Since the ‘snap’ general election was called in April, shockwaves have been rippling in the pensions industry. Whether they have been felt through the last minute rush of passing legislation just before parliament closed, the uncertainty caused by putting other issues ‘on ice’, or by the difficult questions being asked in the election campaign, what is clear is that companies, trustees and individuals will be keeping a close eye on developments after 8 June 2017.
We consider some of the repercussions of the general election 2017 campaign and question how the result may impact on pension schemes.
The Pensions Schemes Act 2017 and Finance Act 2017 both received Royal Assent on 27 April 2017, just before parliament was brought to a close.
Pension Schemes Act 2017
The headline feature of the Pensions Schemes Act 2017 is the formation, authorisation and supervision regime for master trusts:
- master trusts will be required to seek authorisation from the Pensions Regulator (tPR), who will in turn maintain and publish a list of authorised master trusts;
- persons involved in a master trust must meet a fit and proper persons test;
- tPR must decide whether a master trust scheme is financially sustainable; and
- greater supervision by way of requirements for the submission of annual accounts and periodic supervisory returns and a requirement to notify tPR of significant events.
The Pensions Regulator is equipped with powers to issue a fixed or escalating penalty if information is not provided when requested and may decide to withdraw the scheme’s authorisation if it is satisfied that the scheme no longer meets the authorisation criteria.
Finance Act 2017
A shortened version of the Finance Bill 2017 snuck through and received Royal Assent on 27 April 2017. Significantly, however, two proposed areas of pensions tax legislation, could not be agreed before the snap election announcement and therefore do not feature in the Finance Act 2017. These proposed changes would have resulted in:
- a reduction in the money purchase annual allowance from £10,000 to £4,000 from 6 April 2017; and
- a rise in the income tax exemption for employer-arranged pension advice from 6 April 2017, from £150 to £500.
Whether the proposed changes will feature in future legislation remains unclear and will depend on whether the successful government wishes to pursue them.
Consultations, reviews and difficult decisions
Pension-related topics have taken a front row seat in the campaigning. Whether this is connected to the regulation of defined benefit schemes (perhaps on the back of the BHS pension scheme collapse), or changes to the state pension or reviews into the policy of auto-enrolling workers on mass, it would appear that all the political parties are courting voters with plans for their pensions.
The state pension age
One of the hotly contested issues of the election is whether the state pension age should be increased or not.
John Cridland's independent review of the state pension age recommended that the state pension age should be increased from 67 to 68 by 2039. This is a controversial topic, with the Labour party indicating that they will reject plans to increase state pension age above 66 years and will commission a new review of the pension age, specifically tasked with developing a flexible retirement policy to reflect both the contributions made by people, the wide variations in life expectancy, and the different nature of working lives.
Whilst raising state pension age will never be a vote winner, particularly for the younger voters who will be most hard hit, it is a difficult problem that will need to be addressed by the incoming government. When plans are announced, the public and the industry alike will expect hard facts and figures to support whatever plans they propose.
Greater powers for the Pensions Regulator
The DWP’s consultation on its green paper, security and sustainability in defined benefit pension schemes, closed to responses on 14 May 2017.
The green paper came off the back of the Work and Pensions Committee report, which recommended that the tPR adopt a tougher approach to overseeing and intervening in pension schemes, including the requirement for advance clearance from tPR for certain corporate transactions and punitive fines to act as a ‘nuclear deterrent’.
Whether or not tPR will be equipped with more ‘teeth’ is yet to be seen. On the one hand the Government appeared unwilling to adopt the tougher line recommended by the select committee; however, the Conservative manifesto promises new powers to be given to the Pensions Regulator to issue ‘punitive’ fines for those found to have ‘wilfully left a pension scheme under-resourced’. There are also calls for tougher rules to protect employees’ pensions from ‘unsustainable dividends and takeovers’, suggesting the tPR could be given greater powers with regards to clearance.
Beyond tPR, the Conservative manifesto also proposes a controversial new criminal offence for company directors who ‘deliberately or recklessly put at risk’ a pension scheme’s ability to meet its obligations. Questions are already being asked about how ‘recklessly’ will be defined and whether this offence would inadvertently result in poor outcomes for the management of pension schemes, suggesting that this proposal would face fierce opposition before it became law.
Basic state pension ‘triple lock’
The triple lock idea stems back to the June budget of 2010 under the coalition government. It provides for a state pension to rise by the highest of the rise in average UK earnings, the rise in inflation (measured by the Consumer Prices Index) and 2.5%.
Its long-term future is uncertain and has been the subject of fierce political debate in the election campaign. Critics argue that it has cost more than expected, is unsustainable in the long term and should be scrapped. Those in favour of the triple lock contend that it should be retained to protect the future generations who will be more adversely affected if it is scrapped.
Labour and the Liberal Democrats have committed to keep it. Meanwhile the Conservative party has promised to maintain the triple lock until 2020 but, when it expires, it will introduce a double lock whereby pensions will rise in line with the highest of either inflation or earnings. The outcome is therefore very much dependent on the outcome of the election.
Review of auto-enrolment
The Government's automatic enrolment review was due to report to Parliament ‘during 2017’. Given that this is driven by the current government, its future is dependent on the outcome of the general election.
Whilst the uptake for auto-enrolment may have been high so far, whether that remains the case once the higher contribution rates come into force next year remains to be seen.
It is also unclear whether smaller and micro-employers, who have just hit or are about to hit their staging dates, fully understand their requirements. The latest tPR report suggests that whilst awareness of auto-enrolment is high, only 65% of small employers and 56% of micro-employers were recorded as fully understanding their responsibilities, including the requirement to submit a declaration of compliance. This suggests that there is still much work to be done in terms of mass enrolment into pension schemes.