As 2014 draws to a close, following a year of monumental pensions developments, we look forward to what 2015 will bring for employers and trustees alike.
Freedom of choice in pensions: the Taxation of Pensions Bill 2014/2015
In the Budget 2014, the Government outlined a raft of proposals which are set to radically alter the retirement landscape. Some minor changes (including adjustments to the limits for trivial commutation lump sums, small lump sums and capped drawdown) came into force on 27 March 2014. It has, however, been the increased flexibility to be offered from 6 April 2015 which has dominated the headlines. The Taxation of Pensions Bill 2014/15 sets out the statutory framework for these changes, with further detailed provisions to follow. The changes are not overriding and employers and trustees will need to carefully consider whether to provide the increased flexibilities as part of their scheme design. A statutory power will be introduced to assist those employers and trustees wishing to permit the new flexibilities.
To recap, currently a member with a money purchase pot can normally access his pensions savings from age 55 (or earlier if he retires on account of incapacity or if he has a protected pension age) to purchase an annuity, enter a drawdown arrangement or take a scheme pension (if the rules of the scheme permit this). From 6 April 2015 such a member will be able to access his entire money purchase pot flexibly by using “flexi-access drawdown”. Broadly this allows a member to:
- designate some, or all, of his fund as flexi-access drawdown;
- take up to 25% of this amount as a tax-free pension commencement lump sum; and
- take the remainder as uncapped withdrawals as and when he selects (which will be taxed as pension).
Another new arrangement, an uncrystallised funds pension lump sum (which is becoming known by the slightly catchier “flexible lump sum” or “FLUMP” for short), will also be available from 6 April 2015. This will allow a member to take his money purchase pot as a lump sum or a series of lump sums. The first 25% of each lump sum will be tax free, with the remainder taxable as income.
Members who take advantage of “flexi-access drawdown” or FLUMPs will have a separate annual allowance of £10,000 for money purchase savings. This will sit alongside their “normal” annual allowance of £40,000. Breaches of the new money purchase annual allowance will result in a reduction in the member’s “normal” annual allowance, as well as an annual allowance charge.
Free initial guidance will be available for members wishing to take advantage of the reforms.
Ban on short service refunds
he Government has recently announced that short service refunds from defined contribution (DC) schemes will be prohibited for members with 30 days or more pensionable service with effect from October 2015. In line with this, the Government proposes to introduce a new system to automatically transfer small pension pots using a “pot follows member” model.
Once the effective date of the change is confirmed, employers and trustees will need to amend the governing provisions of affected schemes to reflect the new statutory requirements. Trustees may also need to review and adapt their processes for earlier leavers and communications to members.
Changes to the definition of money purchase benefits and PPF eligibility
The introduction of a “new” statutory definition of money purchase benefits earlier this year has meant that some employers and trustees have found that their schemes (or, more likely, that certain elements of their schemes such as AVCs),which they previously thought were DC arrangements, are in fact defined benefit arrangements.
Schemes which have reclassified some benefits may be required to file an “out-of-cycle” section 179 valuation and submit this to the Pension Protection Fund (PPF) Board by 31 March 2015 for the purpose of assessing the scheme’s PPF levy. The PPF has said that it only requires such an out-of-cycle valuation where the result of the scheme’s latest section 179 valuation would have been “materially” different (i.e. a 10% increase in a deficit/a 10% decrease in a surplus and the change is more than £5m in absolute terms) if the amended definition of money purchase benefits had been applied.
Schemes will also have to notify the Pensions Regulator by 31 March 2015 where the scheme includes benefits that are no longer money purchase benefits but which were treated as such until 24 July 2014.
State pension reform and the end of contracting out
Although state pension reform and the cessation of contracting out on a defined benefit basis is not due to take effect until 6 April 2016, most of the preparatory work for employers and trustees will need to take place over the course of 2015.
Employers and trustees with state pension offsets built into their rules will need to consider how these will be impacted by the move to a single-tier state pension.
Employers with contracted-out schemes will need to consider whether they amend their schemes to take account of the increase in their National Insurance contributions. A statutory power has been introduced which broadly will allow employers to amend their schemes by either:
- increasing the employee contribution rate of relevant members;
- altering the future accrual of benefits in respect of them; or
- a combination of the two.
Defined ambition (shared risk) pensions
The Pension Schemes Bill 2014/15 includes a legislative framework for defined ambition pension schemes. Also known as shared risk schemes, they include what is termed a “pension promise” in relation to at least some of the retirement benefits that may be provided to each member. It is unlikely that the new legislation will come into force prior to 6 April 2016, but if employers wish to offer defined ambition benefits, initial planning will be required in 2015.
Capping of charges and governance of DC schemes
Draft regulations to implement the charges cap in relation to trust- based schemes were published by the Government in October this year. They propose that a charges cap of 0.75% will be introduced for funds under management with effect from 6 April 2015 but only for default funds of money purchase qualifying schemes used for automatic enrolment. April 2015 will also see the introduction of a ban on consultancy charges in qualifying personal pension schemes.
Minimum governance standards are also being introduced for DC workplace pension schemes from 6 April 2015. Amongst other matters, this means that trustees will have to prepare a statement (signed off by the chair of the trustees) and report to the Pensions Regulator on their compliance with the minimum governance standards and how they have met the requirements for trustee knowledge and understanding.
Public service pension reform
The Government’s reform of public sector pension provision nears completion. Provisions under the Public Service Pensions Act 2013 will come into force on 6 April 2015 which will result in the closure to future accrual of the final salary sections of the NHS Pension Scheme, Teachers Pension Scheme, Civil Service Pension Scheme, Firefighters’ Pension Scheme, Police Pension Scheme and Armed Forces Pension Scheme. Certain transitional provisions have been agreed for individuals who are close to their retirement dates. Replacement career average revalued earnings schemes will come into effect from 6 April 2015.
Any employer involved in public sector outsourcing will need to be mindful of these changes.
General election 2015
And finally, no reference to 2015 would be complete without a nod to the general election which will be held on 7 May 2015. Any new government may not resist the urge to tinker with pensions policy, meaning that 2015 may be as eventful as 2014!