New DB funding code
The Pensions Regulator (the Regulator) published a draft new DB funding Code of Practice in December, which is essential reading for all trustees and employers. Although the new code is expected to apply only to valuations completed after June, the Regulator is urging trustees with valuations due to be completed before then to have regard to the new code.
The new code reflects the Regulator's new statutory objective of minimising the impact of funding arrangements on the sustainable business growth of scheme employers. Its guiding principles emphasise the need for trustees and employers to work together in an open and transparent way that strikes the right balance between the needs of the scheme and the employer's business. It also stresses the need for trustees to adopt a holistic approach to assessing and putting in place contingency plans relating to employer covenant, investment and funding risks. The code includes a new Balanced Funding Outcome (BFO) model which the Regulator will use to target schemes for regulatory intervention.
The Regulator spent much of 2013 focusing on DC scheme governance. Trustees and employers involved with DC funds should be looking carefully at governance arrangements, in particular the issues of fund suitability and performance and value for money. An area which is also coming increasingly under the spotlight is how members can be helped with turning their funds into a good value retirement income.
Banks and bank scheme trustees will be eagerly awaiting the publication of regulations setting out the Government's proposals for dealing with pension schemes which are impacted by the ring-fencing of banking services. The principle that a ring-fenced bank cannot be liable for the pension liabilities of a non-ring-fenced bank is already established but the mechanics of splitting pension liabilities remain to be determined.
Schemes that employ both English and Scottish based employees will have an eye to the result of the Independence Referendum on 18 September. A yes vote will cause affected schemes to become cross-border schemes, which are subject to more demanding funding requirements. It will also increase administrative costs for employers who have to comply with two pensions regulatory systems.
Money purchase benefits
After several years of head-scratching, the Government will be issuing new regulations on what benefits are money purchase benefits. Trustees will need to review member benefits carefully to check how they are affected by the new regulations.
The roll-out of auto-enrolment continues with employers of 499 to 59 workers having to auto-enrol their employees into a pension scheme during 2014. The large number of employers involved may result in a pension provider and adviser capacity crunch and employers should be starting on scheme design, provider selection and testing of systems at least six months before their staging date.
Employers who have already auto-enrolled will need to continue to auto-enrol new hires and will need to keep an eye out for whether they are affected by a possible retrospective ban on paying auto-enrolment set up costs from member accounts on which a decision is expected shortly.
Despite some helpful moves by the Regulator and HMRC, pensions liberation (and, in some cases, simple fraud) continues to be a threat to members' pensions savings and something trustees will need to watch carefully. The Pensions Ombudsman is expected shortly to make a decision on where trustees stand if they have refused to make a pension transfer because of concerns that the receiving scheme intends to make unauthorised payments or defraud a member. All trustees should be making use HMRC's new registration checking system.
Schemes with overseas employers
June's Olympic Airlines ruling means that, currently, members of schemes sponsored only by overseas employers with no UK trading business are not entitled to PPF protection. It is to be hoped that 2014 will see the Government close this loophole. In the meantime, affected trustees should be keeping a close eye on whether they need to put any protection in place for members, such as security over assets or a guarantee.
PPF benefit limits for members with 20+ years' pensionable service are being increased. Trustees will need to factor this change into PPF funding valuations and PPF levy assessments. The increased cap will have the most effect on schemes with a large proportion of long-serving deferred members with pensions that exceed the current cap (approximately £31,000).
Lifetime and annual allowances
The new tax year will see the lifetime allowance reduce to £1.25 million (from £1.5 million). The annual allowance will reduce to £40,000 (from £50,000). For schemes still open to accrual this increases the chance of members being subject to an annual allowance charge and the need for schemes to put procedures in place to pay and recover this charge. Employers and trustees should think about informing members of the steps available to protect funds exceeding the new lifetime allowance.
Contribution refunds and small accounts
The ability of occupational pension schemes members to take a refund of their contributions where they opt out of a scheme within two years is being removed to bring them in line with the personal pension scheme system. A system for automatically transferring small pension accounts to the scheme of a member's new employer (known as "pot follows member") looks likely to be finalised during the year.
The first same-sex marriages are expected to take place later this year. As with civil partnerships, survivors' benefits will initially only need to be paid on benefits built up after 5 December 2005. However, the Government is to review and may remove this limit. If this happens, trustees will need to consider whether their scheme's rules need to be changed. A change is unlikely to have a material impact on most schemes' funding positions given assumptions about the number of members who are married.
New disclosure regulations apply from 6 April. The new regulations are mainly intended to be more user-friendly than the current regulations and harmonise disclosure timescales for personal and occupational schemes. However, some new requirements apply to schemes with lifestyle funds and there is more flexibility on annuity assumptions used for statutory money purchase illustrations. Trustees should be ensuring their systems comply with the new requirements.
Contracting-out for occupational pension schemes is due to end in April 2016. Because this will increase the cost of future accrual under DB schemes, employers are to be allowed to make compensatory changes to their scheme. Employers may wish to start thinking about what changes they would like to make.
The ATP case on VAT on management charges is due to be decided by the Court of Justice of the EU early in 2014. If the court follows the Advocate General's opinion that no VAT is payable on these charges, DC schemes may see material VAT savings.
IORP II will usher in new governance, disclosure and transparency requirements. UK schemes already have to comply with most requirements so it is unlikely that schemes will need to make significant administrative changes.
Public sector outsourcing
Employers involved in public sector outsourcing will need to get to grips with new requirements dealing with pension provision for staff transferring from the public sector. In general, the new system should be simpler, with employees transferred under new contracts remaining members of their public sector scheme.
Also, on 1 April, the new career average based LGPS will come into existence, which should reduce the costs of meeting the pensions obligations associated with outsourcing contracts.
Finally, the Government is likely to progress its thinking on a new regulatory framework for defined ambition schemes. Larger employers may wish review their pensions policy in light of extra flexibility on benefit design.