its aims and objectives and policies in relation to specified matters) and the performance of the default arrangement at least every three years and without delay after any significant change in investment policy or the demographic profile of relevant members. Unless the trustees decide no action is needed as a result of the review, they must revise the statement. Annual statement regarding governance There will be a new requirement for trustees to prepare an annual statement which essentially involves the trustees reporting on compliance with the new governance standards (the Draft Regulations specify the matters to be included), as well as describing how the requirements of the trustee knowledge and understanding legislation have been met during the scheme year and explaining how the combined knowledge and understanding of the trustees, together with the advice which is available to them, enables them properly to exercise their functions as trustees. The statement must be signed on behalf of the trustees by the chair. In terms of timing, the general requirement will be that the statement must be prepared within seven months of the end of each scheme year and must be included in the annual report. However, following responses to the consultation, the Draft Regulations state that schemes will not have to prepare the statement from 6 April 2015 if the period to be covered for that scheme year will be less than three months. In such cases, schemes would roll that statement up into the next year’s version which would cover a period of more than 12 months. Additional requirements for relevant multiemployer schemes There are some additional requirements that apply to “relevant multi-employer schemes”. Subject to limited exceptions, these are essentially schemes in relation to which some or all of the “participating employers” are not “connected employers”, or which are promoted as a scheme where participating employers need not be connected. “Participating employer” is defined as any employer currently or previously participating in the scheme in accordance with the scheme rules. The additional requirements cover the number of trustees, the need for the majority of trustees including the chair to be “non-affiliated”, the appointment of trustees, and the duration of appointments of non-affiliated trustees, and also require the trustees to make arrangements to encourage members of the scheme, or their representatives, to make their views on matters relating to the scheme known to the trustees. UPDATE FROM THE REGULATOR On 12 February the Regulator published “The essential guide to governance standards and charge controls from April 2015”. It is notable that in relation to the governance standards, the essential guide states that: ■ the trustee board should take steps to ensure it is complying with governance standards well in advance of their annual report and accounts so that they are able to produce the chair’s statement when the time comes; and ■ if a scheme is already performing well against the quality features set out in the Regulator’s DC code of practice, or where trustees are taking steps to improve the scheme in light of these features, this should put them in “an excellent position to comply with the new governance standards”. In an accompanying press release, the Regulator stated that the new minimum governance standards complement its existing DC code of practice and provide a stronger foundation in law for the standards it has said it expects of trustees. It goes on to state that, in the meantime, the Regulator expects trustees to still refer to the existing DC code, which will be updated later this year to reflect the April 2015 legislative changes. 16 | PENSIONS NEWS PENSIONS NEWS OCCUPATIONAL SCHEMES – COMPLIANCE The Draft Regulations make provision in relation to compliance including the following. ■ The list of information to be registered with the Regulator will include the name of the chair, whether the trustees have prepared the annual governance statement, and whether the trustees have complied with the provisions on charges. ■ A breach of the regulations relating to administration or governance is brought within the scope of the Pensions Act 2004 measures on improvement notices. ■ Compliance Notices and Third Party Compliance Notices can be issued in relation to non-compliance with the charges provisions. ■ Penalty notices may be issued in respect of failure to comply with a compliance notice, a third party compliance notice, the charges provisions and the new governance requirements (save for the requirement in relation to service providers). The Regulator will determine the amount of the penalty but it must not exceed £5,000 in the case of an individual or £50,000 in respect of a body corporate. ■ However, in the case of a failure to prepare the annual governance statement, the Regulator must issue a penalty notice in relation to a first failure in connection with a scheme year. This penalty must be at least £500 and must not exceed £2,000. CHARGES AND GOVERNANCE – NEXT STEPS The response to consultation reports on the following next steps. ■ A joint DWP/FCA call for evidence on greater transparency of costs and charges is planned for publication in Spring 2015. The DWP and FCA will use the information gathered during 2015 with a view to a consultation on how the DWP proposes to introduce additional charges and cost transparency, and the FCA will also be consulting on similar new costs and charges transparency requirements in relation to workplace personal pensions. ■ The recent FCA consultation included draft rules to ban all member-borne advisor commission payments in qualifying schemes used for automatic enrolment from April 2016, and to ban consultancy charges from April 2015. During 2015 the DWP will consult on corresponding regulations for occupational pension We would expect that well run schemes will already comply with many of the new governance requirements but the requirement for the annual report signed by the chair evidencing this will be new and trustees will need to have the relevant information and have made the relevant assessments in order to produce this report. Trustees of affected schemes will therefore need to establish when their first report will be due and take steps to ensure that they will be able to comply with the requirements. It is also notable that in February 2014 the Regulator set out its expectation that trustees should assess schemes and produce an annual governance statement explaining the extent to which the scheme has embedded the 31 DC quality features, with the first statement to be published at the end of the 2014/15 scheme year. It is not currently clear how this expectation will interact with the new statutory requirement for annual statements and therefore it will be useful to see whether the updated code of practice addresses this point. In the meantime schemes should consider what steps to take in relation to the Regulator’s expectations. If you would like any further information or training on the new governance standards please get in touch with your usual DLA Piper pensions contact. 17 | PENSIONS NEWS PENSIONS NEWS schemes used as qualifying schemes for automatic enrolment. The DWP will also consider whether these regulations should be designed in such a way as to prevent the development of consultancy-style charges in occupational schemes in future. ■ In 2017 the Government and regulators will conduct a post-implementation review of all the measures in this package. In particular, the review will consider the level of the charge cap and whether this remains appropriate and whether to include some or all transaction costs within the cap. INDEPENDENT GOVERNANCE COMMITTEES Background In the Government response to consultation on DC charges and governance for occupational pension schemes it was reported that the FCA will be making corresponding rules in relation to charges and introducing Independent Governance Committees (IGCs) for workplace personal pension schemes from April 2015. The FCA had consulted on rules for IGCs in August 2014 and on 4 February it published the final rules. The FCA states that it has been working with the DWP and the Regulator on consistent minimum quality standards for workplace pension schemes and that its new rules and the DWP’s Draft Regulations are aligned to ensure similar expectations for contract-based workplace pension schemes and occupational schemes. The final rules The final rules will come into force on 6 April 2015 and will require providers of workplace personal pension schemes to set up and maintain IGCs. The FCA explains that the IGCs will: ■ have a duty to act in the interests of scheme members; ■ operate independently of the firm; and ■ assess and, where necessary, raise concerns about the value for money of workplace personal pension schemes. Points of note in the rules include the following. ■ There are certain requirements which a firm must include, as a minimum, in its terms of reference for an IGC. For example, it must provide that the IGC will: act solely in the interests of relevant policyholders; assess the ongoing value for money for relevant policyholders; and raise any concerns in relation to value for money with the firm’s governing body. The terms must also provide that the Chair of the IGC will be responsible for the production of an annual report setting out specified matters. ■ If, having raised concerns with the firm’s governing body about the value for money offered to relevant policyholders by a relevant scheme, the IGC is not satisfied with the response of the firm’s governing body, the IGC Chair may escalate concerns to the FCA if the IGC thinks that would be appropriate. The IGC may also alert relevant policyholders and employers and make its concerns public. ■ The rules also address appointment of IGC members (including a requirement that a firm must appoint members to the IGC so that it consists of at least five members, including an independent Chair and a majority of independent members); assessing independence; and the duties of firms in relation to an IGC. It is also worth noting that provision is made so that if a firm considers it appropriate, having regard to the size, nature and complexity of the relevant schemes it operates, it may establish a Governance Advisory Arrangement instead of an IGC. 18 | PENSIONS NEWS DEPARTMENT FOR WORK AND PENSIONS PENSIONS NEWS CONSULTATION ON AMENDMENTS TO THE INVESTMENT REGULATIONS Background On 1 July 2014 the Law Commission published “Fiduciary Duties of Investment Intermediaries” which was part of a project that it was asked to complete to give effect to a recommendation of the Kay Review. The Law Commission looked at the legal obligations arising from fiduciary duties in relation to investments and the considerations it is appropriate for trustees and other investment intermediaries to take into account, and its report also contained a number of recommendations. In October 2014 the Department for Business Innovation & Skills published a Progress Report about the Kay Review which also contained the Government’s response to the Law Commission’s recommendations. Points made in the Government’s response included that it intends to consult at the earliest opportunity about two changes to the regulations governing investment for occupational pension schemes, and that consultation was issued by the DWP on 26 February. Consultation Social, environmental or ethical considerations The regulations currently state that the Statement of Investment Principles (SIP) should include a statement of the trustees’ policy on “the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments”. The Law Commission recommended that this should be amended to distinguish more clearly between financial and non-financial factors. The consultation also notes that the current regulations imply that there is scope for trustees not to consider what weight, if any, to attach to such factors. The DWP therefore seeks views on how the regulations should be amended in light of the recommendations, and in particular, would like views on whether trustees should be required to state their policy on: ■ how they evaluate long-term risks including from ESG (ethical or environmental, social or governance) and other factors which may be financially material to the performance over their investments; and ■ determining whether and in what circumstances it would be appropriate to make investment decisions on the basis of non-financial factors. Whilst the Government agrees with the Law Commission’s conclusion that it would not be appropriate to attempt to codify the general law of fiduciary duties through legislation, it does want to ensure that trustees are empowered to consider a range of factors when formulating their investment strategies, in line with the Law Commission’s findings. The consultation also therefore welcomes views on whether amendments to the regulations could be made in such a way as to provide appropriate clarity for trustees regarding their legal duties. Stewardship The Law Commission recommended that trustees should be encouraged to consider whether and how to engage with companies to promote their long-term success, and recommended including a specific requirement for the SIP to contain a statement of the trustees’ policy (if any) on stewardship. The Government response suggested that the requirement should mirror what is set out in the current principles and guidance requiring trustees to report against the Stewardship Code, and the consultation notes that the effect of this would be a requirement on trustees to state in their SIP: ■ that they have signed up to the Stewardship Code, or explain why they considered this was not relevant to them in discharging their investment duties; and ■ if they have signed up to the Code, how they comply with its principles, or explain to what extent and on what grounds their approach departs from these principles. The consultation therefore seeks views on whether the regulations should be amended to require trustees to state their policy with reference to the Stewardship Code. 19 | PENSIONS NEWS PENSIONS NEWS The system will target the transfer of small pension pots built up since the introduction of automatic enrolment, and pots will therefore be eligible to transfer if they meet all of the following criteria. ■ The first contributions were received on or after July 2012 (this date coincides with the beginning of automatic enrolment as it was the earliest possible staging date). ■ The pot is worth £10,000 or less at the point of valuation, although the Pensions Act 2014 requires regulations to provide that this limit should be reviewed at least every five years. ■ The pot is invested in a charge-capped default arrangement at the point of valuation. Phased implementation There will be two phases of implementation, and it is the first of these which it is intended will be in place by October 2016. Phase 1 Key characteristics of phase 1 are that the number of schemes making automatic transfers will be limited and there will be a process whereby members opt-in to the transfer. The DWP notes that the consolidated nature of the market for workplace pensions means that a high degree of market coverage can be achieved by including a Next steps The consultation closes on 24 April and the Government response will be published later in the year, with any resulting changes to secondary legislation expected to be made in 2016. The DWP also states that it would be interested in views on the steps trustees would need to take to comply with any changes to the regulations and how long would be needed to implement them. AUTOMATIC TRANSFERS On 11 February the DWP published “Automatic Transfers. A Framework for Consolidating Pension Saving” (“Framework”) which sets out the progress made in designing a model for automatically transferring workers’ small pension pots when they change employment. The Framework confirms the DWP’s intention to introduce this system from October 2016 as well as setting out some of the proposed features of the new system which include the following. Eligible pots The DWP previously announced that pension pots will automatically follow the member only between ‘pure’ money purchase benefits. However, the Framework sets out limited exceptions – relevant small schemes, executive pension schemes and schemes with only one member – where it may not be in members’ interests to be transferred out. relatively small number of pension providers. The DWP will provide further information on who is included in advance of consulting on regulations later in the year. It is proposed that there will be a defined list of schemes that will be included within the system and in order to automatically transfer a pension pot both the ceding and receiving scheme must be on this list. Phase 2 Phase 1 will be used to test the initial operation of the automatic pot flagging and matching infrastructure and when this phase is complete and as soon as is practicable, the system will move to phase 2. Phase 2 will use an opt-out model whereby the transfer will take place in the absence of the member cancelling it within a specified period. At this point the DWP will also decide whether a greater number of schemes and providers should be brought into automatic transfers at the same time as moving to the opt-out model, or whether the expansion in coverage should take place at a later stage after the opt-out model has been established. The DWP will continue to investigate the use of qualitative criteria to define the list of schemes included in automatic transfers. 20 | PENSIONS NEWS PENSIONS NEWS Further phases The DWP states that further phases could be used to extend the scope of pension pots automatically following members, and that while it anticipates that the first two phases will provide sufficient coverage to satisfy the policy intent, further improvement and expansion of the system will not be ignored. The Framework briefly explores some possible further phases such as expansion of pot eligibility. Implementation model The DWP’s preferred implementation model is a ‘federated model’ whereby a network of interoperable registers will store and match information about eligible small pots. This model is noted to reduce concerns over a single point of failure and a single point of data storage, and to allow for registers to operate in different ways according to the different needs of sections of the pension market. Schemes can decide whether to do this on their own platforms or contract with third parties to provide this functionality. The register-to-register interaction will be standardised, and every register in the network must be able to communicate information with all other registers in the network. The registers will be required to meet a defined set of Open Standards around how they hold, send and deal with data, and these standards will be published to ensure it is clear what is required. Key stages in the process The document identifies the following four key stages in the process, with an Annex which sets out a step by step description of the actions schemes will take to process pension pot information. ■ Pot flagging – schemes will have to identify that a member has left the scheme and has an eligible dormant pot. Where an eligible pot is identified, the scheme will communicate specified information such as first initial and surname, date of birth, NI number, and employer name about this pot to their chosen register. ■ Pot matching – when a new member joins a workplace pension scheme, that scheme will search for eligible pots associated with the member which have been flagged by previous schemes. A positive match will be made if a pot is found on a register that matches date of birth, NI number, and at least two of initial, surname and gender. ■ Contacting the member – If the pot matching exercise produces a positive result, the scheme that initiated the search will contact the member to let them know. In phase 1 (opt in), the communication will be used to ask the member whether they would like the transfer to go ahead. In phase 2 (opt out) the member will be informed that the transfer will take place unless the member chooses to cancel it. ■ Pot transfer – once pots have been matched and the member has had the opportunity to confirm the transfer, the receiving scheme will contact the ceding scheme to request transfer of the member’s pot. At the point of transfer, the DWP thinks that time is critical because it wants to minimise out of market risk, and that these transfers should take place within a matter of days not months. Next steps The next step is for the DWP to develop legislation for the federated model, although it does not intend to regulate for every detail set out in the Framework but rather it intends to create an appropriate legislative framework for schemes to operate within. 21 | PENSIONS NEWS PENSIONS NEWS The DWP notes that the Pensions Act 2014 includes powers to create a compliance regime, and that many regulatory bodies may have links to the system, so to consider the next steps in isolation of these factors would not provide the necessary joined up approach. The DWP will continue to work with the industry and all other interested parties and will confirm its approach as early as possible, which it expects to be in advance of consulting on draft legislation to implement the system later in 2015. The introduction of the system of automatic transfers is another significant upcoming development for pension schemes and it is useful to have some indication of what pots it is proposed will be caught by the system and how it will operate. It will be interesting to see the further details to come later this year about what schemes will be caught by phase 1 of the introduction of the system, as well as the consultation on the draft legislation. 22 | PENSIONS NEWS PENSIONS NEWS LEGISLATION PENSIONS ACT 2014 – COMMENCEMENT The Pensions Act 2014 (Commencement No. 4) Order 2015 was made on 4 February 2015 which includes the following. ■ Various provisions relating to State Pension are brought into force on 5 February 2015 for the purposes of making regulations. Subsequently the State Pension Regulations 2015 were made on 9 February 2015 and come into force on 6 April 2016. These regulations cover issues such as: the minimum number of years of National Insurance contributions or credits a person will need to qualify for any new State Pension; the rate at which a person who defers claiming their new State Pension will accrue an increase to their new State Pension when they finally claim it; transitional provisions enabling a person in the new State Pension scheme to inherit a deferral payment where their deceased spouse or civil partner had deferred an old state pension; and the sharing of state scheme rights following divorce or dissolution of a civil partnership, as a consequence of new arrangements for State Pension sharing. ■ The provisions about the employer’s power to make scheme amendments to offset the additional National Insurance costs that will arise when contracting-out ends were brought into force on 23 February 2015, with further detail to follow in regulations. ■ Section 36 which relates to the abolition of short service refunds for money purchase benefits will come into force on 1 October 2015. Included within this Commencement Order are two significant upcoming developments in relation to pensions – the statutory override in relation to the end of contracting-out, and the abolition of short service refunds for money purchase benefits. We will report further in relation to the statutory override and the end of contracting-out in the March edition of Pensions News, and in the coming months will also report on the steps that schemes need to consider in relation to the abolition of short service refunds. PPF ADMINISTRATION LEVY Following its November 2014 consultation which proposed changes to the PPF administration levy for each of the three years 2015/16 to 2017/18, in February the DWP published the Government response to consultation and the final form of the regulations was also made. The response reports that, given the supporting nature of most of the consultation comments, the Government has decided to proceed with its proposed approach that the PPF administration levy will increase by 15% in each of the three years 2015/16, 2016/17 and 2017/18. PPF LEVY CEILING The Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling) Order 2015 was laid before Parliament in February. This Order increases the levy ceiling, which is used by the PPF and controls the maximum amount of levy that it can charge pension schemes. The Explanatory Memorandum to the Order reports that: the increase ensures that rises in average earnings are taken into account in the value of the levy ceiling, so that it maintains its value; the Order specifies that the increase in the general level of earnings for the year ending on 31 July 2014 is 0.6% over the previous year; and the amount of the levy ceiling for the financial year beginning on 1 April 2015 is therefore £947,610,293 (that is, the current levy ceiling of £941,958,542 increased by 0.6%). The Explanatory Memorandum also states that the current order increased the level of the PPF compensation cap, but a review by the Secretary of State of the change in the general level of earnings in the 2013/14 tax year found that this had decreased by 1.2%, and therefore the current compensation cap will not be increased. NEST RESTRICTIONS In October 2014 the DWP published a technical consultation on two draft statutory instruments – the National Employment Savings Trust (Amendment) Order 2015 (“Order”) and the Transfer Values (Disapplication) (Revocation) Regulations 2015 (“Regulations”) – seeking 23 | PENSIONS NEWS PENSIONS NEWS views on whether they achieve the policy intention of removing NEST’s annual contribution limit and transfer restrictions from 1 April 2017. In December 2014 the DWP published the Government response to the consultation which concluded that the proposed statutory instruments achieve the policy aim, and the Order was laid before Parliament. On 9 February 2015, the Order was made, and it comes into force on 1 April 2017. The Explanatory Memorandum to the Order explains that the Regulations will revoke the Transfer Values (Disapplication) Regulations 2010 and reinstate a member’s statutory right to transfer their pension funds out of NEST to another pension scheme (rather than the limited circumstances in which this right applies at the moment to members of NEST), and are subject to the negative resolution procedure and will be made and laid before Parliament in early 2015. The DWP has previously stated that it retains the option to remove the individual transfer restrictions to coincide with the introduction of automatic transfers of small pension pots, although this is not included in the Order or draft Regulations at this stage. BANKING REFORM REGULATIONS – RESPONSE TO CONSULTATION Background In the January 2015 edition of Pensions News we reported that, following a July 2014 consultation, draft regulations had been laid before Parliament to give effect to the recommendation of the Independent Commission on Banking that ring-fenced banks should not have liabilities to group-wide pension schemes, but that at that stage the response to consultation had not been published. Response document The response was published on 17 February. It reports on the two main changes made to the regulations as a result of the consultation which are: ■ the introduction of a materiality threshold in relation to when an application for clearance needs to be made; and ■ the removal of a requirement for trustees to provide certain information to members where modifications are being proposed in relation to the existing scheme. Another point of note in the response is that, whilst not an issue raised in the consultation, some respondents pointed out that the legislation as drafted could result in individuals with transitional tax protections (such as a protected pension age, protected lump sum rights, or lifetime allowance protection) being disadvantaged by the process of restructuring schemes. The response reports that, given current uncertainties about how individuals could be affected and the commercial choices banks will want to make to separate schemes, the Government has not addressed this issue in these regulations. However, the Government commits to addressing any transitional tax protection issues once it has a greater understanding of the route banks will take to implement the ring fence and the nature of any detrimental impact on individuals. 24 | PENSIONS NEWS PENSIONS NEWS PUBLIC SERVICE PENSION SCHEMES CONSULTATION ON REGULATOR’S ENFORCEMENT STRATEGY Background As part of the reform of public service schemes under the Public Service Pensions Act 2013, from April 2015 the Pensions Regulator will set standards of practice in order to help the schemes meet governance and administration requirements. In light of this new role for the Regulator, in February it published a consultation on a compliance and enforcement policy which presents its proposed approach to compliance and enforcement in relation to public service pension schemes, which are those principally covering civil servants, the judiciary, local government workers, teachers, health service workers, fire and rescue workers, members of police forces and the armed forces. The draft policy sits under the Regulator’s organisationwide approach to regulating work-based pensions, and its specific public service regulatory strategy published in January 2015. The draft policy In broad terms, the draft policy sets out: ■ how the Regulator identifies and assesses risk in public service schemes and how this forms the basis for its operational activity; ■ the Regulator’s approach to monitoring public service schemes through reactive and proactive sources; ■ how a public service scheme may be investigated by a case team; and ■ the enforcement options available to the Regulator and other enablement and educative interventions that may be used. Points of note in the draft policy include the following. ■ The Regulator’s expectation is that most of its activities will be focused on educating and enabling schemes to improve standards of governance and administration, particularly in the early stages of the new regulatory regime. It will focus on: – promoting the public service code of practice and educational tools for public service schemes; – surveying schemes to understand the extent to which they are meeting the standards and practices that the Regulator expects; – engaging with schemes to understand how they are addressing poor standards and non-compliance through the development and implementation of improvement plans, focusing on key risk areas; and – undertaking thematic reviews, focusing on key risk areas, to gather information in relation to a particular issue or set of issues and report back to its regulated community about best practice and risks. ■ If scheme managers or pension board members fail to address poor standards and non-compliance with the law, the Regulator may consider escalating its activities and taking enforcement action. The Regulator states that in deciding its approach and whether to take enforcement action in relation to a breach of pensions legislation, it will take into account factors such as the immediacy and materiality of the risk or issue, or the reaction of the parties involved, and will focus on the outcome that the action would provide. The draft policy also sets out a list of examples of factors that relate to deciding whether or not to take enforcement action, although the list is not exhaustive or prescriptive or weighted in any way. PENSION INCREASES On 10 February a Written Statement was made in the House of Commons and the House of Lords stating that public service pensions will be increased from 6 April 2015 by 1.2% in line with the annual increase in the Consumer Prices Index up to September 2014, except for those public service pensions which have been in payment for less than a year, which will receive a pro-rata increase. 25 | PENSIONS NEWS PENSIONS NEWS DISCLOSURE REGULATIONS Following its November 2014 consultation, on amendments to the Disclosure Regulations the DWP published the Government response on 12 February reporting that responses were generally supportive of the proposed draft regulations. The amendments to be made will: ■ ensure that the exemption from certain disclosure requirements for prescribed public service schemes will apply to any future local government scheme made under the Public Service Pensions Act 2013; ■ update a statutory reference for one of the public service schemes; and ■ remove duplication between the Disclosure Regulations and the Public Service Pensions (Information about Benefits) Directions 2014 so that public service schemes will not need to provide an additional benefit statement on request under the Disclosure Regulations where the member has already been given a Benefit Information Statement in the previous 12 months. In terms of next steps, the DWP notes that, in addition to the amendments proposed in this consultation, separate amendments are being made to the Disclosure Regulations in relation to the Budget reforms. As both sets of amendments will come into force on the same day, the DWP states that its current intention is that, for the sake of legislative tidiness, they will be made by a single, consolidated statutory instrument. These amendments are therefore included in the draft regulations reported in the Budget Reforms section of this newsletter. CONSEQUENTIAL PROVISIONS In December a number of sets of draft consequential regulations were laid before Parliament which relate to the reform of public service schemes including sets of regulations in relation to the teachers’ pension schemes, the NHS pension schemes and the schemes for civil servants. These regulations were made by Parliament in February and the majority of provisions come into force on 1 April 2015. The regulations modify the effect of other statutory provisions in their application to these schemes, with areas covered by the draft regulations including the following. ■ Contracting-out for the period from 1 April 2015 to 5 April 2016, with certain procedural requirements such as the requirement to give formal notices to earners being disapplied. ■ Amendments are made in relation to existing members who will transfer into the new schemes but retain some benefits in the old schemes, with the objective of preventing such members from becoming deferred members and triggering rights that are inconsistent with them remaining in service with the same employer in a successor pension scheme. ■ Amendments so that members will not suffer any unexpected tax consequences as a result of the way the Government has chosen to structure the ill health provisions of the new schemes. NHS PENSION SCHEME Regulations The National Health Service Pension Scheme Regulations 2015 (“Main Regulations”) were laid before Parliament on 12 February and come into force on 1 April 2015. These regulations implement the reformed pension scheme for health service workers in England and Wales under the powers provided in the Public Service Pensions Act 2013. Two other linked instruments were also laid before Parliament on 12 February 2015: ■ The National Health Service Pension Scheme (Transitional and Consequential Provisions) Regulations 2015 (“Transitional Regulations”) which come into force on 1 April 2015, and implement transitional and consequential arrangements for members of the new 2015 NHS pension scheme for England and Wales who have pension rights accrued in either the 1995 or 2008 Section of the NHS pension scheme. 26 | PENSIONS NEWS ■ The National Health Service Pension Scheme, Injury Benefits and Additional Voluntary Contributions (Amendment) Regulations 2015 which come into force on 1 April 2015 (although some provisions have retrospective effect) which implement reforms to the 1995 and 2008 Sections of the NHS pension scheme, including new contribution rates and provisions to support future contractual terms relating to redundancy retirement; enable greater flexibility for members in relation to their money purchase AVC benefits; and make a series of technical clarifications. GAD announcement On 23 February the Government Actuary’s Department (GAD) issued an “Important Announcement” noting that the Main Regulations and the Transitional Regulations had been laid before Parliament and stating that, accordingly, PENSIONS NEWS with effect from 12 February 2015, existing broad comparability certificates issued by GAD against the National Health Service Pension Scheme in England and Wales ceased to be valid for transfers of employment involving this scheme which took place on or after that date. It reports that this includes situations where contractual terms have been agreed but the transfer of staff has not yet taken place, with certificates for such transfers needing to take account of the new regulations. The Announcement goes on to state that GAD will now accept applications for broad comparability assessments against the National Health Service Pension Scheme which take into account the 2015 reforms, and provides some further information about making applications and the issue of certificates. 27 | PENSIONS NEWS OTHER NEWS HMRC NEWSLETTER – PENSION LIBERATION In February HMRC published a Pension Schemes Services Newsletter providing an update in relation to pension liberation. As well as summarising the changes already made to help combat pension liberation, the newsletter also reports on the following upcoming developments. ■ More detailed statistics on the effect of the changes HMRC has made so far will be provided in April 2015. ■ To build on the new fit and proper person declarations required at registration from April 2015 onwards, scheme administrators themselves will be required to provide HMRC with additional information and declarations online and may be asked to produce further information and documentation as a result. ■ To help prevent a scheme being set up legitimately and then changing its structure to become a scheme that is more likely to be the target of pension liberation, from April 2015 the information that must be provided to HMRC when a scheme changes its structure or range of number of members is changing. ■ In a section on pension flexibility and pension scams, HMRC states that it wants savers to make the right decisions about investments and to understand the consequences of not seeking proper advice, and that whilst the action HMRC is taking to prevent pension scams goes some way to help protect pension savings, the responsibility for getting the right advice lies with the pension scheme member. It goes on to state that more detailed guidance for members will be published on the gov.uk website over the next few months and in the meantime members can read about and sign up for the Pension Wise service. PENSIONS OMBUDSMAN On 13 February the DWP issued a press release announcing that Anthony Arter has been appointed Pensions Ombudsman and PPF Ombudsman and will take up his post from 25 May 2015 for a four year term. Tony King will stand down on 22 May 2015 and an update from the Pensions Ombudsman Service states that there will be a handover period to give as much continuity as possible. PPF LEVY FAQS On 20 February the PPF published some new Frequently Asked Questions in relation to the levy. The questions cover issues including the following. ■ Asset-backed contributions which looks at questions such as: how the insolvency value of an ABC is calculated; the form that the duty of care to the PPF from the ABC valuer should take; what the legal advice required for ABC valuations should cover; whether credit can be claimed for an ABC arrangement established after the date of the latest Scheme Accounts; whether schemes that do not want to certify an ABC Value can still claim credit for ABC payments; and why no credit is given where ABC arrangements are self-funded and have not been included in a section 179 valuation. ■ Last-man standing schemes which looks at what legal advice is required (essentially advice will be needed from an “appropriate solicitor” confirming that, in his or her opinion, the scheme’s rules do not contain any requirement or discretion for trustees to segregate assets on cessation of participation of an employer), and the process for providing confirmation that the trustees have received the necessary legal advice (which involves the Pensions Regulator requesting confirmation by e-mail which contains a link to an online form hosted on the PPF’s website, with the trustees having to submit the form by 29 May 2015). ■ Mortgage certification – this relates to the fact that certain types of mortgage will be disregarded when calculating an employer’s score as they are not necessarily predictive of insolvency risk, with questions relating to the process of certification. PENSIONS NEWS 28 | PENSIONS NEWS PENSIONS NEWS ON THE HORIZON ■ Equalisation for GMPs. It had previously been expected that guidance on conversion of GMPs would be published in spring 2014 but, as at the end of February, this had not been published. An HMRC Bulletin on the end of contracting-out issued in July 2014 reported that the DWP understands that schemes are waiting for GMP conversion guidance but it thinks it is important to develop fully considered proposals, and guidance will be published when this critical work is completed. ■ DB to DC transfers. The Regulator’s consultation on guidance on DB to DC transfers closes on 17 March and following this it intends to prepare a response with a view to publishing the final documents as soon as possible. Looking ahead, the Regulator intends to review the guidance in 2016 in light of experience. ■ DC reform guidance. The Regulator intends to publish guides on DC reform (the Budget changes, governance standards and charges) in the New Year. Following the publication of the FCA’s rules on additional protection, the Regulator will also publish complementary guidance for trustees which will provide clarity on the new requirements to signpost pensions guidance and set out the Regulator’s expectations in relation to the provision of information to members on the generic risks of the decumulation options. ■ Public service schemes. The Regulator’s Code of Practice for public service pension schemes is expected to take effect in March 2015. ■ Solvency. Following its consultation on further work on solvency of IORPs (which closed on 13 January 2015), EIOPA will consider the feedback received and expects to publish draft technical specifications by early 2015 for a quantitative impact assessment. Following this assessment, EIOPA will develop technical advice to the European Commission on EU solvency rules. ■ Automatic enrolment technical amendments. A consultation on technical amendments to the automatic enrolment legislation, including the introduction of exceptions was published in December 2014. It is intended that the regulations will come into force in April 2015. ■ Guidance guarantee – levy. The FCA’s second consultation in relation to the levy for the guidance guarantee closed on 2 February 2015, and the FCA intends to publish feedback on the responses and the final rules in March 2015. ■ Guidance guarantee. In November the FCA published a Policy Statement and near final standards for guidance providers and rules for providers to signpost the guidance service to customers. The final form of the standards and rules will be published after the Pension Schemes Bill receives Royal Assent. ■ The end of contracting-out. It is expected that the regulations in relation to the power for employers to increase employee contributions or alter future accrual to offset increased national insurance contributions will be published in early Spring. The regulations in relation to how to administer accrued contracted-out rights will be published as soon as possible after the General Election on 7 May. ■ DC regulation. The Regulator expects trustees of occupational pension schemes to assess the extent to which their scheme complies with the DC quality features and publish a governance statement in relation to this assessment at the end of the 2014/15 scheme year. ■ DC scheme quality and charges. Statutory quality standards for DC schemes and a cap on charges for default funds in qualifying schemes will come into effect on 6 April 2015. ■ DC reform. The far-reaching DC reforms announced in the Budget will come into force on 6 April 2015. ■ Automatic enrolment thresholds. New automatic enrolment earnings thresholds for 2015/16 come into force on 6 April 2015. ■ SMPIs. Updated guidance in relation to Statutory Money Purchase Illustrations that was issued in December 2014 will apply to illustrations issued on or after 6 April 2015. ■ Investment regulations. A consultation in relation to some amendments to the investment regulations following recommendations made by the Law 29 | PENSIONS NEWS PENSIONS NEWS Commission in July 2014 closes in April 2015. It is expected that any changes to the legislation arising from the consultation would be made in 2016. ■ Pension liberation. The Pensions Ombudsman Service has reported that they are currently considering a case in which a member is arguing that their scheme should have blocked a transfer request. The determination is expected to be issued in the first half of 2015. ■ Review of survivor benefits. The review of different treatment of survivor benefits under occupational pension schemes required to be completed under the Marriage (Same Sex Couples) Act 2013 has been published, although no date has been given for when the Secretary of State will announce whether or not any amendments will be made to the legislation. The Employment Appeal Tribunal’s judgment in the Walker v Innospec case concerning the restrictions placed on benefits payable to civil partners is the subject of an appeal to the Court of Appeal, with a hearing due to take place in summer 2015. ■ Review of consumer price statistics. Following the report of an independent review, a public consultation on the consumer price statistics is expected to be published in summer 2015 with the response to follow later in the year. ■ Transparency of DC charges. The April 2015 measures on charges include some reporting requirements in relation to charges and transaction costs. The DWP intends to build on this in 2015 with a consultation on regulations to introduce further transparency in 2016. ■ Short service refunds. Short service refunds will be withdrawn from money purchase schemes from 1 October 2015. ■ DC charges. From April 2016, it is proposed that member-borne commission payments and Active Member Discounts will be banned from DC qualifying schemes. ■ End of contracting-out. The reform of state pension which will result in the end of contracting-out is due to take effect in April 2016. ■ Defined ambition. It is expected that the provisions of the Pension Schemes Bill on Defined Ambition and collective schemes will be available in time for the end of contracting-out in April 2016. ■ Automatic transfers. The system of automatic transfers is intended to be launched in October 2016. Following the publication of a framework document in February, further detail and a consultation are expected to be published later in 2015. ■ IORP II. The draft updated IORP Directive published in March 2014 proposed that Member States would have to transpose the new IORP Directive into national law by 31 December 2016. An updated draft published in September 2014 deleted this date and did not replace it with a new date. A further draft published in December 2014 stated that Member States would have two years after the entry into force of the Directive to transpose it into national law. ■ DC charges. In 2017 it is proposed that the measures on DC charges and governance standards will be reviewed, in particular, the level of the charge cap and the question of whether any transaction costs should be included in the cap. 30 | PENSIONS NEWS PENSIONS NEWS CONTACT DETAILS Cathryn Everest Professional Support Lawyer, London T +44 (0)20 7153 7116 [email protected] David Wright Partner, Liverpool T +44 (0)151 237 4731 [email protected] Claire Bell Partner, Manchester T +44 (0)161 235 4551 [email protected] Tamara Calvert Partner, London T +44 (0)20 7796 6702 [email protected] Michael Cowley Partner, London T +44 (0)20 7796 6565 [email protected] David Farmer Partner, London T +44 (0)20 7796 6579 [email protected] Jeremy Harris Partner, Manchester T +44 (0)161 235 4222 [email protected] Vikki Massarano Partner, Leeds T +44 (0)113 369 2525 [email protected] Ben Miller Partner, Liverpool T +44 (0)151 237 4749 [email protected] Kate Payne Partner, Leeds T +44 (0)113 369 2635 [email protected] Matthew Swynnerton Partner, London T +44 (0)20 7796 6143 [email protected] www.dlapiper.com This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended and should not be used as a substitute for taking legal advice in any specific situation. DLA Piper will accept no responsibility for any actions taken or not taken on the basis of this publication. DLA Piper uk llp is authorised and regulated by the Solicitors Regulation Authority. DLA Piper scotland llp is regulated by the Law Society of Scotland. Both are part of DLA Piper, a global law firm operating through various separate and distinct legal entities. For further information please refer to www.dlapiper.com. Copyright © 2015 DLA Piper. All rights reserved. | MAR15 | 2909587