2015 was a year of major change for UK pensions with the introduction of the new pension freedoms, the continued roll-out of automatic enrolment and new DC governance requirements. It also saw many DB plans and sponsors put in place a long-term, integrated funding and investment plan whilst at the same time looking for de-risking opportunities.
2016 promises to be another significant year, in which we could see the future design and shape of UK pensions fundamentally changed. So, what are the key issues to look out for in 2016?
1. Pensions tax review
If you haven’t done so already, mark 16 March 2016 in your diary, as this is the date on which the Chancellor has said he will announce the outcome of the Government’s consultation on reforming the system of pensions tax relief in the UK. What the Government will do is probably the biggest question for pensions in 2016, and it is one that could shape the future of pensions in the UK for decades to come. Options range from turning the current system on its head by moving to a “Taxed Exempt Exempt” (TEE) system, like ISAs, to less radical, but still significant changes, such as a switch to fixed rate tax relief. For more information, click here.
The Treasury has also said that it is reviewing the use of salary sacrifice arrangements by employers, so this will be another point to watch out for in the 2016 Budget.
2. Tapered annual allowance and reduction in lifetime allowance
From 6 April 2016, the annual allowance will be reduced for many people with taxable income over £150,000 a year. For those with taxable income over £210,000 a year, the annual allowance could fall to as little as £10,000. In advance of this, employers need to assess which of their staff may be affected and decide whether to limit pension contributions and/or re-shape the benefits they pay to higher earners. Any changes then need to be implemented and communicated to affected staff.
On 12 January 2016, we are hosting a webinar on the HR implications of the new tapered annual allowance – to register, click here.
The lifetime allowance will also reduce from £1.25 million to £1 million from 6 April 2016, though transitional protection will be introduced for individuals with pensions worth (or expected to be worth) over £1 million. Registering for protection will be online only with more detail expected inJuly.
3. End of DB contracting-out
Contracting-out for defined benefit plans will end from 6 April 2016 as a result of the introduction of the new single-tier state pension (see below). There is a statutory override designed to allow most private sector employers to offset the cost of additional National Insurance Contributions. It is likely to take some time to decide on and implement changes to plan rules using the override (with a 60 day member consultation exercise being required in many cases). So, employers that wish to make use of the statutory override by 6 April 2016 need to take immediate action. For further information, click here.
4. Value for money
For the first time this year, trustees of plans with money purchase benefits will need to assess and report on the extent to which member-borne costs and charges under their plan represent “good value” for members. Independent Governance Committees (IGCs) are also required to assess and report on the extent to which member-borne costs and charges under workplace personal pension plans represent “value for money”. The first reports from trustees are expected in February 2016and the first IGC reports are due by April 2016.
5. New governance requirements for plans with money purchase benefits
As well as assessing value, trustees of plans with money purchase benefits are also now required to comply with several other new governance requirements that came into force last year. Trustees will be required to report for the first time this year on their compliance with these requirements. This report needs to be included in a plan’s annual report and accounts where this relates to a plan year ending on or after 6 July 2015. For more information, click here.
The Pensions Regulator also continues its focus on governance in relation to money purchase benefits. Its new draft code of practice for plans with money purchase benefits is open for consultation until 29 January 2016, and the final code is expected to come into force in summer 2016. The draft code raises the bar on governance for plans with money purchase benefits and explains how the Regulator expects trustees of such plans to fulfil their new legal duties. In April, the Regulator has said it will consult on a series of “how to” guides to supplement the new code.
6. New single tier state pension
From 6 April 2016, the current state pension will be replaced with a new single tier state pension. Where a plan’s benefit design is integrated with the current state pension system (for example, there is a basic state pension offset or definitions refer to the state second pension), the rules may need to be amended to reflect the changes to the state pension. Many plans have not yet considered this issue. We would urge trustees and sponsors to do so as soon as possible.
7. GMP reconciliation
Trustees wishing to use HMRC’s GMP reconciliation service must register to do so before 5 April 2016. After that, it will be too late. Trustees who do not reconcile their plan’s GMP data with that held by HMRC are at risk of paying incorrect benefits to members and adversely affecting individuals’ state pension entitlements.
8. Auto-enrolment and re-enrolment
It is now over three years since the auto-enrolment requirements were first introduced, and larger employers are approaching (and should prepare for) their first automatic re-enrolment date in 2016. In addition, the number of small employers having to auto-enrol their staff for the first time will soar as we move through 2016.
For more information on automatic re-enrolment click here.
9. PPF levy
The PPF’s strict levy deadlines for the 2016/17 levy year are set out on its website. Trustees and employers wishing to reduce their plan’s 2016/17 levy will need to take action early in 2016, especially if they wish to put in place contingent assets for the first time, or recertify existing contingent assets.
There may be added expense for some plans this year as the PPF has confirmed its intention to issue extra invoices to plans that have mistakenly claimed a levy discount in previous years due to their not meeting the PPF’s precise legal criteria to qualify as a “last man standing” scheme.
10. VAT on pension costs
HMRC has extended the transitional period before introducing its new policy on recovering VAT on pension costs to 31 December 2016. In advance of this, the existing 70:30 split approach will continue to apply. However, plan sponsors, trustees and their service providers still need to consider how they will respond to HMRC’s change of policy and implement any necessary changes before the transitional period expires. Further guidance is expected from HMRC early in 2016.
For more information, click here.
You can also register to attend our VAT and Pensions seminar in London on 18 January 2016.
Europe is likely to be a big topic of debate in 2016, with the prospect of a referendum on Britain’s EU membership later this year. As far as pensions is concerned we can also expect:
- the new IORP Directive to be finalised by the end of June 2016
- the outcome of EIOPA’s stress tests and quantitative impact study on the impact of the holistic balance sheet to be published during the first half of this year
12. Key pensions cases
Some significant pension cases are listed for appeal in 2016, including:
- Horton v Henry in very early 2016 – considering the extent to which personal pension benefits may be accessed by a trustee in bankruptcy
- Briggs v Gleeds in summer 2016 – examining the validity of execution of various deeds of amendment
- Buckinghamshire v Barnardo's in late 2016 – considering trustees’ power to switch from RPI to CPI for pension revaluation and indexation.
There are also likely to be developments in 2016 in relation to various cases on holiday pay which might have implications for pensions
Other issues to look out and prepare for in 2016 include:
- the ban on active member discounts and member-borne commission charges from April 2016
- the UK Statistics Authority’s final response to its consultation on Measuring Consumer Prices: The Options for Change, which is due to be published in the first half of 2016
- the introduction of new disclosure requirements for trustees, relating to the warnings that need to be provided to members when they are about to access money purchase benefits