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Pension Matters February 2012

Ian Hill — Wed, 08 Feb 2012 11:17:01 GMT

Welcome to Pension Matters, produced by Torquil Clark.

Ian Hill, Pensions Technical Manager

New timetable clarifies automatic enrolment starting dates

A revised timetable for when employers of all sizes must start enrolling their staff in a workplace pension has been set out by the Government.

Large employers, those with 250 or more employees, will not face any change in the date they are due to start enrolling their staff.

This follows the announcement in November that small businesses would be given more time to prepare for automatic enrolment to help them out in exceptionally tough economic times.

Employer size (by PAYE scheme size) or other description	Automatic Enrolment duty date
	From	To
250 or more members	1 October 2012	1 February 2014
50 to 249 members	1 April 2014	1 April 2015
Test tranche for less than 30 members	1 June 2015	30 June 2015
30 to 49 members	1 August 2015	1 October 2015
Less than 30 members	1 January 2016	1 April 2017
Employers without PAYE schemes	1 April 2017	- - -
New employers Apr 2012 to Mar 2013	1 May 2017	- - -
New employers Apr 2013 to Mar 2014	1 July 2017	- - -
New employers Apr 2014 to Mar 2015	1 August 2017	- - -
New employers Apr 2015 to Dec 2015	1 October 2017	- - -
New employers Jan 2016 to Sep 2016	1 November 2017	- - -
New employers Oct 2016 to Jun 2017	1 January 2018	- - -
New employers Jul 2017 to Sep 2017	1 February 2018	- - -
New employers Oct 2017	Immediate duty	- - -

It was difficult for companies to prepare while the dates were still up in the air for many employers. Now that the dates have been published, all employers can put a plan of action in place. They should leave themselves plenty of time to get their auto-enrolment systems up and running.

Employers will not have to pay their full contribution rates of 3% of employee salaries until 1 October 2018, thirteen years after the Pensions Commission initially recommended auto-enrolment.

If you haven’t heard or seen any advertising evidence already, look out for a £11 million publicity campaign aimed at increasing awareness of the reforms among workers started 23^rd January 2012.

All FTSE 100 schemes are now closed to new entrants

Royal Dutch Shell is closing its final salary pension scheme to new employees and replacing the scheme with a defined contribution plan from early 2013. The scheme was the last remaining FTSE 100 final salary scheme still open to new entrants.

Two factors are likely to have had an impact on Shell’s pension provision. The first is auto-enrolment and the requirement to include almost all staff within a compliant scheme. For new members of the scheme, that is most easily achieved through a DC arrangement. If this is the reason for the DB scheme closure, it is an unfortunate side effect of legislation that has been designed to improve pension savings for all. However, as Shell has always auto-enrolled new employees into its scheme and has a take-up rate of 95%, it’s unlikely that the the new regulations would have hit the company as hard as it will hit others.

The second is the looming threat that Solvency II-style funding could be introduced for final salary schemes. European regulatory body EIOPA’s consultation on the Institution for Occupational Retirement Provision directive, which includes the Solvency II recommendation, has seen a flurry of concerned responses from industry bodies and pension providers both sides of Christmas. The arguments against the proposal extend to government: pensions minister Steve Webb has put the total cost of compliance at around £100bn for UK schemes.

According to Shell, the closure of the scheme, which has 6,500 active and 30,000 pensioner members, was intended to "reflect market trends in the UK".

Auto-enrolment and the threat of Solvency II are just the latest regulatory moves that have made DB pensions unsustainable. Whether or not those are the “market trends” that have pushed Shell to close its scheme, where a company of the size of the oil giant leads, others will surely follow.

EU gender directive and occupational pensions

The European Commission’s decision to ban gender discrimination when pricing annuities does not apply to occupational pension schemes.

In March last year, the European Court of Justice ruled that insurers cannot price products based on gender from December 21, 2012.

The move will mean that providers will have to radically change the way they price annuities, life insurance, and health insurance.

A European Commission document, published on December 22, has now clarified that this ban will not apply to occupational pension schemes. It says: “Some insurance products, such as annuities, contribute to retirement income. The Directive however only covers insurance and pensions which are private, voluntary and separate from the employment relationship, employment and occupation being explicitly excluded from its scope.

“Equal treatment of women and men in relation to occupational pensions is covered by Directive 2006/54/EC of the European Parliament and of the Council of 5 July 2006 on the implementation of the principle of equal opportunities and equal treatment of men and women in matters of employment and occupation (recast).”

The government is planning to reinvigorate workplace pensions in the spring.

Pensions Minister Steve Webb has said the DWP would conduct a formal consultation into which rules should be scrapped, with every regulation up for discussion "from the absolutely trivial to the huge". "Every piece of regulation will go unless we can justify its existence,"

Webb has already announced his intention to abolish short service refunds, the repayment of contributions to both employers and staff when an employee who is moving jobs opts to cash in a small pension fund rather than have it transferred to another scheme.

He is also believed to be considering changing the rules on indexation of final salary pensions in an attempt to prevent the few remaining private sector schemes from closing. Although the government recently changed the rate at which pensions paid by such schemes increase from RPI to CPI, scrapping this requirement altogether would make funding them easier.

Webb also said the UK would combine forces with other governments, including those of Germany, Ireland and the Netherlands, to fend off European proposals of applying a higher capital requirement, known as Solvency II, to pension funds to ensure their solvency.

If the Solvency II requirements were implemented businesses would have to inject £300bn into their final salary schemes, inevitably leading to the closure of more schemes in the private sector, according to the National Association of Pension Funds.

HMRC updates

HMRC have confirmed pension related practices

Flexible drawdown and auto-enrolment. If a member who has taken flexible drawdown opts out of scheme membership within one month of being auto-enrolled (or re-enrolled) under the Pensions Act 2008 (PA 2008) then HMRC confirms he/she will still meet the flexible drawdown conditions (i.e. no further contributions).
Flexible drawdown and drawing benefits more than once. An individual can draw amounts more than once from the same arrangement under flexible drawdown, without being obliged to provide a further flexible drawdown declaration.
Death benefits and life cover lump sum. The list of authorised lump-sum death benefits that may be paid since 6 April 2011 has been expanded to include a life cover lump sum (a small sum that could have been paid under a previously approved scheme before A-Day to cover, for example, funeral expenses. Payment of a life cover lump sum can only be made if a member died after reaching the age of 75 and the payment does not count as a benefit crystallisation event.
Fixed protection and provision of information to HMRC. A member who has registered for fixed protection must as a minimum give the scheme administrator the reference number for his fixed protection certificate when he draws his benefits. In addition, the administrator may want to see the certificate itself.
Fixed protection and giving up enhanced protection. If a member wishes to give up enhanced protection in order to register for fixed protection instead, he must tell HMRC in writing (members with Primary Protection cannot give this up).

Regulator will rely on 'whistle-blowers' to police auto-enrolment

The Pensions Regulator has said that it plans to rely on "intelligence-led spot checks" and an anonymous whistle-blowing procedure when policing compliance with the new auto-enrolment regime.

Charles Counsell, TPR executive director said, when speaking before the House of Commons Work and Pensions Committee, that he did not "want to generate an excess demand for information from the pensions industry," but expected the "triangle of employer, employee and scheme to work together on this". He added that, instead of routinely collecting contributions data from providers, TPR would watch for worrying trends.

Bill Galvin, TPR chief executive, said that TPR's focus would be on wilful non-compliance and not administrative matters.

Annual statements introduced on defined benefit schemes

The Regulator has announced it would issue annual statements to help pension scheme trustees “understand our expectations within the prevailing economic conditions”.

The hope is that such a statement will result in fewer recovery plans requiring in-depth scrutiny or challenge.

This annual statement might go as far as setting out acceptable discount rates and inflation assumptions to be used for calculating technical provisions. If it does, the regulator will have effectively created a quasi-prescribed statutory funding basis.

Given the cautious nature of the regulator, this is likely to be bad news for scheme sponsors as any prescribed basis is more likely to increase, rather than reduce, the value placed on liabilities.

The regulator plans to consult with the industry in April on the procedures that its case teams follow as they bring a case to the regulator's Determinations Panel. Alongside this, the Determinations Panel will also consult on an updated version of the procedures it follows for making a determination on a case.

Later in the year, the regulator intends to set out its strategic view on how it will regulate the DB landscape in the future.

GMP Equalisation

You couldn’t make this up if you tried, but as indicated in our previous ‘Pension Matters’ the Government has dug up 20-year old case law to plan new equality rules on pensions.

The Department for Work and Pensions (DWP) 20^th January 2012 outlined plans to force companies that offered “guaranteed minimum pensions” in the nineties to reassess the different accrual rates for male and female members of the scheme and equalise overall benefits to avoid discrimination. Companies affected will be those that opted out of the additional state pension and built up benefits in a final salary scheme between 1990-97 offering a guaranteed minimum scheme.

Under the law at the time, women could collect their state pension five years earlier than men, when they reached 60. Men could only start claiming their pension at 65.

This rule has never been updated for the guaranteed minimum pension scheme despite case law in 1990 which ruled it was unlawful to discriminate between men and women in relation to occupational pensions. In short, this gives female members of the guaranteed minimum pension retiring today an unfair advantage as they can get hold of the benefits sooner than men.

The new rules outlined by the DWP would highlight that men are able to claim payments at the age of 60. The accrual rate for females under the guaranteed minimum pension scheme was also better than for men, meaning employers could be forced to top up male members’ benefits to match the payments.

Unfortunately the DWP's consultation does not clear up whether equalisation would occur for members already retired or only for future payments to those workers yet to retire. In theory, a pensioner could be told they are owed money under the rule changes, however, those thinking they are due for a windfall have little to look forward to as payments could be rather small.

The EU has threatened to bring equalisation into practice as the complex issue has been knocking about for decades; but the UK has decided to make it compulsory regardless even though pension schemes could be faced with high additional administration costs.

The DWP’s proposal gives members the best of both worlds on a year on year basis, along the lines of what the PPF intends to do which will be complex to administer and more expensive than just paying the benefit with the higher present value.

Consultation closes on 12 April 2012. Whilst this matter is being considered we are suggesting that employers/trustees:

Not complete any bulk annuity buy-out/buy-in.
Consider gathering the documentation and member communications prepared at the time equalisation was dealt with in the 1990’s.
Consider the implications for members, especially males who are looking to transfer. Members who have taken a transfer value who have GMP benefits between May 1990 and 97 in theory have been discriminated against.
Not complete the process of wind-up!

The consultation document provides a suggested methodology which trustees can adopt to achieve this. The Government has said however that this suggested approach is for guidance purposes only and is not something which schemes will be required to follow, as helpful as ever. Based on the consultation document, it still remains very much a decision for each scheme as to how they equalise GMPs in practice.

What is clear however is that GMP equalisation is not an issue which will go away and is therefore something which will have to be addressed by all schemes which hold GMPs.

Finally, the impact of GMP equalisation is likely to be very modest in individual terms, however costly as a whole for the scheme especially in sorting it out!

The PPF 7800 Index has been updated to the end of December 2011.

Highlights include:

The aggregate deficit of the 6,533 schemes in the PPF 7800 index is estimated to have increased over the month to £255.2 billion at the end of December 2011, from a deficit of £222.1 billion at the end of November.
The funding ratio fell from 81.9 per cent to 80.0 per cent.
Total assets were £1018.9 billion and total liabilities were £1274.1 billion.
There were 5,473 schemes in deficit and 1,060 schemes in surplus.

Hoping For A Dishwasher - Settling For Equity Release

Rachel Jefferson — Fri, 27 Jan 2012 16:11:21 GMT

This morning the postman delivered my monthly subscription to the Which? Magazine. I was really hoping for an independent review on dishwashers, since this is my next electrical purchase. Unfortunately, this wasn’t covered, but what did catch my eye was an article on 'Equity Release'.

As an adviser that is qualified to discuss equity release, I am a big fan. When used correctly, it can be a very useful means of unlocking some value in a property and using it for another purpose.

This four page article talks about going undercover and visiting advisers who are qualified to recommend equity release products. It was alarming to see in this investigation that the advice being given in this area remains inconsistent and inadequate. Advisers had failed to cover the impact of state benefits, alternatives to equity release, as well as whether they were independent or tied advisers. To me this is basic stuff and paramount in any discussion that I have with people about equity release.

Torquil Clark is an independent firm; therefore I have the scope to recommend any product that is suitable for the clients that I meet. That is important, but what is even more important is if it’s not suitable for the client, it should NOT be recommended. Equity Release can often be seen as a last resort. I am not sure that this is always the case, but what I am sure about is that all other ways of raising capital should be looked at and discounted if necessary. Involving other family members in the discussions is also useful; after all, it could be their inheritance that is reduced. You can get good, consumer focused information on Equity Release by visiting the Safe Home Income Plans (SHIP) website.

So, although I haven’t been able to select my quality dishwasher, I am confident that my advice in the area of equity release is of a high quality.

Find out more about Rachel Jefferson

Opportunity Knocks For Protected Rights

Administrator — Tue, 24 Jan 2012 14:26:47 GMT

First introduced back in April 1988 as the benefit format for contracting-out of the State Second Pension via money purchase pension arrangements, Protected Rights will bow out in April this year when this contracting-out option is finally abolished.

With effect from 6 April 2012, Protected Rights will cease to exist as a separate entity, and simply become ‘Ordinary Rights’.

Those still contracted-out will automatically be brought back into the additional State Pension, and dependent on earnings, may then begin to accrue entitlement to this state benefit from this date. Those still contracted out via a money purchase occupational pension scheme will see an increase in their National Insurance (NI) contributions, but only up to the standard rate payable. Currently, membership of such schemes grants entitlement to pay lower NI payments to reflect the fact that the difference is paid into the pension (referred to as the ‘rebate’ or ‘minimum payment’)

The end of Protected Rights will remove the burdens associated with having to secure spouses’* benefits on retirement and death, for clients either married or in a civil partnership. Its demise will therefore bring with it opportunities in the following guises:

Annuity options
Death benefit nomination
Pension consolidation
Proportionality rules
Flexible drawdown

Annuity options:

The key change here is the removal of the mandatory 50% spouse’s* benefit on annuity purchase. Not only is the spouse’s* pension compulsory, but the rate is fixed at 50%, whereas ordinarily up to 100% can be chosen.

Protected Rights are also subject to unisex annuity rates, whereas rates used for Ordinary Rights are gender specific meaning rates are currently higher than for women because mortality rates are higher for men. Whilst gender-sensitive pricing is to be outlawed on 21 December this year, there is a short window for male annuitants to potentially access higher payments.

For those prepared to annuitise this year, even with current rates as unappealing as they are, at least the changes ahead will offer greater choice in terms of the bases available.

Death benefit nomination:

Unlike most pension lump sum death benefits, those payable from Protected Rights will often be liable to inheritance tax (IHT). This is because the current rules only allow a lump sum to be paid if there is no surviving spouse*. Any death benefit nomination made in respect of Protected Rights is therefore classed as an ‘irrevocable direction’, i.e. the nomination cannot be changed once made.

Once Protected Rights become Ordinary Rights, whilst any nomination already made will remain valid, it can still be changed. Post April 2012 could therefore be the ideal time to review Wills and/or death benefit nominations, with the new uncapped options in mind.

Pension consolidation:

Legislatively speaking, self invested personal pensions (SIPPs) have been allowed to accept Protected Rights since October 2008, when the rules on investment options for such rights were relaxed. However, that is not to say that all existing and available SIPP products have amended their rules to reflect this change. Legacy systems have also prevented some SIPPs from accepting such rights, whilst others have chosen to limit acceptance to separate policies which come with their own set of charges and terms.

However, the relaxations only allowed for SIPPs to accept Protected Rights going forward and not their occupational equivalent, small self administered schemes (SSASs). Therefore, once the differential between such rights is removed, all SIPP and SSAS clients can consider the viability of consolidating such rights within the scheme.

Proportionality rules:

Because of the requirement for Protected Rights to provide for a spouse* on death or annuity purchase, legislation dictates that where Protected Rights and Ordinary Rights are held within the same pension scheme the Protected Rights cannot be depleted at a greater rate. This is known as the ‘proportionality’ rule.

This rule has been a bone of contention for those keen to consolidate their drawdown pensions for ease, only to be faced with the mandatory requirement to take further benefits. However, whilst this rule will shortly disappear, drawdown pension transfers still require careful review to ensure there is no adverse effect on the maximum income available.

Flexible drawdown:

Incorporated in the pension rule changes effected in April 2011, the flexible drawdown option (the option for unlimited withdrawals) is not currently available for Protected Rights funds. For those with Protected Rights funds who qualify for flexible drawdown, 6 April 2012 simply brings about a greater capacity for uncapped withdrawals.

Still contracted out?

For those still contracted-out under a money purchase arrangement, the last rebate (in respect of this tax year) will not be payable until around July 2012. Therefore, any decision to take benefits or consolidate pension benefits once the Protected Rights distinction has disappeared may need to be further deferred to take into account the final rebate expected.

Ultimately, it should not be taken for granted that the cessation of Protected Rights will bring about an immediate change. Pension scheme providers or administrators may choose not to, or simply not be able to adjust to these imminent changes at all, or as quickly as required. However, this in turn can stimulate the need for a pension review.

It should also be remembered that for many, the ability to accrue Protected Rights has been a beneficial alternative to the promise of an additional pension payable from a State Pension Age that may rise further in the future.

* in respect of this briefing, spouse includes husband, wife or civil partner.

Off The Shelf Wills Are Not Always The Way

Rachel Jefferson — Fri, 20 Jan 2012 16:25:46 GMT

By Rachel Jefferson.

Every day this week I have come across a horror story around the subject of people not making a Will or, even worse, not drawing up a Will correctly. It really brings it home to me just how important it is to make sure you have thought about how you would wish for your assets to be divided up in the event of death.

Saying you have got a Will is one thing, whether it is right or not is another. Solicitors tell me that they see ‘off the shelf’ Wills that have used different colour inks, are not dated correctly and not even witnessed; I could go on, but you get my point. If you have gone to the effort of thinking about drawing a Will, then at least get it right. If you make a mistake, it can leave you in the same position as if you hadn’t written a Will at all.

As a professional, I would always recommend another professional qualified to draft the Will, or any other legal document, i.e. Power of Attorney. I suppose what does put people off is who they are going to choose as Executors. Ideally, they need to be trustworthy; after all they are going to be dividing up possessions and estate on death.

I have a campaign this year and that is to ensure that every client I see has a Will drawn. If not, I will refer them to a Solicitor to arrange this for them. I appreciate that it can be an ardous task, but setting aside one day for this can help relieve many days of heartache for loved ones in the future.

A Defining Year for Pensions

Ian Hill — Mon, 09 Jan 2012 16:45:18 GMT

For those who have anything remotely to do with pensions 2012 will be an important year. Some have even suggested that it will be the most important year for a generation, but as pension legislation appears to change with the weather, every year is important.

The obvious major change is that this is the year that for employers with more than 3,000 employees the introduction of the auto-enrolment requirements from October 2012 will proceed as planned. This has been over a decade in the making and yet there continues to be changes in the detail, such as the government’s announcement that employers with fewer than 50 employees will not be brought into the new regime until 2015. However, according to the government, it is full steam ahead for auto-enrolment in 2012 as most of the legislative framework is in place. January 2012 will hopefully reveal the revised staging dates for those employers who employ between 2,999 and 50. No doubt we will see further regulations and guidance from the Pensions Regulator as the year develops.

On 6 April 2012 the lifetime allowance (LTA) will reduce from £1.8m to £1.5m for individuals who have not taken out fixed, enhanced and/or primary protection. This reduction is a direct consequence of the redesign of the pension’s tax relief system where it was felt that, with a reduced annual allowance, the LTA should also be reduced so that there is more coherence between the two.

When individuals start to take benefits there is a test against their available LTA. Once an individual has used up all their lifetime allowance they are subject to a lifetime allowance charge on any further benefits crystallised.

Some individuals may have funded their pension, not unreasonably, on the basis that the lifetime allowance would be at least £1.8 million. For these individuals, the reduction in the lifetime allowance to £1.5 million will mean that they could face a sizeable tax charge on the portion of their pension rights they have accrued above the reduced lifetime allowance. In recognition of this, the government has introduced Fixed Protection which allows a member to protect themselves from a lifetime allowance charge if their benefit value does not exceed £1.8million.

For individuals with Primary or Enhanced Protection even though the level of the lifetime allowance is going down their level of protection will not.

Up until the 5 April 2012 the trivial lump sum commutation limit is 1% of the standard LTA. From the 6 April 2012 the link to the Standard LTA will be broken and the trivial commutation limit will be £18,000.

From 6 April 2012, contract based schemes (i.e. personal pensions) may like their trust based occupational counter parts, pay trivial commutation lump sums of up to £2,000 provided the member has reached 60, subject to a lifetime payment of two payments. The government is considering the removal and restriction of short service refund provisions applicable to occupational pension schemes.

April 2012 will see the end of Defined Contribution contracting out and protected rights will become ordinary scheme benefits. If trustees have protected rights hard wired into their scheme rules they must either continue to comply with the requirements or amend their rules.

A key consideration for sponsoring employers and trustees of Defined Benefit schemes in 2012 will be the 2012 /2013 Pension Protection Fund Levy (PPF) determination implementing a new framework for calculating the risk based levy which includes a new measure of insolvency risk and takes account of investment risk.

The pension protection levy for 2012/13 will be £550m.

This is the lowest levy that the Pension Protection Fund (PPF) has ever set and marks a reduction from £600 million in 2011/12, the second cut in two years.

Underfunding will no longer be calculated on the basis of a scheme’s assets and liabilities on a specific date. Instead the daily average of appropriate indices and rates over five years (i.e. for 2012/13, the five year period to 30 March 2012) will be applied to smooth scheme funding and reduce the influence of short-term volatility in the market.

In addition, investment risk will be included in the calculation of the PPF levy for the first time in 2012/13 via the application of a standard stress factor to a scheme’s asset value. The stress factor applied will vary by asset class. Investment risk will be calculated using the information on a scheme’s asset portfolio provided through Exchange. Schemes should ensure that full and accurate asset details are provided as, for example, setting out the asset split in a pooled fund can lead to a levy reduction.

Schemes with liabilities of £1.5 billion or more will have to make their own assessment of investment risk by adopting a tailored stress test based on criteria set by the PPF. Other schemes may elect to adopt a bespoke approach. Trustees and their advisers may wish to consider whether there is merit in completing their own assessment.

Going forward, insolvency risk will be based on an average of monthly failure scores over the preceding 12 months to the end of March and not a year in advance as before. Failure scores will be allocated to one of 10 risk bands corresponding to a different levy rate.

Annuity rates for men and women will be harmonised in December 2012, following a 2011 European Court of Justice judgement.

We will presumably have a White Paper on radical state pension reform, with the government’s proposals for a flat rate £140 a week state pension being unveiled.

Developments sweeping in from Europe, with a decision on Solvency II expected towards the second part of the year, could do major damage to UK defined benefit pensions. Solvency II is the new EU-wide solvency regulation for insurers and reinsurers that is currently due to come into effect in October 2012.

While it will clearly have a significant impact on insurance companies in Europe, pension scheme fiduciaries need to worry about it.

Annuity prices are likely to rise as a result of Solvency II, so settlement solutions could become more expensive. Members of defined contribution (DC) schemes who are retiring and have to buy annuities will also get less retirement income for their money.

There will potentially be changes in the investment behaviour of insurers, which represent a significant segment of the market. This will have knock-on effects for pension schemes.

It is possible that Solvency II regulations might eventually be extended to cover defined benefit (DB) pension schemes.

The implications for UK pension schemes are tremendous. They will place additional burden on DB pension schemes and large contributions on behalf of sponsors would be necessary to bring UK pension schemes in line with the requirements.

Under the current regime, pension schemes have the ability to negotiate increased security (albeit at an increased price). Under the new regime, this increased price will become imposed upon them. One glimmer of hope is that if the European regime becomes too onerous, the providers will surely become more creative in seeking to mitigate its effects.

The Pensions Regulator expects all schemes to measure the quality of their data. Where the tests indicate problems, the Regulator expects plans to be put in place to resolve them by the end of 2012.

The quality of data supporting day-to-day pension processes is often incomplete or inaccurate. Pension scheme data has a long shelf life and has often been through significant changes and transfers following corporate transactions, system migrations, change of administrative providers and legislative changes.

Full review of the quality of scheme data will be needed and any plans to rectify significant issues put in place in accordance with Regulator guidance.

Pension Matters January 2012

Ian Hill — Mon, 09 Jan 2012 10:41:45 GMT

Welcome to Pension Matters, produced by Torquil Clark.

Ian Hill, Pensions Technical Manager

Auto-Enrolment Delays Announced

The timetable for staging in the duty to auto-enrol employees of "small" employers (those with less than 50 employees) has been put back.

The proposal is that small employers, previously scheduled to be staged in between 1 April 2014 and 1 February 2016, will now begin to auto-enrol their staff from May 2015. But it is not clear whether the current 1 year and 10 months transition for such employers will be retained. If it is, then it will not be until 1 March 2017 that all employers will be staged in.

The DWP also says that for those auto-enrolling into a money purchase scheme, the required initial level of contribution will remain in place until all businesses have been staged in. Currently this is due to end on 30 September 2016. So the delayed auto-enrolment for small employers is likely to be of some benefit to all employers using money purchase schemes.

Those with 3,000 or more employees who are due to be enrolled before July 2013 will see no change in their dates. The timetable for employers with more than 50 but less than 3,000 employees will be adjusted to "smooth" out the transition by stretching the timetable for this group into the year vacated by the small employers.

The full revised timetable showing the new staging dates for the affected employers will be published early in the New Year. Employers with between 3,000 and 50 employees will have their staging date put back by a few months.

RPI vs. CPI – The Judicial Review Judgment

Unions (included the Police Federation of England and Wales, Civil Service Pensioners Alliance, National Union of Teachers and Fire Brigades Union) have been fighting through the courts to keep their members pensions increasing on an annual basis by RPI rather than CPI, challenging the legality of the switch from RPI to CPI.

The Government announced in the June 2010 Budget that any increase to public service pensions in payment would be determined by considering CPI rather than RPI as the measure of inflation. The Government said it believes CPI provides a more appropriate measure of pension recipients' inflation experiences.

Pensions paid under many public service schemes are increased in accordance with the Pensions Increase Act 1971 and related legislation. Broadly, this means that the Secretary of State is required to review the “general level of prices” for a given period and, where there has been a price increase, an uprating order will be laid before Parliament increasing benefits by not less than that percentage increase.

Legislation requires the Secretary of State to provide for the increase to public sector pensions in line with the “general level of prices”. The unions’ main argument was that the Secretary of State was not entitled to adopt CPI because it is not an index that measures the general level of prices. It was submitted that CPI’s use of the “geometric mean” showed that it was more akin to a cost of living index than a prices index.

The court rejected this analysis unanimously. It acknowledged that CPI takes into account to some extent the consumer reaction to price increases, but said that both CPI and RPI are measures which the Secretary of State can use “to establish without undue difficulty” the increase in the general level of prices.

The unions submitted that the Government is obliged to make the best estimate of the increase in the general level of prices, not just choose an index that it considers will less accurately reflect the increase simply because the state of the national economy justifies it. They argued the Secretary of State had “put the economic cart before the statutory horse” and said the need to make savings was the dominant factor driving the choice of index, rather than consideration of which index would best achieve the statutory purpose.

The court was not persuaded by this argument. It said if the Secretary of State is satisfied that a particular measure is a fair and genuine method for making the relevant determination he can adopt that method even if his reason for preferring it over other potential candidates is that it “draws less on the public purse”. Even if that was wrong, and the Government had to adopt what it considered was the best index for measuring price changes, the court felt that the Government took its decision to change the index because it considered that CPI was a better measure of price inflation than RPI, quite apart from the savings anticipated.

However, one of the three judges, Mr Justice McCombe, disagreed. He felt that cost considerations dominated the process and the decision was not made on a stand-alone basis.

The claimants said that factors such as explanatory literature, negotiations with unions and past practice created a legitimate expectation that RPI would continue to be used for future up-rating reviews, so that it would be unfair or an abuse of power to go back on that general understanding.

Again, this argument was rejected unanimously. The court found no evidence that clear and unequivocal promises had been given. It said that the only legitimate expectation was that the beneficiaries would be treated in accordance with the lawful policy in place at the time.

The unions argued that the Secretary of State had not properly considered his statutory duty to have due regard to equality of opportunity between men and women, and that the Treasury did not assess fully the adverse effect the change would have on women. It was submitted that women would be disadvantaged by this change more than men.

The court held that even if the duty did arise, it was satisfied by the Treasury’s equality impact assessment.

The court rejected the unions’ challenge (unanimously on all but one of the four grounds) and found that the Government had not acted unlawfully in making the switch from RPI to CPI. The unions are likely to appeal.

Public (and some private) sector schemes will have to consider their own rules to determine whether they are affected by the change from RPI to CPI and, if so, what this case and any appeal may mean for their scheme.

Auto-Enrolment Threshold Review

The Department for Work and Pensions has launched a review of the auto-enrolment earnings threshold, currently set at £7,500, for the 2012-13 tax year.

The consultation highlighted that, under the Pensions Act 2011, such a review would be due each year to guarantee that automatic enrolment would not occur for those who would not benefit.

The qualifying earnings band can be used as one definition of earnings for schemes that seek to qualify for auto-enrolment on a money purchase basis. It is also used for non-contracted-out defined benefit schemes put forward as auto-enrolment vehicles. The earnings trigger is the point which an employee's earnings must reach before the employer auto-enrolment duty applies.

The lower and upper limits of the qualifying earnings band were set (in 2006/07 terms) at £5,035 and £33,540 by the Pensions Act 2008, whilst the earnings trigger was set (in 2011/12 terms) at £7,475 by the Pensions Act 2011.

The consultation closes on 26 January 2012.

Flat-Rate State Pension Edges Closer

The Government has taken another step towards the goal of delivering a flat-rate State Second Pension (S2P) through regulations laid before Parliament that set the "flat-rate introduction year" as the tax year commencing 6 April 2012.

The previous Government first refocused S2P on the lower paid with a complex three bands of earnings approach. The Pensions Act 2007 provides that from 6 April 2012 S2P will accrue in two components:

A flat rate accrual amount of £72.80 pa (in October 2004 terms - the actual amount, which remains to be announced, should be increased from this date in line with earnings)
An amount equal to 1/440ths of earnings between the lower earnings threshold (£14,700 for 2012/13) and the Upper Accrual Point (£40,040)

Because the Upper Accrual Point is frozen but the lower earnings threshold increases in line with earnings the second component will diminish over time. It had been predicted that by 2030 it would become zero and so S2P would then accrue on a flat-rate basis.

The stage has now been set for the Government to go further with its own reforms and either make S2P genuinely flat rate on its own, or go further and amalgamate it with the Basic State Pension.

Increase In State Pension Ages

The increase in State Pension Age from 66 to 67 will be brought forwards.

The increase is to take place over a two year period between April 2026 and April 2028. Changes being brought in by the Pensions Act 2011 accelerate the equalisation of State Pension Age at 65 and bring forward the increase in State Pension Age to 66.

Anyone born between 6 April 1960 and 5 April 1969 will see their State Pension Age increase. Those born between 6 March 1961 and 5 April 1977 will now all have a State Pension Age of 67.

The measure is expected to save around £60 billion in today's prices between 2026/27 and 2035/36 (this latter date being when the age 67 State Pension Age was due to take effect).

For those just starting out on their working lives should not expect a State Pension much before they are 70.

Annual Allowance; Carry Forward Rules For The Transitional Years

HMRC has been asked to look again at the interpretation of how the carry forward rules work for the annual allowance for the transitional years of 2008-09, 2009-10 and 2010-11.

As a result of this review the guidance on how carry forward works for the transitional years has been revised. There is no change to the guidance for the carry forward rules outside these transitional years.

The annual allowance for 2008-09, 2009-10 and 2010-11 is deemed to be £50,000. So if an individual's total pension input amount in each of those tax years was £20,000 then they will have £30,000 unused annual allowance to carry forward each year. If their total pension input amount was £50,000 or more in a year then they would not have any annual allowance left to carry forward from that tax year.

The way that pension savings are calculated is based on the new valuation methods. So, for a defined benefit arrangement the new factor of 16 (rather than the existing factor of 10) will be used and increase the opening value CPI to work out how much your pension saving is.

Normally, if one of the previous three years has an input amount of more than the annual allowance then that excess is treated as using up any amount of available annual allowance from the preceding year(s) first and this will reduce the available annual allowance to be carried forward to the current year. However, the position is different for 2008-09, 2009-10 and 2010-11.

If one of the previous three years that has an input amount of more than £50,000 is 2009-10 and/or 2010-11 then that excess is not treated as using up any amount of available annual allowance from the preceding year(s). This is because any amount of available annual allowance from the preceding tax year(s) would not have had the effect of reducing an amount of annual allowance charge for 2009-10 and/or 2010-11.

The method of working out if the individual has to pay an annual allowance charge, and how much, for the tax years 2008-09, 2009-10 and 2010-11 has not changed.

New Framework For The PPF

The PPF announced in May 2011 that a new framework for the pension protection levy would apply from the 2012/13 levy year.

The purpose behind the new framework was to achieve stability and predictability for levy payers by fixing the levy parameters for a three year period. The PPF has now published the final levy determination and supporting guidance for 2012/13. It has also confirmed a levy estimate of £550m, the lowest estimate to date.

The key points to note are:

Contingent assets: the PPF was concerned that some schemes had put in place type A assets (group company guarantees) where there was little prospect of the guarantor paying more than a fraction of the guarantee. The PPF proposed that trustees would have to certify positively that the guarantor was able to meet the full sum guaranteed.

The PPF has modified its proposals as a result of consultation responses that it was effectively asking for an annual covenant review of all guarantors. Instead trustees will be required to certify that they have no reason to believe that the guarantor, at the date of the certificate, could not meet its full commitment under the guarantee. The PPF has also altered the contingent asset certificate so that the trustees have the option of certifying a lower amount than the face value of the asset or of only reporting the most substantial guarantors (where there is more than one) if they feel that they cannot otherwise provide the certification of the guarantor's strength. These changes are designed to achieve additional flexibility for trustees.

The PPF considers that the simplification of the certification process means that it will be able to undertake an assessment of the guarantor's strength. In 2012/13 this assessment will be a comparison of the publicly available financial information with the value that would be attributed to the contingent asset in the levy. However, since this is the first year of this assessment, the PPF comments that the benefit of any doubt will be given in favour of schemes. The PPF confirms that it will review its approach for future levy years.

Investment risk: schemes with liabilities measured on the PPF basis of £1.5bn or more are required to undertake a bespoke assessment of investment risk. The PPF will assess the investment risk for other schemes unless they choose to conduct a bespoke assessment. The PPF has now confirmed that schemes which opt for bespoke assessment will not be required, as originally proposed, to continue with that bespoke assessment in future years where there is no benefit for the scheme. The exception to this is schemes which use derivatives to de-risk. Such schemes should use the bespoke approach consistently or not at all.

Insolvency scores: D&B failure scores will be determined monthly in order to ascertain the average annual score. The PPF has confirmed that where D&B does not have data for all months, they will produce an average score based on the number of months they have.

Trustees and employers should already have started to consider what action they should take as a result of the new levy framework. However, they will need to prioritise any outstanding actions early in 2012 to ensure that they meet relevant PPF deadlines.

Income Tax Rates & Thresholds (Including Personal Allowance)

The draft Finance Bill 2012 contains clauses that (subject to any further announcement in the Budget on 21 March 2012) confirm that the basic, higher and additional rates of income tax remain at 20%, 40% and 50% respectively for 2012/13.

The income tax personal allowance will increase from £7,475 to £8,105 (for those under age 65) and, as a result, the band of earnings subject to 20% tax will reduce from £35,000 to £34,370 in order that 40% taxpayers do not benefit from the higher personal allowance. This means that the threshold for 40% income tax will remain at £42,475 (the same as the Upper Earnings Limit for national insurance contributions).

Short Service Refunds Abolished

Pensions minister Steve Webb has confirmed the Government will abolish short service refunds for defined-contribution pension schemes.

Under current rules, companies can get a refund on employer and employee contributions if a member leaves within two years of joining a pension scheme.

The DWP is also seeking views on a range of reform options designed to make it easier for people to consolidate small pension pots. These range from small changes to encourage transfers to an automatic transfer system where pension pots could either be consolidated in one or more ‘aggregator’ schemes or move with people from job to job.

Short-service refunds, where contributions are refunded if a member leaves a company within two years, have repeatedly been highlighted by the government as a threat to auto-enrolment reforms coming into force next year.

The consultation paper, 'Meeting future workplace pension challenges: improving transfers and dealing with small pension pots', references work undertaken by other countries to address the problem of the growing number of small pots.

It noted that Australia's government was looking to address the issue of 'lost' superannuation pots, where pots that had not received a contribution in two years and the Super fund was no longer able to trace the member, had led to AUD$20bn (€15bn) saved in untraceable accounts.

The end of short service refunds could pose problems for some schemes.

Auto-enrolment will bring into focus the current difficulties experienced by scheme members with small pension pots. These include members losing track of their pension savings or finding that several small pots cannot obtain as good a deal when purchasing an annuity as one larger pot. The DWP expects that auto-enrolment, along with a highly mobile jobs market, will generate a further 4.7 million such pots by 2050.

Having addressed the anomaly that currently exists between trust and contract, this move has created another as, unlike a contract-based policies, trustees are now faced with the responsibility of administering many more small pots.

Flexible Apportionment Arrangements

Changes to the rules surrounding how companies repay pension debts will come into force on 27 January 2012.

The new mechanism reallocates the liabilities of the departing employer to one or more employers remaining in the scheme. For employers who are about to stop having active members in an ongoing multi-employer scheme, it means that to prevent their becoming liable for an immediate debt payment they need to:

Find one or more employers staying in the scheme who are willing to take on their liabilities
Convince the trustees through a "funding test" that all the remaining employers will be reasonably likely to be able to fund the scheme and that the security of members' benefits will not be adversely affected

In addition, the trustees, departing employer and those taking on the liabilities must consent to the arrangement and the scheme must not be likely to fall into a PPF assessment period within 12 months.

An employer debt can arise when a company leaves a multi-employer defined benefit occupational pension scheme and is commonly encountered in corporate transactions or during internal restructuring. When an employer leaves a pension scheme it must ensure that there are enough funds in the scheme to pay for the benefits due to its employees. Where there is not enough money to run the scheme, the employer that leaves is still liable for its share of this underfunding.

Under the Pensions Act, repayment of this debt can be put off in some circumstances. Companies can ask the trustees to agree to an arrangement, known as an apportionment arrangement, which allows the employer who is leaving to pay less than the full amount of its debt. Some or all of the other remaining employers must agree to pay the rest. The trustees of the pension scheme must carry out a 'funding test' to make sure that the remaining employers can fund the scheme.

The new regulations introduce 'flexible apportionment arrangements', which allow trustees of pension funds to choose to give some companies more time to pay their share of the debt. Under these arrangements, trustees may decide to carry out the funding test only once where a number of employers leave the scheme at broadly the same time.

The regulations also extend the current 12-month 'period of grace' to 36 months. This is the period during which companies do not have to pay debt on any underfunding when they do not employ any active pension scheme members, but intend to employ some in the future. The new regulations give trustees discretion to extend this period to 36 months. In addition, employers will have two months rather than one month after they cease to employ active members of a scheme to notify trustees if they wish to rely on a period of grace.

Social Security Benefit Rates

The Department for Work and Pensions (DWP) has confirmed the social security benefit rates from April 2012 including the following:

The Basic State Pension from April 2012 will be £107.45 pw for a single pensioner and £171.85 pw for pensioner couples
Serps/S2P benefits in payment in 2012/13 will increase by 5.2%
Post-1988 guaranteed minimum pensions (GMPs) will increase at the 3% capped rate in 2012/13

Deadlines For Information To PPF

The deadlines for providing information to the PPF are as follows:

5pm on 30 March 2012 for the compulsory submission of scheme returns (including any voluntary section 179 valuations). The asset split data will be particularly vital this year
5pm on 30 March 2012 for certification or re-certification of contingent assets
5pm on 10 April 2012 for certification of deficit-reduction contributions
5pm on 29 June 2012 for certification of full block transfers that have taken place before 1 April 2012 (failure to have notified the PPF of full block transfers in time is likely to be met with potentially hefty levy penalties)

Scheme Specific Lump Sum Protection (Block Transfers)

This protection applies to members of occupational pension schemes on 5th April 2006 who had a tax free cash entitlement of more than 25% of their pension fund.

The protected lump sum rights could be transferred to other schemes as part of a block or bulk transfers.

The current lump sum value is calculated using the increase in the standard LTA. From 6th April 2012, the calculation will continue to use a figure of £1.8 million in place of the standard LTA (£1.5m) until such time as the standard LTA is increased beyond this amount.

So in the true spirit of ‘Pension Simplification’ confusing the situation even further, for an individual in this group who is considering registering for Fixed Protection, this adds a new dimension to their decision. While Fixed Protection applies, the lump sum scope increase does not.

Commutation Of Small Personal Pension Funds

Draft regulations have been issued to enable individuals to access those savings held in small personal pension schemes, i.e. £2,000 or less, by way of lump sum payment.

From 6 April 2012, it will be possible to pay out funds in this way to individuals aged 60 or over, as an authorised payment, provided certain conditions are met. These payments can be made regardless of the value of the individual's total pension savings and can be made provided the individual has received no more than one other such trivial lump sum payment.

The measure will help individuals aged 60 or over, who cannot otherwise use the lifetime trivial commutation rules, to access a very small personal pension pot, and also some who have already taken a trivial commutation lump sum and later discover small benefit rights in a personal pension scheme.

Taking Action On Inheritance Tax

Paul Korobejko — Thu, 15 Dec 2011 12:26:01 GMT

How many times have you been told that Inheritance Tax (IHT) could eventually wipe a large amount from the value of your estate on death, gone away, thought about it, and then done nothing about it? Or it may be the case that your parents are being advised of the problem, but take no action and the younger generation get a little frustrated.

In my experience, advising on IHT is as much about getting into the psyche of the client as much as understanding the financial problem and how to solve it. As much as a client may understand that the taxman could be a significant beneficiary after one’s death, it is often difficult to make important decisions during one’s lifetime, for many different reasons. This might be for worry of losing financial security, family reasons, or it just might be too big a decision to make.

Financial advisers can often tell you about the problem and come up with a textbook solution, but sometimes may not be so good at persuading you to take the correct positive action and do something about it.

I have found that planning of this type is something that evolves over a period of time and often in smaller bite sized chunks, rather than making huge financial decisions all at once. The adviser, whether solicitor, accountant or financial adviser will often need to give a friendly nudge to spark some action. The important thing is that one needs to feel comfortable and confident about making important financial decisions. If you have a long term and trusting relationship with your adviser this can make things much easier for you.

The best place to start is firstly to understand what the problem is. In a nutshell, if a married couple has joint assets valued at more than £650,000, then eventually, upon the second death Inheritance Tax is payable on the excess above £650,000 at a rate of 40%. So, for example, a £1 million estate could have a tax bill of £140,000.

There are a few useful allowances to help reduce this tax during one’s lifetime. I always try to encourage clients to utilise the smaller allowances to begin with and these include:

You can each gift £3,000 per annum. If you haven’t used last year’s allowance, you can mop this up, making it £6,000 each straight away.
There are exemptions for gifts to children or grandchildren getting married. £5,000 each person to children, or £2,500 each to grandchildren
You can make regular gifts out of income, with no definitive limit. The general requirement is that the gift should be seen to be regular and out of income and also that the amount should not reduce the standard of living.

These smaller allowances can build up over time and make useful savings. Perhaps even more importantly, isn’t it nice to be able to help family members with generosity whilst you are still alive, and hopefully see the enjoyment this can bring, at the same time saving tax?

If the thought of making gifts directly causes concern, you can think about making gifts into trust; giving you more control over how and when the money is paid out.

Making gifts and using the smaller allowances is a good start. To help make a significant impact on the tax saved it is sometimes necessary to gift larger amounts. In general, you then need to live for 7 years for the value to avoid Inheritance Tax. For this reason it is better not to delay this type of planning for too long.

Larger gifts can be made outright to individuals but sometimes there can be reasons why this isn’t the best way – usually family problems. To get round this, a trust is often the way forward. This does not need to be complicated or expensive. A good family solicitor should be able to give good advice. Alternatively, there are some very good off the shelf trust products through insurance companies that can often provide a very good solution, usually offered through Independent Financial Advisers.

If your assets are valuable enough to get caught in the IHT trap, there is no doubt that making a Will is absolutely essential. My advice is don’t keep leaving it as we never know what’s around the corner.

It takes time to take the right action to reduce the Inheritance Tax burden and with the help of a trusted, knowledgeable and understanding adviser, this can be made a lot easier.

Paul Korobejko, ACII Dip PFS and Chartered Insurance Practitioner.

Employers must engage with employees for pension changes to work

Ian Hill — Thu, 15 Dec 2011 12:23:28 GMT

With the introduction and prospect of employers having to auto-enrol their ‘eligible job holders’ into a pension scheme, starting next year, millions of employees will be saving in a company sponsored pension scheme for the first time. With such an influx of new entrants to both existing and new schemes this presents a significant challenge for the pensions industry. Notwithstanding the administrative detail that has to be considered, communication, engagement and education strategies will be integral to the governments plan to ensure that employees save for their retirement.

Recently there has been acceleration away from defined benefit (DB) schemes with a good number of employers expecting to close their DB scheme, not just to new members but to future accrual for existing members. Therefore for the majority of employers, this leaves a defined contribution (DC) scheme as the only form of pension available to auto-enrol employees into.

Managing the cost and risk, inherent in a pension scheme has given employers a headache for decades. We can now add employee appreciation of pension benefits to the list, as this will become one of the key challenges facing employers today. Employers will have to focus on conveying information effectively, it builds employee appreciation of the value of the workplace benefits being provided, which can help promote both retention and recruitment. However, the employer must be mindful of not crossing the line and straying into the territory of ‘financial advice’.

DC provision requires a substantially different level of communication from DB. Members have more decisions to make that have a real impact on their retirement savings. DC also has a reputation for being inferior to DB, a view that is likely to be strongest among former DB scheme members. For these reasons, I would suggest that communication has to be very high on the agenda for a DC scheme to be effective.

Employees often do not understand how their current benefits work. This creates a huge obstacle when communicating pension changes. In the DB world, most employees did not need to understand their company’s benefits plan; they just knew that they had a pension. But in the DC world, employees need to understand and be engaged in their benefits plan to maximise returns. It is easy to assume what employees know. Electronic solutions of communication are increasing in sophistication, but there is an assumption being made that an employee is fully conversant with pension jargon used. Considering the significant number of new members that will be drawn into pension schemes, communication strategies will need to start with the basics to help employees understand the whole process and how it pays to participate in planning for retirement. One of the best communication strategies is the option of face-to-face discussions, either on a one-to-one basis or through group staff presentations. There is nothing wrong with electronic communication, but this should be viewed as support to face-to-face interaction and to adopt a balanced approach combining different communication media.

Younger members are likely to have different concerns and interests to those close to retirement. Many members will always wish to take the passive default approach, while others will be keen to take active control over the contributions and investments. Trying to meet all these members’ needs through a one-size-fits-all communication is likely to end in failure.

The key to successful DC communications is understanding members and segmenting the audience. Different groups within an employee population view pension plans differently and it is important to address the needs of all employees. You do not want to over-communicate with people who are clearly not interested, but you need to provide enough information for those who are.

Employee engagement is a key measure of the success of pensions' change. The result is an engaged workforce that is aware of the benefits on offer and actively participates in making regular choices about savings.

Employers and trustees have the opportunity to have a proactive, responsive reaction to the difficult challenges ahead. If communications are well managed, the government’s aim of delivering retirement solutions to the majority of employees might just help private schemes do just that.

Pension Matters December 2011

Ian Hill — Wed, 07 Dec 2011 10:22:46 GMT

Welcome to Pension Matters, produced by Torquil Clark.

Every month I will update you on the latest legislation and news surrounding corporate and personal pension planning. To find out more about the topics covered in this edition, please call 01902 576707. We'd also like to take this opportunity to wish you a Happy Christmas and a prosperous New Year.

Ian Hill, Pensions Technical Manager

Auto-enrolment delays for small businesses

Businesses with fewer than 50 employees will not have to auto-enrol staff into pension schemes until 2015, the Government has confirmed.

Minister for pensions, Steve Webb, confirmed in Parliament today that auto-enrolment for small businesses will be delayed for one year to allow additional time to prepare for the changes.

The Government also confirmed that automatic enrolment for businesses with 50 or more employees will begin in autumn 2012. Small businesses will have to begin automatically enrolling their staff in May 2015, instead of in April 2014 as previously planned.

Webb commented: "Our society and economy needs to be based on a foundation of saving, not debt. Automatic enrolment will help millions save, and to not act will leave people poorer in retirement."

He added: "We recognise that small businesses are operating in tough economic times so we are softening the timetable for implementation to give them some additional breathing space. This is a sensible step that ensures long term pension issues are addressed while meeting the short and medium-term needs of small business. We are committed to ensuring the employees of these small businesses get the chance to save and that is why no one will miss out."

With auto-enrolment delayed for small firms until after 2015 any employer expecting to auto-enrol their staff after July 2013 could see their staging date pushed back. This could include firms of up to 3,000 employees. The introduction of the full 8 per cent contribution rate will also be delayed. The Government will set out new dates early next year.

This takes a large proportion of Turner’s target audience, at one stroke out of pension saving. Even on the current timetable they would have a big gap they will never be able to make up in their pension pot.

Whilst this may be a sort term saving to employers, it doesn't put off the inevitable

Further details of the changes will be published in January.

NEST launches employer automatic enrolment guide

NEST Corporation has published its automatic-enrolment guide for employers.

The guide sets out what organisations need to consider ahead of the Government's changes to workplace pensions with indications of when they might need to take action.

You can download a copy of the guide here: http://www.nestpensions.org.uk/schemeweb/NestWeb/includes/public/docs/Employers-guide-to-automatic-enrolment,PDF.pdf

NOW: Pensions unveils charging structure as it prepares to rival NEST.

The multi-employer trust-based defined-contribution scheme, which is backed by Danish pension scheme ATP, will charge members £1.50 per month for administration plus a 0.3 per cent annual investment management charge.

The pension scheme will operate a single investment strategy which it says “performs and protects”. The strategy will be based on a managed diversified growth fund, a retirement protection fund and a cash protection fund.

ATP claim that they have been providing Denmark’s working population with stable, consistent returns over the past 45 years, no matter how volatile the economic climate.

In comparison NEST pension scheme will levy a 1.8 per cent charge on member contributions in addition to a 0.3 per cent AMC.

Pensions Bill now an Act

On 3 November 2011, the Pensions Bill received Royal Assent and is now the Pensions Act 2011.

Key measures in the Act are:

State Pension Age - implementation of an accelerated timetable for increasing state pension age to 66.
Automatic enrolment - a number of changes to the regulatory framework for the duty on employers to automatically enrol eligible workers into a qualifying pension scheme and to contribute to the scheme, many of which implement the recommendations from last year's review of the scope of automatic enrolment policy. The amendments recently proposed by the Government in relation to the cap on administration charges on schemes used for auto-enrolment have gone through.
Revaluation and indexation - amendments to existing legislation concerning revaluation and indexation of occupational pensions, and indexation of payments by the Pension Protection Fund (PPF), following the Government's decision to use the Consumer Prices Index (CPI) as the measure of increase in the general level of prices in place of the Retail Prices Index (RPI).
Payment of surplus to employer - extension until 6 April 2016 to the transitional period for trustees to ensure that payments of surplus to the employer can be made.
Pension Protection Fund - measures to assist the PPF and other parties such as a power to enable the PPF to decide whether a PPF entry valuation for a particular scheme is required
Money purchase benefits - following the Government's defeat in the Bridge case, a new statutory definition of "money purchase benefits" to make it clear that such benefits with design features which have the potential for there to be any mis-match between assets and liabilities, expenses aside, will now no longer be treated as money purchase benefits.

Annual allowance carry forward

HMRC has confirmed that it will publish a changed reading of the tax law on carry-forward available from the three tax years 2008/9, 2009/10 and 2010/11, in working out Annual Allowance (AA) charges for 2011/12 onward.

As a reminder, under the new Annual Allowance regime, where the pension savings of an individual exceeds the AA in a tax year, unused AA amounts from up to three previous tax years are "carried-forward" and offset against the excess, before assessing the AA charge - with carry-forward amounts from 2008/09 to 2010/11 calculated as though the new regime were in place then.

To date, HMRC's guidance included examples for these specific three tax years showing that a tax year's over-saving compared to £50,000 used up spare under-use from a previous tax year.

However, following representations, HMRC's revised reading of the law is that any over-saving in these tax years is ignored, and does not use up earlier spare AA (Note this new reading only affects how the three "notional AA" years interact with each other - there is no change to the reading for using up carried-forward unused AA after 6 April 2011).

So, for example, an individual whose pensions savings are valued for this purpose at £40,000 in 2008/9, £70,000 in 2009/10 and £40,000 in 2010/11 would, under the old reading, when testing for any 2011/12 AA charge have unused carry-forward available of only £10,000 from 2010/11 because the spare £10,000 from 2008/09 was used up against the excess in 2009/10. Now this is freed up, to give a total unused carry forward of £20,000 for use in 2011/12 (£10,000 from 2008/9 and £10,000 from £2010/11).

Our analysis is that this has no impact for individuals with spare AA in all three of these years, or with no spare AA in all three; otherwise, it either improves an individual's position (by at most £100,000) or does not change it.

State Pension Increases

The government has stood firm over its commitment to the state pension 'triple lock', confirming the state pension will rise in line with the 5.2% consumer price index (CPI) level for September.

This is in line with the triple guarantee attached to the basic state pension (BSP), which the government has pledged will rise in line with the highest of earnings, prices or 2.5%.

It had been rumoured the chancellor would try to find a different basis for the CPI figure, for example an average over the year, to keep costs down.

A full BSP will rise by £5.30 to £107.45 per week in April 2012. The full rate for couples whose entitlement is based on their spouses’ or civil partner’s pension will rise by £8.50 to £171.85 per week.

The pension credit will increase by 3.9% in April 2012 to £142.70 per week for single pensioners and £217.90 a week for pensioner couples.

The threshold for the savings credit in April 2012 to will rise to £111.10 for single pensioners and £177.20 for pensioner couples.

Chancellor George Osborne also confirmed widely-trailed plans to bring forward the rise in the state pension age, hiking it to 67 between 2026 and 2028.

Osborne told parliament the state pension age (SPA) would begin to rise from 66 to 67 in 2026 to adjust for rising life expectancy. Under Labour's timetable, the pension age was set to reach 67 between 2034 and 2036.

More women will receive Basic State Pension in future

The Office for National Statistics has published Pension Trends Chapter 5, which shows that, whilst women's State Pension Age is rising, more women will receive the full Basic State Pension in future and its purchasing power will strengthen.

Pension Trends Chapter 5 reveals that in September 2010 only 48 per cent of female pensioners received a full Basic State Pension (BSP), compared with 87 per cent of male pensioners. Many women in the current generation of pensioners failed to build up full or near-full BSP entitlement under the system in place before 6 April 2010, mainly because of broken work histories and part-time work patterns.

However, as a result of legislative changes, 95 per cent of women reaching State Pension Age in Great Britain in 2030/31 are expected to receive a full BSP.

The purchasing power of the BSP is also set to rise. This is because the Pensions Act 2007 re-linked BSP increases with earnings and in 2010 the Government introduced the ‘triple lock' policy guaranteeing that BSP will be increased each year by average earnings growth, inflation or 2.5 per cent, whichever is higher. Modelling by the Department for Work and Pensions (DWP) suggests that by 2030 the purchasing power of BSP would increase by almost half.

Nevertheless, DWP modelling suggests that 60 per cent of women reaching SPA in 2016-20 will have state pension entitlements of less than £140 per week in 2011/12 earnings terms.

Pensions Regulator and Hybrid schemes

The Pension Regulator has published a statement to help trustees and their advisers understand the structure of their ‘hybrid' scheme (schemes with defined benefit (DB) and defined contribution (DC) elements).

The regulator has warned trustees that governance failings in complex 'hybrid' schemes risk impacting members' retirement benefits. Trustees must take action to address these risks.

The statement includes a series of checklists which summaries the actions trustees, administrators and employee benefits advisers should take to ensure they are able to properly manage their scheme.

From November 2011, the regulator will include additional questions in the scheme return for DB and hybrid schemes.

The Pensions Regulator updates scheme return forms

The Pensions Regulator has updated and started to issue scheme returns forms for 2011.

Three key changes have been made:

Information about a scheme's "statutory employers" is being requested.
There is a space for information about any hybrid benefits in a scheme.
In the case of schemes with liabilities exceeding £1.5 billion, the results of a stress test on their investment risk is needed, following changes to the PPF levy calculation. Smaller schemes can opt to provide bespoke investment risk data.

PPF annual report

The PPF has published its annual report and accounts for 2010/11 and its long-term funding strategy update.

The latest report and accounts show a surplus of £678 million, an increase of £248 million from 2009/2010, and confirm that the probability of the PPF being able to be financially self sufficient by its target date of 2030 has increased to 87% as at 31 March 2011.

More details about the PPF's long-term funding position are published in the accompanying long-term funding strategy update.

By 31 March 2011, a total of 283 schemes had transferred to the PPF, representing 74,651 members. 335 schemes were in an assessment period, representing 187,223 members who could be entitled to compensation. 170 schemes completed PPF assessment, beating the target of 135.

PPF Confirms GMP treatment method and announces pilot project

The Pension Protection Fund has confirmed how it will calculate compensation for men and women being assessed for entry into the PPF, or who are already PPF members, to ensure the equal treatment of men and women required by law, and has announced a pilot project.

Differences in compensation or assistance payments for men and women can arise because of differences in the calculation of guaranteed minimum pensions (GMPs), primarily brought about by different retirement ages. In 2008, the PPF confirmed that it has to take account of GMPs to ensure the equal treatment of men and women that is required by law.

The PPF has now confirmed how it will calculate compensation for men and women being assessed for entry into the PPF, or who are already PPF members, to ensure the equal treatment of men and women.

Before applying the method to all pension schemes in the PPF assessment period, the PPF will undertake a six month pilot project with selected schemes to iron out any teething problems.

This means that pension accruals for men and women in otherwise identical circumstances between 17 May 1990 (the date of the Barber judgment requiring sex-equalised pension benefits) and 6 April 1997 (when GMPs stopped accruing) will be compared and the PPF compensation adjusted to reflect the higher pension.

PPF entry valuations can continue to ignore the GMP inequality adjustment if without it they show that the scheme is underfunded. PPF levy valuations that all PPF-eligible schemes are required to complete every three years are completely unaffected.

As the manager of the Financial Assistance Scheme (FAS), the PPF is also to ask affected FAS schemes in wind-up for data to enable it to adjust the calculation of assistance payments. Revised guidance is to be issued shortly to help schemes do this.

Immediate impact will be limited to the pre-selected pilot schemes. And once the adjustment is up and running it applies only at the compensation determination stage.

For schemes that remain outside the PPF for which nearly two years have passed since the Government announced that it intended to take action and this outcome may be different.

Fixed Protection

HM Revenue & Customs (HMRC) has published Its Pension Scheme Newsletter 50, a special edition focused on Fixed Protection, giving much-awaited answers on the operation of this new transitional protection available to individuals concerned at the possible impact of the reduction in the Lifetime Allowance (LTA) from £1.8m to £1.5m on 6 April 2012.

Even more so than usual with transitional protections, the law is complex particularly in relation to defined benefit arrangements and following HMRC's guidance is vitally important for those concerned.

HMRC that it is expecting 70,000 registrations for Fixed Protection. It is clear that HMRC is now anxious that members have sufficient information to have a fair crack in the tiny window before the 6 April 2012 deadline for registration to analyse the option.

Affected members have some difficult analysis to carry out before deciding their preferred course of action.

Torquil Clark Wins The Gold Standard Award

Administrator — Wed, 30 Nov 2011 10:02:55 GMT

Torquil Clark has won the prestigious Gold Standard Award for Independent Financial Advice for the eighth consecutive year and was presented the award in the House of Commons last week.

The awards are dedicated to identifying firms in the financial services sector that can demonstrate a strong structure and are committed to excellent standards of service.

The Gold Standard Awards are one of the toughest Awards to achieve. As well as taking into account financial strength, the awards assess areas such as trust, fair value, service as well as capability to conduct business. They are designed to identify companies that not only have strong structures and procedures in place, but are going above and beyond standard business practices to restore faith in the financial services sector generally.

The financial services landscape in the UK will change dramatically in the coming years. Not only structurally, but also morally as we witness a growing shift towards more corporate responsibility. Increased standards of professionalism will be at the very heart of the financial services sector in the future. The Awards recognise the efforts of those companies who are taking these changes on board.

Commenting on the Awards, chair of the judging panel, Deborah Benn, says, "The level of interest in this year’s awards bears witness to the fact that there are companies out there who are working extremely hard to promote trust in financial services in the best way possible - by their actions.”

"Torquil Clark's entry was extremely detailed and comprehensive. Their overall capability as a fee-based adviser is very clear. The range and quality of client reviews provided was excellent. A worthy Gold Standard Award winner."

Entrants to the Awards are asked to answer a rigorous series of questions formulated specifically to assess the areas of capability, trust, fair value and service and provide evidence in line with their responses. The baseline for all responses and evidence supplied is on standard requirements to conduct business. However, only those companies that can clearly demonstrate they go above and beyond standard requirements are considered for a Gold Standard Award.

Autumn Statement: Key Points & Reaction

Tom Biggar — Tue, 29 Nov 2011 17:18:25 GMT

In essence this was a budget which just reminds us all that Britain’s books will not be balanced by the next election. With the Eurozone sliding towards recession, all eyes remain on the Chancellor to protect the UK from the same downward direction. In order to avoid the prospect of a double dip, the UK has to be repositioned for business growth and George Osborne is hoping the British public will roll up their sleeves and create the stimulus needed to aid economic recovery. The financial benefits awarded to small businesses are welcomed but the concern remains that if the current plans for the economy continue to produce lack lustre results, there is no clear plan B in place.

All eyes are on now on the Chancellor meeting his revised forecasts for growth and debt deficit, as the mood of the country is that there is no room for further failure.

What we wanted to see from George Osborne was a clear focus on growth for the UK economy and progression on plans for reduction of the deficit – signs that the painful spending cuts were working.

News that economic growth for 2011 has been revised to 0.9% down from 1.7% the Chancellor predicted in his budget earlier this year is not reassuring news, but then neither was the announcement that borrowing figures had also been revised to a staggering £127bn for 2011-12. A bitter pill to swallow for Cameron who told us that we could not ‘borrow our way out of a crisis’.

The good news is that the focus for the Autumn Statement was on stimulating the economy, focusing heavily on infrastructure projects and easing the financial constraints which are choking businesses.

A credit scheme programme to underwrite up to £40bn in low-interest loans to small and medium sized firms has been introduced alongside a £1bn business partnership to help secure funding for medium-sized firms. Regional Growth regeneration fund is to get £1bn in extra funding and a £250m support package for energy-intensive firms.

£5bn will be spent on infrastructure spending including £1bn for the rail network. New rail link between Oxford, Bedford and Milton Keynes are promised to create 12,000 and jobs and much needed stimulus.

It all sounds promising, infrastructure and investment into business, essential in order to get ‘Britain Moving’ but this has to all be paid for and where is it coming from? Well it’s the public’s coffers again and £20bn from pension pots. All this perfectly timed to co-inside with the rise in the state pension age of 67 being brought forward to 2026, this may save an estimated £59bn but disrupting the retirement plans of workers.

Some revenue is to be clawed from Banks as the levy has been increased from the current 0.078% to 0.088% in January 2012. The public will be pleased to see that Banks are sharing some of the current financial pain however Osborne will need to tread carefully if he wishes to keep London as the home of global banks, if they are taxed too heavily then the concern is that they will leave. Bank share prices dropped on the news of the increased levy, RBS lost 0.6% to reach 19.08 pence per share, Lloyds lost 2.44% to reach 23.11p per share.

The ongoing housing problem is being tackled by a mortgage indemnity scheme which is set to help up to 100,000 people buy homes with a 5% deposit. This is being coupled with a 50% discount scheme to help social tenants buy their own homes with profits from sales to be ploughed back into new developments of social housing. The aim is that this scheme will kick start stalled construction projects in England.

The good news is that the planned 3p fuel duty in January has been deferred until August 2012, basic state pension is to rise by £5.30 to £107.45 per week and pension credit is going up by £5.35 per week. £1.2bn is to be spent on school buildings. Transport costs are to be capped, rise in regulated rail fares to be capped a 6.2% which will be applauded by commuters.

Consider The Options Before Taking Your Pension

Paul Korobejko — Wed, 23 Nov 2011 11:07:11 GMT

When you were a youngster do you remember chuckling at the silly antics of Freddie and the Dreamers, or singing along to Herman’s Hermits? If so, you’re probably now of an age when you’re thinking about your pension and when you might be retiring, if indeed you haven’t done so already.

The greater proportion of my clients are in that age group. For a few, life hasn’t quite worked out as planned. From a financial point of view, life was supposed to get easier as the kids flew the nest and the mortgage got paid off. Sadly, many people are finding that is not always the case.

More frequently these days I find that a pension fund is being called upon earlier than expected to help overcome some of life’s financial challenges. This can be for all sorts of reasons, perhaps redundancy, or to pay university costs for children, or because business isn’t as good as it was.

Pension rules allow for pension benefits to be paid out from age 55 onwards. Some financial advice firms actively promote their ‘Pension Unlocking’ services and while this is fully legitimate, the regulators keep a very watchful eye on this to make sure that people are not badly advised and deprived of their pension in later years, without realising the consequences. Of course this is a good thing as it helps to protect the public against the risk of mis-selling. An adviser would be expected to explore all appropriate avenues, including the possibility of getting a loan instead of using the pension fund. Thankfully, the due process goes a long way to make sure that advisers give high quality advice – if they don’t, they face a real possibility of the Regulators coming down very hard.

One of the benefits of a pension fund is that part may be taken as a cash lump sum, free of tax. Generally, this is limited to 25 per cent of the available pension pot. It is the cash lump sum that is usually of most interest when money is tight. The rules allow this to be accessed from age 55 and the pension can be taken at the same time, or it can be deferred to a later date. If the money is being used for the right reasons and the person is fully aware of the consequences, earlier access to a pension may well be the right action. Sometimes a large cash lump sum can make a big difference to a person’s personal circumstances and can solve immediate problems – perhaps almost a life changing thing.

Even when money from the pension fund is not necessarily required immediately, there may be other good reasons to start taking the pension, perhaps sooner rather than later. Within Torquil Clark we believe that as a general principle, there is a time to build up a pension fund and there comes a time to start taking the pension, although of course there may be exceptions. Often, it can make sense to start looking at your options from about age 60 onwards, simply because you need to receive the pension for many years to get your money’s worth out of it. I need to qualify this by saying that this can depend on whether there are penalties or actuarial reductions for taking the pension early.

For those expecting pensions from final salary type schemes, the decision making is somewhat less difficult as you should know what to expect and when it will be coming, more or less. However for those in money purchase type pensions, such as Stakeholder, Personal Pensions and SIPPs there are many variable factors to consider, such as the fund value and interest rates, especially at a time when both are at lower levels, thereby having an impact on the level of pension.

Deferring the pension could prove costly. For example, if a 65 year old waits for a year to start taking his pension, he could be almost 80 by the time he catches up with that one year’s pension lost. This is based on reasonable assumptions about investment growth and interest rates during that year.

People will sometimes defer in the hope of the fund value improving, or perhaps pension annuity rates getting higher. There is a risk that these could go in the opposite direction which means lower pension benefits in addition to missing the pension from earlier years. This general principle should be taken on board by almost anyone over age 60.

Remember, each individual’s circumstances are different, so please always try to take good, reliable, advice about your pension.

Uncertainties Still Surround Auto-Enrolment

Ian Hill — Wed, 23 Nov 2011 11:02:11 GMT

Next year will see the start of a huge revolution in the provision of workplace savings. Pensions auto-enrolment, under which all employers will be compelled to offer most of their workforce a pension, will commence.

For many businesses deciding how to handle the detail will involve senior decision-makers in the company, from pension fund trustees to the finance director. Preparing for it on both a practical and financial level requires some significant decisions as auto-enrolment is not just a pensions problem, but the sooner preparations are made, the easier it will be to comply with the legislation. The UK’s larger employers have only one or two years before their staging dates to comply with the new regime or face penalties of up to £10,000 a day. However, even with constantly changing legislation and delays one of the biggest barriers is that gaps still remain in the legislation surrounding auto-enrolment.

One example of the limitations of current detail is the lack of definition of a ‘qualifying scheme’, for companies that want to use their existing pension arrangements for auto-enrolment. The Department for Work and Pensions (DWP) currently has a draft version of the certification, but the finalised version at the point of writing has not been released.

There is still confusion over whether the DWP will abolish short service refunds. These allow employers and employees to reclaim their basic contributions if they leave a trust-based scheme within the first two years. This could have a substantial impact on the type of scheme that employers, particularly those with high staff turnover, choose to implement.

Awareness amongst employers still remains low even though the costs for employers could be substantial. Not only will employers have to cover the cost of pension contribution for relevant workers, but also the cost of dealing with the implementation and administration will have to be factored into corporate business plans and it is recommended that employers undertake financial modeling to understand the budgetary implications.

Not all employers will be able or want to cope with the extra burden of running their own pension scheme and will be drawn to the prospect of using NEST, the the Government-backed large scale alternative pension arrangement, but NEST has yet to formally open its doors to business and prove itself in a live environment. By deciding not to include support for connecting NEST to company payroll systems, it may have been a hasty decision as Insurance companies and other providers competing for the same business are offering to solve the data management headaches for employers as a part of their offering. We are seeing competition for the ‘market’ identified by NEST. ATP, the Danish Labour Market Supplementary Pension has announced the launch of NOW: Pensions, an independent multiemployer trust in the UK which is being set up in anticipation of auto-enrolment and will be open for business from early 2012.

Communication and engagement exercises will be as important as the benefits themselves. Building information systems within existing online systems will make it easier for the employer to engage their staff as auto-enrolment will not create value for the employer unless employees really understand what they are getting.

Segmentation of staff will be a HR model that may be adopted by employers, using NEST for transient, low paid, unengaged staff. This would have the advantage of affecting traditional pension scheme providers’ charging structures as small monthly pension contributions do not appeal to current providers and the product terms offered will be reflected accordingly.

I have mentioned before in similar articles that the governance of Defined Benefit Schemes is being translated to Defined Contribution Schemes. This is highlighted within the guidance issued by the DWP about default investment options for auto-enrolment, which includes a requirement for full reviews every three years and whenever certain events occur such as developments within the economy.

Although feeling frustrated at further regulatory developments the employer has a lot to consider over the next few years including revisiting current pension scheme arrangements, implementation issues, including opt-in and opt-out processes and employee communication. One of the challenges will be maintaining the governance structure once everything is in place.

Pension Matters November 2011

Ian Hill — Mon, 07 Nov 2011 12:49:50 GMT

Welcome to Pension Matters, produced by Torquil Clark.

Ian Hill, Pensions Technical Manager

Independent Advice To Be Mandatory Element For Enhanced Transfer Values

It has been widely reported in the press that pensions minister Steve Webb has warned that Employers will have to pay for independent financial advice to every defined benefit (DB) scheme member to whom they offer an enhanced transfer value (ETV) or cash incentive to transfer out of DB schemes.

This is in response to his statement that the use of cash incentives was ‘unfair’ to members and the Pensions Regulators stance that trustees should take the initial view that these transfers are not naturally in the best interests of the scheme members even though it could be that for some individuals, depending on their financial circumstances and the level and form of the enhancement, it may well be in their best interests to transfer. Therefore any ETV exercise ought to be tackled with probing and well-informed caution.

ETVs are not currently illegal, but the minister is reportedly concerned that the prospect of cash and/or enhancements in the short-term is encouraging many members to make pension transfer decisions that are not in their long-term interests.

Employers and trustees currently involved in enhanced transfer value exercises or pension increase exchanges should be mindful of the possibility that such exercises will be scrutinized so although sponsoring employers should not shy away from considering the merits of an ETV exercise, they should involve the experience of an IFA practice at an early stage ensuring money is well spent funding properly for the communications and member advice, allowing the member sufficient time with the adviser for informed decisions to be made. Critical to the success of any exercise is engaging with an IFA firm that has the relevant depth of technical experience, staff with the right qualifications, a robust process, and crucially the individual member communication skills to engage members at a high level on what can be a complex decision is vitally important. This will be and also to help reassure trustees.

The driving force behind an ETV exercise is usually an employer looking to reduce the risks associated with running a final salary scheme. Trustees should be aware that ETVs are not the only solution, but some members want to manage their own pension future taking their own investment decisions and choosing the shape and form of their income in retirement where the current Scheme offers little or no choice.

The motivation for an Enhanced Transfer Value exercise should be to offer members an option which may be more valuable to them than the alternative, with a potential mutual benefit to the other beneficiaries or plan sponsor, rather than simply a tactic to reduce the cost of a buyout for the benefit of the plan sponsor.

The Government is also reportedly concerned at the use of pension increase exchanges under which members are offered a higher initial pension in return for giving up their rights under the scheme rules to future pension increases. However, even where members are advised not to transfer, many may simply ignore that advice.

Pensions Regulator Clarifies Role Of DC Trustees

TPR has published a statement aimed at the trustees of defined contribution (DC) schemes with more than 12 members, as well as qualifying schemes set up in anticipation of the new workplace pension reforms commencing in October 2012.

The statement reminds trustees of the key differences between DC and defined benefit (DB) schemes and it emphasises that, whilst governance functions may be similar in both types of scheme, steps taken to manage these duties are not identical. The statement clarifies what TPR expects from DC trustees, as well as highlighting that trustees’ fiduciary duties extend to deferred members. TPR also warns trustees that it may take action in cases of persistent non-compliance by removing trustees and/or appointing an independent trustee with exclusive powers.

TPR intends to issue a further statement addressing the complexities and risks associated with DC sections of hybrid schemes. TPR is concerned that trustees are sometimes inclined to treat such DC sections as the “poor relation” to the DB section, with the result that insufficient time and consideration are given to DC issues.

Plans For Future Pension Reforms

In a recent speech at the Confederation of British Industry (CBI) conference, Steve Webb, the Pensions Minister, provided delegates with an indication of his plans for future pensions policy.

Key points were:

The possible introduction of a charge cap in relation to default funds, to safeguard workers who are auto enrolled into pension schemes
A consultation on the future of short service refunds next month, which will provide that they will "not be part of the long-term pensions landscape"
DWP is still looking to "reinvigorate" occupational pension schemes and provide further encouragement for people to build up adequate pension savings
There are plans to revisit the risk-sharing model of pension saving
If DB contracting-out is abolished, the Minister is "open" to introducing a statutory override so that schemes can lower future accrual rates to offset increased NICs.

Agency Workers Regulations Come Into Force

The Agency Workers Regulations 2010 came into force on 1st October, giving agency workers the right to the same basic working and employment conditions as comparable employees of the hirer after a qualifying period of 12 weeks.

The regulations do not, however, give agency workers employee status and they will not have unfair dismissal rights or the right to receive statutory redundancy pay.

There is also an exemption in respect of occupational pensions, but agency workers will be covered by next year's auto enrolment requirements (although, it will be the agency, not the hirer, that is normally responsible for compliance).

Compulsory Retirement Abolished

As from 1 October 2011, there is no longer a default retirement age (DRA) of 65 except for certain employees already served with retirement notices before 6 April 2011.

The abolition of the DRA does not stop pension schemes from having Normal Retirement Ages (NRAs) but employers and trustees need to think about the benefits that will be provided to those who remain in service past their NRA. Employers are likely to find that there will also be an increase in demand for flexible retirement, where employees take some or all pension benefits whilst still working, full or part-time, with the same organisation. Employers need to think about their policies in this area and should consider the effect on their businesses of having a workforce with older members.

Early Access To Pensions

Early access to pensions could be looked at again if auto-enrolment fails by 2017.

Speaking at a National Employment Savings Trust (Nest) event Steve Webb hinted that high opt-out rates could see policy ideas like early access to pension funds, quietly dropped earlier this year, re-emerge.

Webb said: 'Auto-enrolment is a massive control experiment and we will learn from those who opt out. We have put early access on hold but if it turns out the reason they opt out is because of not being able to have early access then we would look at that again at the end of the roll out period.'

NEST Update

NEST Corporation has announced it will offering membership of NEST to its own employees, together with a private 'top-up' group personal pension scheme provided by Aviva (for contributions over NEST's annual contribution limit of £4,200, in 2011 terms).

Total employer and employee contributions to NEST Corporation's pension arrangements will amount to 13 per cent of basic salary.

NEST Corporation is one of a number of employers using the National Employment Savings Trust ahead of the introduction of workplace pension reforms duties in 2012.

It has also been announced that almost 100 employers have so far signed up to use NEST ahead of the introduction of employer duties.

Some of the larger employers also considering using NEST include Gondola Group (which includes companies such as Pizza Express), Sodexo, Spirit Pub Company and Travelodge.

DB Can Deliver The Same Retirement Income As DC At Significantly Lower Cost

A new US study has found that New York City's defined benefit (DB) pension plans can deliver the same retirement income as a defined contribution (DC) plan at almost 40% less costs.

The report, A Better Bang for New York City's Buck, found that DB savings come from three main sources: superior investment returns, better management of longevity risk and portfolio diversification.

The study was carried out by the National Institute on Retirement Security (NIRS) and Pension Trustee Advisors (PTA) on behalf of the New York City Comptroller John Liu using data from the five New York City retirement systems. The analysis shows that for workers in the DB plans that were studied, the cost to deliver the same level of retirement income ranges from 36% to 38% lower than the cost of a DC plan.

State Pension Age Rise Delayed For Worst-Hit Women

The government has delayed rises to the state pension age (SPA) for women set to be worst hit by the measure.

Welfare secretary Iain Duncan Smith has revealed long-awaited relief measures for women who were facing two years longer than expected before they could claim the state pension.

The delay came as result of reforms that would see the SPA for women reach 65 by November 2018 and rise to 66 for both men and women by April 2020. The amendments, will propose that the SPA for men and women reaches 66 by October 2020.

Under plans announced last year SPA for women would go from 60 to 66 by 2020. However men’s age will not start rising from 65 until 2018. The early rise for women meant around 500,000 women currently over 55 would see their pension age rise by more than a year and in some cases two years, overnight.

The amendment to the timetable originally proposed in the Bill maintains equalisation of state pension age at 65 by November 2018, but then phases in the transition from 65 to 66 more slowly. As a result, the state pension age reaches 66 in October 2020 instead of April 2020. The government said that the amendment will mean the maximum delay before a woman receives her basic state pension will be reduced to 18 months.

State pensions will cost the government an extra £45 billion by 2025 because of the triple guarantee to uprate the basic state pension by the highest of earnings, prices or 2.5%.

Insurance Industry Launches Annuity Initiative

The Association of British Insurers has announced it will introduce a compulsory code of practice for insurers. Under the new code, ABI members will remove the annuity application form in the communications they send to their customers.

The intention is to stop consumers from automatically rolling over their pension savings to an annuity with their current provider.

The new code will also ensure that customers receive all the information they need to shop around in one easily accessible place. The ABI will also continue to work with Government, consumer groups, and others, to make it easier to shop around.

ABI figures show that increasing numbers of consumers are buying an annuity from a provider which is not their pension provider (46% in 2011, compared to 35% in 2008. However, about a third of people do not shop around. As a result, consumers may be missing out on a higher income, potentially losing thousands of pounds, over the course of their retirement. Given about 650,000 people turn 65 in the UK every year, the ABI says that it is critical that the industry supports those individuals to obtain the best possible retirement income.

The ABI has identified customer inertia as one of the key reasons why people fail to shop around. Most consumers receive an application form for an annuity from their existing provider as part of the communication pack posted to them in the run-up to their retirement date. Many simply complete and sign the application form and send it back to their existing provider, rather than shop around for a better deal.

Pensions Bill Update

The report stage and third reading of the Pensions Bill took place in the House of Commons on 18 October. The Bill has now moved to the House of Lords for its final reading, after which it will become the Pensions Act 2011.

Three sets of government amendments have been agreed:

Definition of money purchase benefits

Following the Supreme Court decision in the Bridge Trustees case, a new definition of "money purchase benefits" is to be introduced into the Pension Schemes Act 1993. The new definition would mean that a benefit could only be treated as a money purchase benefit where "its rate or amount is calculated solely by reference to assets which (because of the nature of the calculation) must necessarily suffice for the purposes of its provision to or in respect of the member". Pensions in payment would only be treated as a money purchase benefit where they are secured by way of an annuity contract or insurance policy taken out with an insurer and where "at all times before coming into payment" the benefit fell within the said meaning of a money purchase benefit. The Government's objective is to ensure that benefits that could develop a funding deficit cannot be treated as money purchase, meaning that some schemes that have formerly been treated as money purchase will now be classed as defined benefit.

There have been a number of stories in the trade press suggesting that as a result of the proposed changes SSASs and SIPPs will no longer be in a position to offer a scheme pension out of the funds of the scheme. However, when you look closely at the proposed amendments in the light of the above the position is not so clear cut.

The concept of ‘scheme pension’ under a ‘money purchase arrangement’ exists through HM Revenue and Customs legislation in Finance Act 2004 and the new legislation being DWP legislation and designed to protect “occupational schemes” does not appear to have any impact.

A SIPP is not an occupational scheme and so could not fall foul of the occupational scheme funding rules nor have a requirement to pay the PPF levy as these only apply to defined benefit occupational schemes.

Although a SSAS is an occupational scheme, so potentially could be caught by the new definition, there has historically been exemptions due to the specialist structure of SSAS, to the extent that most schemes should not be caught by the scheme funding rules or have to pay the PPF levy where they have only one member or have less than 12 members and all members are trustees and the rules provide that all decisions must be taken unanimously.

In isolation the new definition of money purchase does appear to create an issue for money purchase schemes who offer scheme pension as a retirement option. However, when you take into account the legislation that it is changing it would appear that it is only intended to apply to true defined benefit occupational schemes.

As written it is therefore difficult to see how it could impose any restrictions upon scheme pension under a SIPP. There is potentially an argument that a SSAS scheme pension could face restrictions but given past exemptions this would be a rather strange approach to take.

Member charges on auto-enrolment.

A new clause will cap administration charges levied on active and deferred members of a qualifying scheme under the Pensions Act 2008 at levels to be prescribed by regulations. Charges covered by this provision will include deductions made from a member's contributions, investment returns or benefits that are used to defray the administrative expenses of running a scheme or to pay commission.

Following the report stage and third reading in the House of Commons on 18 October 2011, the Pensions Bill will undergo its remaining parliamentary stages on 31 October 2011. Royal Assent is expected to be given shortly afterwards.

45% Of Britons Don't Know How Their Pension Is Invested

45% of Britons are unable to say whether they opted for the default option when they last reviewed their pension, according to research conducted by Barings.

35% say they chose the default investment option. However, 20% say they have chosen the fund allocations of their pension; the highest percentage Barings has recorded since 2008, showing some increased engagement with pension fund allocation.

The survey also found that men are more likely than women to choose the fund allocations of their pension plan (21% and 18% respectively).

PPF Index Update

The PPF 7800 Index has been updated to the end of September 2011. Highlights include:

The aggregate deficit of the 6,533 schemes in the PPF 7800 index is estimated to have increased over the month to £196.4 billion at the end of September 2011, from a deficit of £117.5 billion at the end of August.
The funding ratio fell from 89.2 per cent to 83.1 per cent.
Total assets were £963.8 billion and total liabilities were £1160.2 billion.
There were 5,345 schemes in deficit and 1,188 schemes in surplus.

PPF Bulletin

The latest edition of the PPF Bulletin concentrates on the changes to the Pension Protection Levy for 2012/13.

It sets out what those developments are, and what impact there will be on schemes. It also points out some key things scheme trustees and their advisors should focus on to ensure that they are charged the right amount.

Schemes with ‘Type A ‘(parental guarantees) contingent assets should be aware that the PPF has become concerned about the financial strength of some entities providing company guarantees. In future, trustees will have to certify each year that the guarantors for their scheme can be expected to meet their commitments under the guarantee and the PPF will be "taking active steps to obtain comfort as to the financial strength" of the guarantors. However, the PPF will allow a wider range of entities to act as guarantors; they will no longer have to qualify as "associates" of an employer.

Where the PPF has reason to question the value of the arrangement to a scheme, it may request further independently verifiable information to assist it in deciding whether to accept that contingent asset. Where satisfactory evidence is not provided within the required timescales, the contingent asset will be ignored for the purposes of the levy calculation.

This requirement may cause a number of practical difficulties for trustees in establishing whether a guarantor company has sufficient worth to cover any contingent asset offered. For instance, is an employer covenant review required and how long might that take? How are the costs of any additional reviews to be met and how are trustees to give a certificate relating to data of which they have no knowledge?

Actuarial Profession Proposes Conflicts Of Interest Restrictions On Pension Actuaries

The Actuarial Profession has published policy proposals concerning conflicts of interest facing actuaries.

Several of the proposals that are relevant to pension actuaries are likely to be incorporated into the existing actuarial standard Duties and responsibilities of pension actuaries (APS P1) with effect from April 2012.

The main areas focused on in the consultation are:

new regulatory provisions applicable to actuaries undertaking pensions work;
guidance for actuaries on conflicts of interest;
guidance to pension fund trustees on the approach of actuaries to conflicts of interest; and
proposals for additional training and support.

Paragraph 5.1 of amended APS P1 will include a term that a scheme actuary should not advise a sponsoring employer "in relation to the funding of that scheme or in relation to any matter which has a direct bearing on the benefits payable under that scheme, including, but not limited to, advice on actuarial factors".

But the working party that has produced the proposals rejected an outright ban on an actuary advising a sponsoring employer, on the grounds that this would "impede sensible arrangements for scheme administration agreed between trustees and employers".

Additional guidance for actuaries about how to deal with conflicts is included as Appendix 5 to the consultation paper and a guide for pension scheme trustees on actuaries' approach to conflicts appears as Appendix 6. The consultation period on the proposals runs until 10 December 2011.

Court Considers Legality Of Pension Index Change

The High Court has begun considering whether the government behaved lawfully in changing the inflation index for public sector pensions.

Ten unions are challenging the decision to switch from the Retail Prices Index to the Consumer Prices Index.

While the government claims the CPI is the more appropriate index, the unions argue that the move is a deficit-reduction measure and should not have been implemented without consultation. They add that the government has not been willing to negotiate on the inflation link in talks on the package of reforms.

Two judicial reviews, being heard together, will now determine whether the Treasury acted lawfully in changing the indexation from the RPI measure which unions say is stated in the 1992 Social Security Administration Act. A verdict expected within four weeks.

The Act requires an up-rating ‘in relation to the general level of prices obtaining in Great Britain estimated in such manner as the Secretary of State thinks fit’.

All the unions in the judicial review plan to take part in the day of action over pensions on November 30. They have either already balloted, or are currently balloting members, ahead of what could be the biggest strike for a generation.

Know Where You Stand With Auto Enrolment

Ian Hill — Tue, 25 Oct 2011 10:27:25 GMT

It is the Government’s plan that most employees should join a pension scheme by automatic enrolment through their employer.

The starting date for auto enrolment will be October 1, 2012 and will be phased in over four years. To recap, from October 1, 2012 to September 1, 2016 employers will be required to automatically enrol eligible “workers” into a pension scheme. Employers will be able to use their own existing occupational pension scheme or group personal pension plan if it meets statutory requirements as a “qualifying scheme”. Otherwise, they will have to enrol workers in NEST (National Employment Savings Trust) a trust based occupational pension scheme to be set up by the government and regulated by the Pensions Regulator.

Employers will be separated into bands based on size with each band being a particular monthly “staging date” up to full implementation from 1 September 2016. Clearly larger employers must think about this more urgently than smaller employers, but all should begin the planning process without further delay.

Employers should be considering the cost of the compulsory 3% employer contribution, or if currently offering a higher contribution, the cost and sustainability of enrolling all eligible staff on that basis. Consideration should be given to whether contributions will be based on the full salary amount or ‘band earnings’.

The key is to budget now for the new requirements so that bigger pension contributions will not mean a sudden spike in costs. If it was known that the cost of raw materials was going to increase by a fixed amount in the future businesses would factor in the cost within their rolling business plan; the same consideration should be given to the extra cost to the employee benefit package spend.

In a Defined Benefit scheme, monitoring the employer covenant is one of the most important areas of governance. The covenant of the employer refers to its legal obligation to fund the scheme both now and in the future. With a Defined Benefit Scheme the employer has to stand behind the known pension promise. From their relevant ‘staging date’ from October 2012, employers will have to stand behind a known Defined Benefit minimum contribution cost. This is compounded by the fact that employers are battling a continuous need for improving operational performance and competitiveness by efficient use of working capital with the two critical items; cost reduction and achieving cash position improvements on board agendas. Therefore it stands to reason that employers should be assessing their business models in light of the future Defined Benefit commitments as employers suddenly find their costs for funding for greater numbers soar dramatically. In essence, employers should be considering a form of employer covenant review for the Defined Benefit pension scheme model.

At the very least employers should be assessing how many are classed as a ‘workers’. To do this, there will need to be an understanding of contractual relationships. A worker is defined as any individual who; works under a contract of employment (an employee), or has a contract to perform work or services personally (i.e. they cannot send a substitute or sub-contract the work) and is not undertaking the work as part of their own business. Anyone who has entered into a contract of this type with an individual is an employer and will be required to comply with the new employer duties.

In many cases, it will be easy to identify whether someone is considered a worker. Equally, it will usually be easy to identify who is the employer. However, in cases where there is uncertainty, an employer will need to examine the contract under which the individual is working seeking specific legal advice when assessing their workforce.

Employers should not rely solely on a person’s tax status when assessing whether they are a worker. An individual considered by HM Revenue & Customs (HMRC) as self-employed for tax purposes may still be classed as a ‘worker’ under the new legislation, if they are working under a personal services contract.

It is imperative that employers’ asses the cost implications from their ‘staging date’ and beyond making sure that their business has a sustainable future and remodelling where necessary.

New Technologies Aiding Traditional Financial Advice

Paul Korobejko — Tue, 25 Oct 2011 10:26:18 GMT

In my job as a financial adviser the current pace of change is moving faster than I’ve ever known; it and clients are needing to run fast if they want to keep up – of course some prefer to just leave all of that to me.

At some stage within the near future you may well come across the term ‘Wrap Account’ in relation to your own investment matters, if you haven’t done so already. Wrap is the big change happening in the finance markets at the moment. This change is fast gathering pace, prompted by the regulators demanding high levels of service and consistency from financial advisers and the FSA will come down firmly on those advisors who do not step up to the mark.

The best way I can describe a Wrap is that it is an administration system designed to provide a simple and reliable way to have your investments and pensions collated and updated securely in one convenient place.

This can mean just one convenient statement for most of your investments and secure online access where you can view a number of investment types in one place.

A Wrap can include ISAs, Personal Pensions, SIPPs, Unit Trusts, Investment Bonds, shares, gilts, ETFs and various other types of investments, all under one convenient umbrella. The Wrap allows investment across the market, not just the one investment company. This is a big change from the past when an individual investor would have various investment products scattered across a number of different companies, each with its own, usually cumbersome, administration system.

Currently there are many Wrap providers; some will be names that are new to you, some well known brands. Sometimes, it can be the lesser known names that provide the best Wrap services because this is their only role. In the fullness of time I expect some providers not to survive as the ongoing development requires very large capital investment and there is only so much business to go round. One major provider estimates that the market for this could be in the region of £400 billion in ten years time. Eventually, I think the market will be dominated by a handful of Wrap providers. The weaker companies will simply be eaten up by the stronger ones, but this does not mean a threat to the financial security of your investments.

From my point of view as an adviser Wrap is great as it strongly enhances the quality of service and advice I can offer for clients. Most Wraps include sophisticated “tools” that advisers can use to benefit clients. These tools include fund research, risk analysis, model portfolios, switching, rebalancing, and tax analysis.

Most advisers like to be able to offer carefully constructed portfolios designed to match an investor’s tolerance to risk. These tools make the job much easier which means that investors may benefit in the longer term from better returns and hopefully some protection against market volatility. Some advisers like to carry out their own research, some prefer to outsource this to specialist firms, but either way the Wrap is well placed to handle this.

Anyone who has been invested over the last few years should now be well used to volatility as we’ve had some troubled times. The Wrap can help the adviser to help his clients in times like this by reacting to market changes quickly and positioning portfolios for clients. Of course you will still be relying on the wisdom of the adviser, or the outsourced investment manager. Some may be concerned that the improved level of service will add to cost, and whilst some Wrap providers apply penalties for moving away, or do not allow you to transfer easily, this is not always be the case. The market is very competitive and with the coming of the Retail Distribution Review in 2012 costs are really under the spotlight and already investors are benefitting from this. If anything, advisers can offer better value by selecting the right Wrap allowing you to benefit from the slick administration services of Wrap accounts.

Wraps can be regarded as a one-stop, lifetime investment which can adapt to changing circumstances. It is not for everyone; an adviser should assess whether or not a Wrap is suitable, however, some will be perfectly satisfied with their current arrangements. Those who can see the benefit may not be able to move to Wrap overnight due to the nature of existing arrangements which may have tie-ins or penalties for moving out. For most people a gradual transition is the way forward.

So if you can see the potential benefit of having your investments in a Wrap all you need to do now is find an adviser who knows how to use the facility properly and at a price that you feel is fair and reasonable.

Employers May Be Required To Provide Staff With Pension Transfer Advice

Ian Hill — Mon, 24 Oct 2011 15:14:36 GMT

It has been widely reported that pensions minister, Steve Webb, has warned employers they will have to pay for independent financial advice to every defined benefit (DB) scheme member to whom they offer an enhanced transfer value (ETV), or a cash incentive to transfer out of DB schemes. This is in response to his statement that the use of cash incentives was ‘unfair’ to members, and the Pensions Regulator’s stance that trustees should take the view that these transfers are not naturally in the best interests of the scheme members, even though it could be that for some individuals, depending on their financial circumstances and the level and form of the enhancement, it may well be in their best interests to transfer. Therefore any ETV exercise ought to be tackled with probing and well-informed caution.

Employers and trustees currently involved in ETV exercises or pension increase exchanges should be mindful of the possibility that such exercises will be scrutinised. Although sponsoring employers should not shy away from considering the merits of an ETV exercise, they should involve the experience of an IFA practice at an early stage ensuring money is well spent, funding communications and member advice, allowing the member sufficient time with the adviser for informed decisions to be made. Critical to the success of any exercise is engaging with an IFA firm that has the relevant depth of technical experience, staff with the right qualifications, a robust process, and crucially the individual member communication skills to engage members at a high level on what can be a complex decision is vitally important. This will also to help reassure trustees.

The driving force behind an ETV exercise is usually an employer looking to reduce the risks associated with running a final salary scheme. Trustees should be aware that ETVs are not the only solution, but some members want to manage their own pension future, taking their own investment decisions and choosing the shape and form of their income in retirement where the current Scheme offers little or no choice.

The motivation for an ETV exercise should be to offer members an option which may be more valuable to them than the alternative, with a potential mutual benefit to the other beneficiaries or plan sponsor, rather than simply a tactic to reduce the cost of a buyout for the benefit of the plan sponsor.

Equity Release Shakes Off Its Old Image

Craig Evans — Thu, 13 Oct 2011 11:26:59 GMT

Equity Release schemes were once looked down on as a product for those struggling to make ends meet in retirement, but that’s no longer the case.

New and more flexible products have been developed in recent years allowing the old dowdy image to be shaken off. As such an increasing number of people are accessing the gold mine locked up in their home and not just for a top up income. A common use now is to release cash from a home in order to reduce an inheritance tax liability, gifting the money early to their loved ones tax-free.

The need for some pensioners to bolster their income does remain a growing problem and one where Equity Release schemes are still very much needed. The difficulties facing many people in their retirement years are that they are ‘asset rich’ but ‘cash poor’. Their wealth is often tied up in their home, so whilst on the outside they can appear to be affluent, on a day-to-day basis they can be impoverished.

The simple fact is that we are all living longer because of access to healthcare and healthier lifestyles. Whilst many people do own their own homes in retirement, not everyone has managed to build up enough in savings to enjoy a comfortable lifestyle. In these circumstances, tapping into the reserves of your home in order to enjoy a better standard of living, whilst retaining ownership and security can suit some people’s needs.

New schemes are more versatile than they once were and this Equity Release schemes have found new popularity. There are two main types of schemes to choose from;

Lifetime Mortgage - is where you borrow a sum of money that is secured against your home. You retain ownership of your property and have the flexibility of being able to move house in the future if you wish. You don’t make repayments on the loan, instead the interest is rolled up or ‘compounded’ and the full amount gets settled when you die or permanent residential care. If you are a couple, on the second of your deaths or requiring permanent residential care.

Home Reversion Scheme - is where you sell a proportion of your property, so part of your home belongs to someone else. When you die they take their percentage of the property value. One of the greatest features with this scheme is the ability to ring fence a proportion of a home from the scheme, so if you do have children that you want to provide an inheritance for, this can still be achieved. A small number of lenders also offer this facility on the lifetime mortgage route.

To protect the consumer a number of providers formed a trade association in 1991 called ‘Safe Home Income Plans’ or SHIP. This lays down a code of practice for those providing Equity Release schemes to adhere to and by meeting these standards; products are able to carry the SHIP logo. One of the rules is to provide a ‘no negative equity’ guarantee, which is why lifetime mortgages that carry a SHIP logo have become increasingly popular.

Equity Release schemes have received bad press in the past but schemes have moved on a lot since then. They certainly don’t suit everyone’s needs or circumstances but for some people, releasing the cash tied up in their home in order to enjoy a better quality of life can make sense.

The problem now facing those people considering equity release is falling house prices, which is all thanks to the current economic climate. The significant wealth accumulated in property over the boom in the housing market is diminishing and falling house prices means the amount of cash you can release from your home is falling too. If you have been thinking about equity release you may wish to act quickly if you want to maximise the best possible deal. This is certainly true; however don’t forget just how much profit you have built up in your home. Equity Release needs serious thought and I would not recommend you allow current market pressures to influence your decision.

If you are considering Equity Release as a solution to your money difficulties then it is always best to speak to an independent financial adviser and if you have close family, bring them with you for that meeting. You should explore other ways of raising money, such as downsizing to a smaller home before you make any decision and talk to your family at each stage. Taking the step to release the equity from your home is a major decision and one that should not be taken lightly.

If you receive State benefits, taking out an Equity Release plan may affect the benefits that you receive.

My colleague Rachel Jefferson and myself, Craig Evans, will be holding a seminar at our offices on Thursday 24th November at 11am and 2.30pm, to explain how Equity Release works and to dispel all of the myths. If you, or a close family member, would like to learn more about equity release, call us to book your place on 0800 294 7199.

Pension Matters October 2011

Ian Hill — Thu, 06 Oct 2011 09:34:19 GMT

Welcome to Pension Matters, produced by Torquil Clark.

Ian Hill, Pensions Technical Manager

Employers unaware of auto-enrolment duties

According to Pensions Regulator, many employers still know nothing about the introduction of auto-enrolment from next year.

The study reveals that as few as two in five employers are aware and only 1% knew that the age from which auto-enrolment applied was age 22. Three-quarters of employers have still not had any discussions about the prospective requirements. The findings are consistent with provider research, with Standard Life finding that most large employers are still not properly prepared to meet the regulatory requirements of auto-enrolment.

The Pensions Regulator (TPR) has spelled out just what happens to employers of any size which fail to comply.

TPR will issue at least two letters, one at 12 months and one at three months before their staging dates, to every employer informing them of their duties. The letters also contain details on where to find more information and support, so claiming ignorance will not be an option.

Employers will have a duty to keep records of their pension schemes and employee take-up rates, and TPR may request to see these at any time to check for suspiciously high opt-out rates. The regulator will also rely on whistleblowers to inform them of employers that induce their staff to opt-out.

If an employer is found to have failed to comply with regulations, TPR will send them a formal compliance notice as the first step to enforcement. This will set out again what the employer must do.

If the employer, within a set amount of time, does nothing to comply, TPR has the power, enshrined in the Pensions Act 2008, to impose fines on the company until it does comply.

In the first instance of TPR discovering non-compliance, it can hand out a set fine of £400. After that, it can impose daily fines, dependant on the size of the employer, until it complies.

So, for employers with between one and four employees, that fine could be £50 per day. For those with between 50 and 249 employees, the fine could be £2,500 a day, and for employers with more than 250 staff members, the penalty could hit £5,000 a day.

Abolition of contracting-out

HMRC's has produced a bulletin aimed at assisting scheme administrators to prepare for the abolition of DC contracting-out on 6 April 2012.

The bulletin confirms that:

HMRC will run a one-off "closure" scan of its records early in 2013 to identify and terminate open periods of scheme membership for appropriate personal pension (APP) and contracted-out money-purchase (COMP) schemes.
Contracted-out certificates held in respect of the DC section of mixed benefit schemes will also be cancelled on 6 April 2012. This will not affect salary-related sections that hold a contracting out certificate.
HMRC's scheme cessation unit is currently agreeing membership and financial data with scheme administrators in advance of the abolition

Accounting standards for pensions

The National Association of Pension Funds (NAPF) has published a report informing the accounting standards currently used to calculate companies' pensions assets and liabilities are undermining pensions provision in the UK.

The report recommended:

Pension liabilities should be valued as the discounted present value of future net asset/liability cash flows, thereby allowing for the asset/liability interaction that occurs over the life of a pension scheme.
Pension disclosures should include the actual cash contributions that a corporate sponsor is committed to as a result of negotiation with scheme trustees and/or the Pensions Regulator.
The recognition of a discounted cash flow model of pension accounting through the accounts of the firm can be viewed as the long-term position of the scheme. To make this number useful, company accounts should also disclose the market value of scheme assets relative to a discounted pension liability.

The report argued that the current standards are not only inappropriate for assessing the long-term liabilities of pension funds, but can also lead to unintended consequences.

The key thrust of the authors' argument is that by valuing assets based on market prices, the current accounting standards introduce short-term volatility into the measurement of companies' pension surpluses and deficits. This is at odds with the long-term nature of pension schemes, whose position in economic terms changes only gradually over time.

According to the report, this volatility has led companies to close perfectly viable pension schemes, and has encouraged schemes to adopt extremely cautious investment policies. This in turn has led to an increase in the cost of pension provision and a misallocation of investment in the economy through excessive investment in low return government bonds.

Speeding up the increase to State Pension age

Ministers have indicated in the press that the current timescale to increase the state pension age to 67 in 2036 and to 68 in 2046 will be speeded up.

The Pensions Bill, currently working its way through Parliament, already provides for an accelerated equalisation of male and female state pensions ages in 2018 and their subsequent increase to age 66 in 2020.

Iain Duncan Smith, Secretary of State for Work and Pensions, suggested that the scheduled increase to age 67 could be brought forward. The pensions minister Steve Webb has stated that the increase in state pension age to 67 could be accelerated from 2036 to 2026. The Government is also seriously considering an automatic mechanism to give effect to further increases.

The retirement age was due to rise to 67 in 2036 and to 68 by 2046 but Duncan Smith has stated that the timescale, set out by the previous government, was ‘too slow’ thinking that’s too late because people’s age levels have increased even since the announcement was made.

The government has been holding a consultation over the summer into reform of state pensions.

More information on Flat Rate Pensions

Pensions minister Steve Webb has defended government plans for a flat-rate state pension of £140 per week, saying it is fairer and would not cost more than the current pensions system.

Speaking at a Liberal Democrat conference meeting Webb shed more light on how a universal, non-means-tested state pension would be funded, and whether existing entitlements would be honored.

He said the reforms would not cost more than what had already been budgeted by the previous government.

‘We will take the state pension budget for 2016 and look at how we can spend it better,’ said Webb.

Webb said those about to retire when the reforms come in could expect to receive the same state pension as they would have otherwise done. However, those further away from retirement would see their expected entitlements change by the time they retired.

He said: ‘You will still get your £160 a week if that is what you are about to get now. In the future high earners will not be entitled to any more than £140. But on day one there will not be that many whose entitlement is lowered because we have to honor the past, so we have done little things to fix that, for example if you have only spent a few months in the country you don’t get anything.’

He also stressed the importance of removing means-testing to ensure the success of auto-enrolment.

DWP to revisit risk sharing

Steve Webb, the Pensions minister, has indicated that the government will revisit the issue of risk-sharing pension schemes as part of its drive to reinvigorate occupational pensions. Webb said the Department for Work and Pensions would encourage the development of models that transfer some investment risk away from members.

Webb has also reiterated the government commitment to largely remove short service refunds from occupational pension schemes, warning employers not to take them into account in their decision making process when setting up schemes.

Webb repeated his call to stamp out ‘bad practice’ in the conduct of enhanced transfer value exercises and confirmed that the results of a call for evidence would be released in the autumn.

Update of the PPF index

The PPF 7800 Index has been updated to the end of August 2011.

Highlights include:

The aggregate deficit of the 6,533 schemes in the PPF 7800 index is estimated to have increased over the month to £117.5 billion at the end of August 2011, from a deficit of £67.3 billion at the end of July.
The funding ratio fell from 93.7 per cent to 89.2 per cent.
Total assets were £974.2 billion and total liabilities were £1091.6 billion.
There were 5,012 schemes in deficit and 1,521 schemes in surplus.

ACA queries ‘Scheme Pays’ operation

The Association of Consulting Actuaries (ACA) has written a letter to HM Revenue & Customs (HMRC) regarding the operation of Scheme Pays - the mechanism under the revised Annual Allowance regime, by which, at a member's request, a scheme meets the Annual Allowance charge due from the member and makes an equivalent reduction in the member's scheme benefit.

The letter highlights that the guidance that HMRC published in August has not fully addressed the ACA's concerns and has raised additional issues. The letter focuses on the operation of Scheme Pays around the time when a member retires where the law is complex, so HMRC's views would be particularly welcome.

The issues raised could be important for affected scheme members retiring now (and so for how schemes process any retirements now) as well as for trustees to set ongoing policy. It may be advisable to delay definitive actions and decisions in this area where possible until the picture becomes clearer.

Legal Challenge to Civil Partnerships

Human rights campaign group Liberty has had some initial success in its legal challenge to the treatment of surviving civil partners' pension’s rights when Foster Wheeler, a major multi-national company, agreed to give the civil partners of its employees the same pension benefits as spouses.

Under Foster Wheeler's pension scheme the surviving civil partner of a scheme member who retired in 1999 would receive no survivor benefits as the scheme rules at that time did not recognise civil partnerships. Although the Civil Partnership Act 2004 requires schemes to treat surviving civil partners and spouses alike from 5 December 2005, an exemption in the Equality Act 2010 allows them to continue to exclude surviving civil partners in respect of pension rights accrued before then.

Liberty argued this would contravene both European Union law and the European Convention on Human Rights. However, whilst Foster Wheeler has agreed to amend its scheme to give civil partners the same benefits as spouses, the company maintains that the old terms were not unlawful - and continues to defend the claim of discrimination on grounds of sexual orientation.

A hearing is due to take place in Reading Employment Tribunal in January 2012 to determine whether the original pension scheme rules unlawfully discriminated against the couple on grounds of their sexual orientation.

DC default funds should consider human capital and financial wealth

According to Pensions Institute research, an age-dependent approach to DC default funds, which takes into account a member's human capital and financial wealth, is better than traditional lifestyling.

The two studies identified three factors which should be considered when designing DC plans: a member's human capital as represented by their salary profile over their career, their attitude to risk, and their preference for current versus future consumption.

Details can be found at - http://www.pensions-institute.org/papers.html.

PPF Announces £550m Levy Estimate, Consults on 3 Year Levy Rules

Pension protection levy for 2012/13 will be £550m, the lowest ever set
Rules governing new levy framework for next three years are confirmed
Levy rules deliver stability and predictability called for by levy payers
PPF remains on course to reach self-sufficiency by its 2030 target

This is the lowest levy that the PPF has ever set and marks a reduction from £600 million in 2011/12, the second cut in two years.

Alongside this announcement, the PPF began consulting on the rules which will govern its new levy framework coming into effect for the first time in 2012/13 and are needed to calculate individual levy bills.

In a significant break from the past when the PPF changed the way the levy is calculated every year. These new rules are intended to be fixed for three years.

This means that levy bills will be more predictable then ever before and schemes can expect that if their risk falls over the three years, then so will their levy. The rules are also designed to make the levy more stable.

Speaking at an industry conference, Alan Rubenstein said: “The further reduction in the amount of levy we want to collect again recognises our desire to protect employers and pension schemes which are still navigating choppy waters, while remaining mindful that we also have to protect our own financial position.

The PPF confirmed the details of its new pension protection levy framework earlier in the year. The levy is paid by all eligible defined benefit, e.g. final salary, pension schemes to fund the compensation the PPF pays to people whose employers have become insolvent and their pension schemes cannot afford to pay the pensions they promised.

Complexity of employers self certifying pension scheme structures

Employers could be forced to rethink their pension contribution structures after the Government included geographic salary allowances in its definition of basic pay for automatic enrolment self-certification.

In May, change to the tests used by firms to self-certify their scheme meant they would be based on basic rather than pensionable earnings.

In July, the Government amended its definition of basic pay to exclude “variable elements”, such as commission and bonuses. However, the definition includes salary allowances given to employees working in different parts of the country with higher living costs, such as London.

Companies are going to have to think about their contribution structures and it is going to cost them more money, even if they just extend the definition of basic pay to include pound allowances for these staff.

Professional Advisers Must Work Together

Paul Korobejko — Mon, 26 Sep 2011 08:00:00 GMT

Sometimes, I think too many of us in the professions, including perhaps solicitors and accountants, make assumptions about clients’ expectations from us without asking them what they think.

Over the years, as I’ve matured in my role and as clients have grown with me, I have found myself helping them with a wide range of financial and life planning issues, some of which are outside of my usual area of expertise. Thankfully, I think I’ve learned what questions to ask and where to guide people in finding the right solutions. Quite often I find that I need to point clients towards one of the other professions to get specialist expertise. In my role as an Independent Financial Adviser I think it is important to help people carefully consider the bigger picture over the longer term.

The main areas of discussion seem to be around Wills, Trusts and Power of Attorney, usually in that order and all of which are more likely to be the domain of a family solicitor.

It is surprising how many people do not have up to date Wills, or indeed any type of Will at all. It can be very difficult for a family, or other loved ones such as a partner, to find that the financial affairs are so difficult to sort out at such a traumatic time.

When a person dies without leaving a valid Will, their property must be shared out according to Rules of Intestacy. This can lead to a spouse not receiving all of the estate, as some of the estate may need to be held as a life interest. This may be far removed from what was intended.

For unmarried partners, same sex or not, things can get even more difficult, as they may inherit nothing and could even find that they need to find a new home for themselves.

It is possible to do a DIY Will, or use a Will writing company, but be careful that this is not as it could be a false economy if things are not done correctly.

Quite often I find that people in their later years become acutely aware of the likely cost of Inheritance Tax and sometimes leave it too late (but not if I can guide them to take action early enough). It is a difficult decision to give sizeable amounts away and this is where Trusts can be a great help. We find that more and more people look towards trusts for the eventual benefit of children, or more likely grandchildren. A trust can help protect the assets against future unexpected events in a family such as a divorce or untimely death of a beneficiary. The other big benefit of a trust is the potential to protect the assets from Inheritance Tax, currently at a rate of 40%.

As people approach old age they might become more concerned about how they will cope with daily living tasks in the event that they become ill or frail. My own parents are getting on in years and although still live independently I encouraged them to arrange Lasting power of Attorney. I helped them with the paperwork in setting these up and even though I am used to dealing with financial matters I found the procedure quite challenging and somewhat long-winded.

It is possible to download the forms and deal directly with the Office of Public Guardian on a DIY basis. My own experience suggests that this should only be done if you have good knowledge, a lot of patience and an eye for detail. Any mistake on the forms will significantly hold-up the procedure and cause a lot of frustration. I think this is best left to the professional advisers.

Power of Attorney comes in two parts – Financial and Welfare and a good adviser should help you to decide which parts you need.

It is not inexpensive to set up the Power of Attorney through a solicitor but it can be money very well spent.

For any of these services, Wills, trusts, power of attorney, I would usually guide a client towards a good solicitor and I would suggest a firm that I think will suit the client, as solicitors come in different shapes and sizes, as do clients.