The number of pages involved in this regular update is once again an indicator of the width of changes currently introduced to UK pensions at present. We also like to think that it is a reflection of the comprehensiveness of the historic detail available in the Guide’s pages. So here we go... and in no particular order:
There is much news to report about the governance of money purchase benefits and procedures. In its press release of 6 December 2011, the Pensions Regulator outlined six principles spanning the lifecycle of a Defined Contribution scheme. The principles start with (i) initial design’ and (ii) set-up and move on to (iii) monitoring the scheme’s governance, (iv) accountability, (v) scheme administration and (vi) communications with members. New 1.11.29 provides the full detail. It also confirms that the Pensions Regulator intends to develop and publish ‘further tools and guidance on the features of a good defined contribution scheme’.
More to follow on this subject, then.
The definition of ‘money purchase benefits’ in the Pensions Act 1993 has been clarified following the Supreme Court’s judgment in Houldsworth and another v Bridge Trustees and Secretary of State for Work and Pensions. In its ruling, the Court stated that ‘benefits cannot be classed as “money purchase benefits” where a “funding deficit” can arise in respect of them’. This ruling could impact adversely on some schemes, whose rules provide a ‘guaranteed or notional rate of investment return’, or administer their own ‘internal annuities’ rather than securing them with an external provider. Sections 1.11.1 (Note) and 1.11.2 (Note) provide the detail.
The Association of British Insurers (ABI) has announced that it intends to issue a new code of practice, compulsory for its members (whose clients include pension schemes), aimed at improving the use by schemes of the open market option. One requirement of the new code is that all members of the ABI end the practice of issuing their own annuity application forms with retirement packs sent out to prospective retirees. [1.11.25 (Note) confirms]
From feedback received, the Guide is a popular training aid for students of the Awards in Pension Trusteeship examinations (mostly trustees) [see 3.8.1]. With contracting out ending for Defined Contribution schemes but continuing for Defined Benefit schemes, further detail has been added to explain the background [see 1.5.1].
Effective 6 April 2012, contracting out via Defined Contribution schemes ceases. [Sections 1.8.10–11 and 11.4.4 provide the detail]. This means that all contracting-out certificates held by occupational Defined Contribution schemes, appropriate personal pensions and contracted-out Stakeholder schemes will be cancelled [see 2.10.5 and Note], and certificates issued in respect of the money purchase sections of contracted-out mixed benefit schemes (COMBS) will no longer be valid. At the same time, all benefits previously classed as Protected Rights (PR) [see 1.8] will revert to being ordinary money purchase benefits. [Section 1.6 carries the detail]
Note: where the provision of PR is written into scheme rules, a rule amendment may be necessary to facilitate their abolition. Under such an amendment, rights accrued prior to 6 April 2012 could conveniently be referred to as ‘former protected rights’ benefits under the rules [see 1.8.10 (Note)]. Further, such rights could be paid as a lump sum benefit under discretionary trust.
Stakeholder pension arrangements were introduced on 6 April 2001 under the Welfare Reform and Pensions Act 1999 and mandatory access to pensions in the workplace began on 8 October 2001 [see 1.13]. On 6 April 2012 auto-enrolment into Stakeholder schemes will cease [see new 2.10.5].
A number of sections in the Guide relating to NEST and auto-enrolment from 6 April 2012 have been updated, including:
(a) the earnings threshold for auto-enrolment has increased from £7,475 (in 2011/2012 terms) to £8,105 (in 2012/2013 terms) [see 1.25.10] (b) the earnings trigger for the payment of contributions to personal accounts under NEST (known as ‘Qualifying Earnings’) has also been up-rated, from £5,035 to £5,564 [see 1.27.6(vi)] (c) no employer is to be exempt from auto-enrolment [see 1.28.4 (Note)] and (d) the timeframe for employers to complete their auto-enrolment has also been modified, particularly those who employ (i) fewer than 50 employees and (ii) fewer than 10 employees (referred to as ‘micro-employers’) whose auto-enrolment staging date commences in April 2015 [see 1.28.4 (Note)].
The original timetable for moving women’s state pension age (SPA) to age 65 (first set out in the Pensions Act 1995) was to have been completed by April 2020 [see 2.4.13 (Note) (iii)]. That done, the plan was then (under the Pensions Act 2007) to move to a common pension age of 66 between 2024 and 2026 and, thereafter, to a common age of 67, between April 2034 and April 2036, and finally to a common age of 68, between 2044 and 2046.
No longer is the above to be the case. Owing to further anticipated increases in life expectancy, SPA for women will reach age 65 sooner: under the Pensions Act 2012 by November 2018 (rather than 2020). Further, the Government also announced (on 29 November 2011) that it intends to accelerate the subsequent planned increase in the common pension age (from age 66 to 67) so that this occurs between 2026 and 2028 (previously 2034 and 2036). This change will require the approval of Parliament, which, if granted, may well see a desire to bring forward the proposed timetable for achieving the higher common pension age of 68 (possibly affecting people today who are currently aged around 45 and producing a lower relative level of pension – see 1.1.7 and below).
From a date to be announced, the accrual under Band 1 of S2P will become a flat-rate one [of approximately £1.60 per week (in 2011/2012 terms) for each qualifying year]. Also from a date to be announced, earnings between the LEL (£5,304 in 2011/2012) and the Low Earnings Threshold (£14,400 in 2011/2012) will accrue a flat-rate benefit, to be fully in place by 2030 or thereabouts. [1.4.3 (Note) confirms]
With poverty in retirement a distinct possibility (both for those in employment and the non-employed), a new 1.2.14 mentions that non-employed individuals may nevertheless qualify to build up Additional Pension under the State Second Pension Scheme. Individuals potentially eligible include those looking after children under 12 years old and claiming Child Benefit.
There is much more also covered by this Update. Here are a few of the other items:
Sections 24.5.2 and 3 expand on the existing coverage of the exchange of small pension entitlements for cash sums. In brief, a further opportunity will exist after 6 April 2012 for cashing out funds of £2,000 or less from personal pension arrangements.
A new opportunity has been introduced enabling restructuring to take place across multi-employers without an employer debt being triggered. [14.10.6 provides the detail]
16.10.11 (Note) expands the Guide’s existing information about the calculation of the levy raised by the PPF. It includes information about a scheme’s (i) risk-based levy, (ii) under-funding risk, (iii) scheme-based levy, (iv) insolvency risk and (v) new ‘scaling’ factors.
Under the Finance Act 2011 and effective from 6 April 2012, the Lifetime Allowance will be reduced from £1.8 million to £1.5 million [2.12.1 (Note) and 24.3.13 (Note) refer]. Even at this stage it is worth mentioning that a concession exists which enables individuals to apply for ‘fixed protection’. Under fixed protection individuals register a ‘protected’ Lifetime Allowance (of up to £1.8 million) only on the footing that (i) they cease to accrue benefits in all registered pension schemes before 6 April 2012 and (ii) do not already have Primary or Enhanced Protection. [See also 24.7.4]
The Pensions Regulator has published updated guidance on the automatic enrolment duties of larger employers and their advisers. The detail includes recent legislation [see ‘Compulsory pension provision from 6 April 2012’ above] and also a number of areas where professional advisers have requested more detail. In summary the new guidance includes: (i) employer duties and defining the workforce, (ii) getting ready, (iii) assessing the workforce – postponement; transitional period for DB and hybrid schemes; and having completed the assessment period, (iv) pension schemes, (v) automatic enrolment, (vi) opting in, joining and contractual enrolment, (vii) opting out, (viii) safeguarding individuals and (ix) keeping records. Additional resource information is also available covering: (a) information to workers (b) employer duties and safeguards and (c) the different types of worker.
Each of these guides is aimed at assisting pension professionals to prepare for automatic enrolment.
The Pensions Regulator has confirmed that it intends to publish an annual statement (the first due in April 2012) to help trustees deal with their ‘valuation and recovery plan process in the current economic climate’.
To quote the Regulator’s press release: ‘We will publish… an annual statement, helping trustees [starting their valuation process] to understand our expectations within the prevailing economic conditions. By publishing a contemporaneous statement in this way, it is also our hope that when we start to receive recovery plans for this group of schemes, fewer will require in-depth scrutiny or challenge from us… We have already indicated a greater interest in [more risky] schemes – such as those schemes with a very weak employer covenant. We expect less intensive interaction with… better funded schemes with stronger employer support.’
As usual, all the best and, on this occasion, here’s wishing you a happy Easter break.
The Guide's regular Updates help keep it up to date with important and topical new items, but changes to pages can also include new technical terms, changes to organisations' names, new cross-references and a variety of minor revisions, as well as description of legislative, technical and other material, and useful tips or simply interesting additions. Here is a summary of the main changes made by this Update.