Pensions; DWP updates, Pension scheme newsletter 124 and more.

• DWP launches cross-sector working group to help address multiple small pension pots
• DWP pushes on with DC consolidation and investment plans
• Triple lock confirmed; and legislation tweaked
• TISA: Getting retirement right - plan, prepare, enjoy
• WASPI’s “Back to 60” Appeal Fails
• Pensions schemes newsletter 124

 

 

DWP launches cross-sector working group to help address multiple small pension pots

(AF3, FA2, JO5, RO4, RO8)

The Department of Work and Pensions has launched a cross-sector Working Group with industry to assess and make recommendations, as an interim step, on ways to tackle deferred, small pension pots. Guy Opperman outlined his vision for the Working Group, the challenge of small pots, and the Government’s commitment to putting the consumer at the heart of this work.

Following the DWP launch, the Pensions Policy Institute (PPI) published a Briefing Document intended to support the DWP working group.  The Briefing paper entitled: “Small pots: what they are and why they matter” summarises the PPI’s report on the topic earlier this summer

Minister for Pensions and Financial Inclusion, Guy Opperman, said:

Automatic enrolment has transformed the way people save for retirement, meaning millions more can look forward to a more secure future.

With the launch of the cross-sector Working Group and our ongoing efforts to make Pensions Dashboards a reality, we are focused on ensuring that consumers can stay on top of their pension savings, make more informed choices about their financial futures and have real returns from their savings.

The Minister, speaking at the event led by the Department for Work and Pensions and supported by the (PP) and Now: Pensions, confirmed the Working Group will report later this Autumn with an initial assessment, recommendations and an indicative roadmap of actions for industry, delivery partners and Government.

Since launching in 2012, more than 10 million people have been automatically enrolled into a workplace pension and over 1.7 million employers have met their duties.

Making workplace pension saving the norm, including for lower earners and people who move jobs frequently, increased the possibility that an individual’s pension savings could become fragmented into a number of deferred, small pension pots.

The Government is working with industry and others to ensure the delivery of Pensions Dashboards, allowing consumers to see what they have, online and in one place.

The new Working Group will complement the work on dashboards to identify the priority option or combination of options to help tackle the growth of deferred, small pension pots – involving experts from within the pensions industry, fintech and those representing member interests and employers.

DWP pushes on with DC consolidation and investment plans

(AF3, FA2, JO5, RO4, RO8) 

The DWP has responded to the February 2019 consultation on investment innovation and future consolidation. The response also introduces further proposals (under consultation, which runs until 30 October 2020) to improve Defined Contribution (DC) scheme governance, promote the diversification of investment portfolios and signal the Government’s commitment to transparent disclosure to scheme members.

Guy Opperman’s foreword sets the tone stating that “… there remain large numbers of smaller DC schemes many of which are poorly governed, have on average higher charges and do not have the scale to bring the benefits of investing across a broad range of asset classes ... I am therefore bringing forward measures that will ensure that we tackle persistent underperformance and poor governance by accelerating the pace with which the market is consolidating”. There may also be a new buzzword acronym to become familiar with, namely “TSEI” meaning “technological, social and environmental infrastructure”, the Government’s “aspirational” focus for future DC scheme investments.

At this point most of these proposals will affect “relevant schemes”.  Broadly speaking, these are occupational pension schemes which have non-AVC DC assets. 

The consultation response is long and detailed. The following is a summary of the proposals.

All are intended to take effect from 5 October 2021.

New reporting requirements to drive consolidation

The Government believes that consolidation is the most effective way to ensure that all DC savers receive the best value from well-governed schemes that can achieve economies of scale. The Government’s proposals, taking account of the feedback it has received, will:

• Require all relevant schemes to publicly report on the net return on investments of default and member selected funds in the annual Chair’s Statement.

• Require relevant schemes with assets below £100 million (and that have been operating for at least three years) to undertake an updated value for members assessment, which additionally includes a requirement to compare the scheme to three larger arrangements (including one that would be expected to accept their scheme on wind-up). Note that the threshold is a ten-fold increase of the £10m in the February 2019 consultation, so many more schemes will be affected. As currently, the outcome of the review is to be reported in the annual Chair’s Statement. It is also to be reported to the Pensions Regulator in the annual scheme return.

• Require schemes with assets below £100 million to report to the Pensions Regulator what action they plan to take or are already taking in the event that the scheme does not represent good value for members as part of the annual Chair’s Statement.

• Require all relevant schemes to report to the Regulator the total amount of assets held in the scheme in their annual scheme return.

Diversification, performance fees and the default fund charge cap

The Government remains keen to find solutions to enable DC schemes to make investments more easily into illiquid assets. The Government’s proposals are to:

• Enable schemes to pay performance fees by allowing schemes to prorate them (which can significantly vary throughout a year) when assessing compliance with the charge cap or to effectively ignore the performance fee for scheme members who were only in the scheme for part of the charges year.
• Confirm that the costs of holding ‘physical assets’, such as real estate or infrastructure, are not included within the charge cap. This is already set out in guidance, but the Government intends to finally put the exclusion on a statutory footing.

• Update charge cap guidance to clarify treatment of underlying costs in investment trusts.

• Additionally, the Government is not now planning to continue with the requirement for larger schemes to state their policy in relation to illiquid investments in their Statement of Investment Principles and the percentage holdings via the implementation statement.

Other changes

The DWP’s proposals will introduce:

• An amendment to extend the requirement to produce a default Statement of Investment Principles to ‘with profits’ default arrangements.

• An amendment to extend the costs disclosure requirements to funds which are no longer available for members to choose, i.e. those that are closed to future contributions.

• Amendments to exclude wholly insured schemes from some requirements of the Statement of Investment Principles to do with the trustees’ policies regarding asset managers. This is to correct an oversight when new requirements were introduced last year.

• Amendments to statutory guidance to provide additional clarity on how costs and charges information should be set out in the Chair’s Statement. This is intended to make it easier for schemes to comply with the requirements.

An extensive draft set of regulations which will implement these proposals via amendments to a range of the core pensions regulations is annexed to the consultation.

Triple lock confirmed; and legislation tweaked

(AF3, FA2, JO5, RO4, RO8) 

On 23 September, Thérèse Coffey, the Secretary of State at the DWP, introduced a two clause Bill, the Social Security (Up-rating of Benefits) Bill to address the potential impact of this earnings drop.

What many people don’t realise is that there is no legislation for the Triple Lock. The existing law covering basic and new state pension increases (s150A Social Security Administration Act 1992), only addresses uprating in line with earnings growth. The Triple Lock is a Government commitment, over and above this, to uprate by the highest of earnings, prices or 2.5%.

S150A of the legislation is rather convoluted in the way it covers the basic and new state pension increases. However, it appears that subsection (3) below has been interpreted by the Government as meaning that negative earnings growth precludes any uprating in pension benefits, i.e. without the above Bill, the 2.5% floor is made redundant. The legislation currently says:

(2)        Where it appears to the Secretary of State that the general level of earnings is greater at the end of the period under review than it was at the beginning of that period, he shall lay before Parliament the draft of an order which increases each of the amounts referred to in subsection(1) above by a percentage not less than the percentage by which the general level of earnings is greater at the end of the period than it was at the beginning.

(3)        Subsection (2) above does not require the Secretary of State to provide for an increase in any case if it appears to him that the amount of the increase would be inconsiderable.

The new Bill adds a new clause, s150A (2A) for next year’s uprating only. This clause effectively overrides the do-nothing provisions of s150A (3) and permits an increase “…by such a percentage as the Secretary of State thinks fit”.   

This Bill covers only the 2021/22 increase and the real problem with the Triple Lock hits in 2022/23 when an earnings bounce in May-July 2021 was expected to bring a 5% increase. The can has been kicked down the road a year.

It is a fast-tracked piece of legislation so that the uprating decision can be settled by 27 November to meet DWP IT deadlines. Why the DWP did not act earlier and why the measure is limited to the 2021/22 increase only are both interesting questions to consider…

TISA: Getting retirement right - plan, prepare, enjoy

(AF3, FA2, JO5, RO4, RO8)

In a report entitled: “Getting Retirement Right - Plan, prepare, enjoy”, The Investing and Saving Alliance (TISA) has published four additional proposals in relation to changes to Auto-Enrolment (AE), which would see individuals earning below £17,500 being given the option to opt out from their own AE contribution, whilst still receiving their employer’s contribution.

It is hoped that this would help those that are financially insecure, and the proposals have been made in conjunction with some of the major pension and investment firms. TISA is running a ‘Getting Retirement Right’ scheme, which aims to ensure that everybody has the opportunity to plan, prepare and ultimately, enjoy their pensions and retirement. The main proposal would mean that those who are less financially secure are less likely to have to deal with escalating debt levels or forfeiting household essentials in order to remain in a workplace pension, but that employers would still be required to contribute.

Extensive research in this area highlights the fact that those who are lower earners struggle to pay their personal contributions, but do not opt out, indicating that these individuals rely on increasing levels of personal debt instead. The Department for Work and Pensions (DWP) defines ‘low pay’ as 60% of national median earnings. Figures from the Office for National Statistics (ONS) show that the median household disposable income for the tax year ending 2019 was £29,400, and 60% of this is £17,500. This is the basis for the figure under which individuals would be able to opt out of personal pension contributions, but still receive the employer’s element. This threshold would be reviewed on a yearly basis.

At present, AE contributions amount to 8% of qualified earnings, 5% of which comes from the employee and 3% that is contributed by the employer. In February 2020, an initial research paper was published, which found that, for a median earning household, a contribution level of 12% of whole salary would be required in order for families to achieve a moderate retirement, when added to full state pensions. Newer proposals recommend that the 12% should be shared equally between employee and employer, and phased in over a six-year period, at a rate of 0.5% per year, starting in 2023.

In line with the Net Pay Action Group, in relation to the net pay anomaly, an issue which affects the lowest earners, TISA is recommending that the issue is resolved by HMRC at the end of the tax year using Real Time Information (RTI) data. This would mean that any of those individuals who are impacted will receive a bonus to the amount of the tax relief they would have received had they been in a relief at source scheme.

The Head of Retirement at TISA, Renny Biggins, said:

“We are pleased to present phase two of the campaign which sets out our proposals to progress AE and ensure that everybody has the opportunity to save for their futures. AE has been a bigger success than anyone could have imagined but, nearly 10 years on from its inception, changes need to be made to ensure it continues to develop and serve hard-working people in the UK.

Research has shown that opt out levels have remained consistently low, lower than predicted, which is excellent news but may also have a detrimental impact on the lowest earners. This could result in levels of debt reaching unsustainable levels, yet it is also vital people are saving for their futures.

We hope to continue working closely with the Government to realise these proposals, most notably to protect the lowest earners and to ensure contributions reach the necessary 12% of pensionable salary for the majority, which will allow people and households to retire on a moderate income as set by the PLSA Retirement Standards.”

The full set of proposals laid out in Phase Two of ‘Getting Retirement Right’ are as follows:

• The 12% level of contribution proposed in the ‘Getting Retirement Right’ research should be split equally between the employer and employee

• To recognise the financial impact on employers and employees, the increases should be phased in over a period of six years at a rate of 0.5% per year, and should commence the year after the proposed mid-2020 proposals have been fully implemented (which were proposed by 2022 in part 1) – 2023 and complete in 2028

• To introduce an additional personal contribution ‘opt out’ option linked to earnings, to recognise that flexibility is needed with the AE framework to cater for lower earners

• Resolve the Net Pay Anomaly through an HMRC reconciliation process using RTI data.

WASPI’s “Back To 60” Appeal Fails

(AF3, FA2, JO5, RO4, RO8) 

The Court of Appeal has, in the case of Delve & Anor, R (On the Application Of) v The Secretary of State for Work And Pensions [2020] EWCA Civ 1199 (15 September 2020), dismissed the appeal against last year’s Divisional Court judgment which denied the application for judicial review of increases to State Pension Age. There were four grounds of appeal:

• The changes are unlawful age discrimination contrary to Article 14 of the European Convention on Human Rights.

• The changes are indirect sex discrimination, or a combination of age and sex discrimination also contrary to EU law and Article 14.

• A duty arose on the government to notify the affected cohort of women about the changes which was not fulfilled.

• There had been undue delay in bringing a challenge to the allegedly unlawful legislation.

Whilst once again expressing sympathy with the plight of the women bringing the appeal and many others like them, the Court unanimously rejected all of the arguments put forward in support of these claims.

Joanne Welch, founder and director of BackTo60, told the BBC she would now consider taking the case to the Supreme Court and would also draft legislation to bring a women's Bill of Rights.

If the legal avenues are all closed off, then attention will turn to the Parliamentary Ombudsman’s investigation as the only other avenue for recourse for the affected women.

Pensions schemes newsletter 124

(AF3, FA2, JO5, RO4, RO8)

HMRC Pension Schemes Newsletter 124 covers the following:  

• extension to the temporary changes to pension processes as a result of coronavirus; 

• re-employment in response to the coronavirus outbreak; 

• relief at source and suspension of the process for applying for a National Insurance number; 

• relief at source annual return of information – notification of residency status reports; 

• call for evidence: Pensions Tax Relief Administration; 

• Managing Pension Schemes service - schemes without Pension Scheme Tax References (PSTRs); 

• Managing Pension Schemes service - signing in to online services. 

Issues of particular interest 

Extension to the temporary changes to pension processes as a result of coronavirus 

Confirmation that the following temporary changes to guidance will continue until 31 March 2021: 

• rent and loan payment holidays;

• R63N repayment requests for registered pension schemes;

• AFT return submission and payment delays;

• APSS262 – reporting transfers to qualifying recognised overseas pension schemes;

• pension scheme returns for 2019 to 2020;

• benefits crystallisation event 1 and valuing sums and assets held within a registered pension scheme;

• other scheme valuations;

• APSS105 relief at source repayment claims;

• APSS106 relief at source repayment claims;

• submitting the APSS107 registered pension schemes annual statistical return without a signature;

• APSS590 relief at source declaration;

• relief at source – excess relief;

Full details of these temporary change were announced in Pension Scheme Newsletters 118, 119, 120 and 121. 

Re-employment in response to the coronavirus outbreak 

The protected pension age easement was originally extended until 1 November 2020, this hasn’t yet been extended but HMRC advise they will report on any changes in further newsletters. 

Schemes without PSTRs 

As part of the work HMRC are doing to prepare for migrating schemes to the Managing Pension Schemes service they are currently looking at pension schemes that were registered before 6 April 2006 that were provided with an SF reference number. 

If you’re a scheme administrator for one or more of these pension schemes and do not currently have access to the scheme on the Pensions Schemes Online service, so do not have the PSTR, please contact HMRC at pensions.administration@hmrc.gov.uk with ‘SF reference pension schemes’ in the subject line. You should include a list of your SF reference numbers and scheme names in your email. 

Deletion of Pension Schemes Online accounts 

HMRC is due to start an ongoing programme of deleting credentials (user ID and password) for users who have not signed into a service for three years in October 2020. 

It’s important for all scheme administrators and practitioners who have not signed onto either the Pension Schemes Online service, the Managing Pension Schemes service or other tax services for a while, to make sure that they log into their Business Tax Account as soon as you can so that your credentials remain active and are not deleted.