In this November 2012 edition of the Pensions Bulletin, we consider revised guidance from the Pensions Regulator on dealing with GMPs on scheme wind-up, the ONS’s consultation on changes to the RPI calculation methodology, the Regulator’s consultation on its guidance on maintaining contributions in DC schemes and the PPF’s consultation on the level of and framework for calculation of its protection levies for the year 2013/14.
Revised guidance on GMP reconciliation on scheme wind-up
The Pensions Regulator has recently updated its guidance on scheme wind-ups to encourage trustees to use a £2 per week "tolerance level" when determining the correct amount of Guaranteed Minimum Pension (GMP). It is hoped that this new guidance will reduce the costs and delays involved in reconciling GMP records, minimising the need to reduce benefits and helping schemes to meet the Regulator’s target of completing the key activities involved in winding-up an occupational pension scheme within two years.
The Regulator has identified that the reconciliation of GMP records maintained by the scheme with those supplied by NISPI as one of the main issues that can delay the wind-up process and incur disproportionate expense. It is hoped that setting a £2 tolerance level at the beginning of the reconciliation process, as opposed to the previous practice of determining an appropriate tolerance level once data differences have been discovered, will address the existing difficulties.
Consultation on changes to RPI calculation methodology
The Office for National Statistics (ONS) is consulting on changing the manner in which the Retail Prices Index (RPI) is calculated with a view to removing any "unjustified differences" between the RPI and the Consumer Princes Index (CPI). The difference in question, known as the "formula effect", arises from the use of different formulae in calculating average prices where there is no information about precise expenditure.
The consultation document sets out four options, ranging from no change to the existing methodology to a full alignment of the formulae with those used to calculate the CPI. The consultation closes on 30 November 2012 and it is expected that any recommendation for change will be announced by the ONS in January 2013. Were the Bank of England to consider that any recommended change would be "materially detrimental to the interests of the holders of relevant index-linked gilt edged securities", the Chancellor’s agreement to the change would be required.
Any change would be likely to reduce the long-term rate of RPI inflation and therefore lead to a reduction in liabilities for schemes which provide for RPI revaluation and/or pension increases. It may, however, result in a corresponding reduction in the value of index linked investments. In addition, there may be deeper issues in any change for utility companies’ pricing structures, commercial property asset rents and PFI related structures and infrastructure vehicles which have liabilities or cashflows explicitly linked to the RPI and in which schemes may have invested.
The Pensions Regulator’s consultation on monitoring contributions to DC schemes
The Pensions Regulator has published a consultation paper proposing amendments to its existing codes of practice on contributions to occupational defined contribution (DC) schemes and to personal pensions, together with new accompanying guidance notes.
While the existing codes of practice focus on the reporting by trustees and pension providers of late payments of contributions, the proposed amendments would shift the focus to maintaining contributions and encourage trustees and providers to play a more active role in the monitoring of contributions. The amendments will emphasise that without proper monitoring, trustees and providers cannot know whether an amount due has been received and therefore fulfil their legal duties in respect of late payments. New provisions on providing members with the information they need to enable the member to monitor their own contributions are also proposed.
In anticipation of a significantly increased volume of reports arising from the introduction of employers’ auto-enrolment duties, the paper also proposes changing the circumstances which will trigger a report. At present, trustees and managers have a duty to report material failures to pay where contributions have been outstanding for more than 90 days. This will be replaced with an obligation to report where there is reasonable cause to believe that the employer is "not willing" to pay outstanding contributions or where they have been outstanding for 120 days. A report should be made within 10 working days of the trustees or manager having reasonable cause to believe that a material payment failure has arisen or immediately where there is imminent danger to members’ or an employer’s payments. The Regulator indicates that it will work to develop standardised reporting for material payment failures.
The PPF consults on protection levies for 2013/14
The PPF has confirmed that the "levy estimate" (i.e. the amount it anticipates collecting) for the levy year 2013/14 will be £630 million. While an increase on the 2012/13 estimate of £550 million, this is broadly equal to the amount the PPF expects to actually collect for the 2012/13 year.
As discussed in our December 2011 edition of Pensions Extra, the PPF had intended that the levy estimate and framework would be fixed for levy years 2012/13 to 2014/15 to afford greater certainty and allow schemes to plan for their levy bills and to make risk reduction measures. The increase in insolvency risk of sponsoring employers together with falling gilt yields and the reduced use of contingent assets have however resulted in increased levies for many schemes on the basis of the existing regime. In order to keep the levy estimate within its statutory powers, the PPF has therefore altered the levy parameters. The levy cannot increase by more than 25 per cent year on year and without tweaking the parameters, the estimate for 2013/14 would have been £765 million.
The PPF’s consultation also proposes a number of changes to the contingent asset procedures. For Type A contingent assets (parent or group company guarantees), it is proposed that the contingent asset guidance will be amended to clarify how trustees should assess guarantor strength. In this regard, the PPF has also confirmed that it will, for now, continue its approach of only challenging guarantees where the net assets are significantly below the sums guaranteed, rather than applying an exact comparison.