This year has been a busy one for pensions and 2015 looks to be very much the same. Squire Patton Boggs has highlighted 12 key areas for trustees to focus on in 2015.
Here's the first four.
1. DC Flexibilities - A Race Against Time
The 2014 Budget gave the pensions industry a bit of shock (to say the least!) with its wide reaching reforms regarding access to defined contribution pension benefits from April 2015. The tight timescale for implementation poses a challenge for the Government and for all involved in the pensions industry.
During the early part of 2015, trustees of pension plans containing any element of DC (including Additional Voluntary Contribution arrangements) should be assessing, in conjunction with the employer and the administrator, what flexibilities (if any) will be offered to members.
The legislation will include a statutory override which will allow trustees to permit members to take advantage of the new flexibilities despite contrary provisions in their pension plan rules.
Trustees should be ready to communicate their decisions to enable members to make choices about accessing their DC pension benefits and get the most from the guidance guarantee service. Trustees will need to signpost this guidance to members and consider how their own retirement processes and
communications should be updated.
We recommend that trustees, in discussion with the sponsoring employer, make a comprehensive plan to address how the DC flexibilities will be incorporated into their pension plan and communicated to members. Trustees should exercise caution when using the statutory override.
Legal advice is strongly recommended and it is advisable for trustees to consult with the employer on any decisions which may have cost implications or a significant impact on scheme design.
2. DB Transfer Policy - Fit for Purpose?
Trustees of defined benefit plans may see an increase in requests from members who are interested in transferring their benefits to a DC plan to take advantage of the new flexibilities from April 2015. This could impact on funding and cashflow positions, and trustees are advised to monitor transfer activity.
The Government is to introduce legislation requiring the trustees of a DB plan to ensure that a transferring member has received ‘appropriate independent advice' before transferring benefits to a non-DB arrangement.
A late amendment to the Pension Schemes Bill indicates that members will have a new statutory right to transfer separate categories of accrued benefits where they have two or more categories of benefits within the same pension plan.
The draft provisions are complex, but for example, members of hybrid pension plans with both DB and DC sections would have a right, under the draft legislation, to transfer their DC benefits out of the plan whilst retaining their DB benefits in the plan.
The Government stated an intention to consult on the possibility of allowing full or partial withdrawals directly from DB plans, to avoid the need for members to transfer their DB benefits to a DC plan in order to take advantage of the greater flexibilities to access those benefits. There seems insufficient time now for consultation during the current Parliament, but this issue may reappear during 2015.
Trustees should consider their policies on transfers in anticipation of increased member interest and should monitor developments in legislation. Rule amendments may be required.
Trustees are advised to ensure that member communications clearly explain the implications of transferring out to mitigate the risk of future complaints. Trustees should also obtain appropriate discharges, which confirm the taking of financial advice, particularly for members who do not have a statutory right to transfer where the trustees cannot rely on a statutory discharge.
3. PPF Levy Reductions - A Risky Business
The Pension Protection Fund is currently undergoing a major period of change with the move to Experian's "more predictive and more transparent basis" for calculating failure scores from 31 October
2014, and consultation on the new levy triennium rules which will apply from April 2015.
There are changes to the way in which the risk-based levy can be reduced for 2015/16 and it is important for trustees and sponsoring employers to be alert to the areas that affect them.
Changes include the ability for employers to apply to have certain types of mortgage excluded from the risk assessment, and the recognition of asset backed contributions (incorporating any asset type). There are also amendments to the way in which parent/group company guarantees are valued and certified.
Trustees of pension plans registered as ‘last man standing' arrangements on Exchange will be contacted by the Pensions Regulator and will be required to certify by 31 May 2015 that they have taken legal advice on the status of the plan.
Trustees should consider the PPF's levy determination and supporting documents and decide whether action needs to be taken regarding levy reduction measures. In most cases this action will need to be completed by 31 March 2015.
4. Governance and Charge Capping - Route Planner Needed!
New governance legislation for private sector money purchase occupational plans and hybrid plans with money purchase sections will come into force on 6 April 2015. In summary, the new regulations will require trustees to design default investment arrangements in the interests of pension plan members and keep them under regular review.
They must also ensure that core financial transactions are processed promptly and accurately, assess the value of costs and charges borne by members, and appoint a Chair of trustees who will be responsible for signing off an annual statement setting out how the governance requirements have been met.
Trustees or managers of a ‘qualifying scheme' that is used to satisfy an employer's automatic enrolment duties must also check that any default investment fund complies with the charge capping requirements expected to come into force from April 2015.
These requirements will apply to private sector and public service pension arrangements and under current proposals it (somewhat strangely)
appears that they will also extend to DB qualifying schemes with a money purchase AVC facility.
Identification of a default fund will not always be straightforward and trustees will need to make an assessment of the funds offered by their own pension arrangements for this purpose.
If a default fund does not meet the charge cap, the trustees are expected to provide an alternative default fund which is compliant and offer transfers to members invested in the original default fund.
Compliance with the governance and charging measures will be monitored and enforced by the Pensions Regulator and some new questions will be added to the scheme return. Some of the finer points of the new governance and charge capping requirements are subject to consultation which closed on 14 November 2014. The final regulations are expected to be laid before Parliament early in 2015.
Trustees should familiarise themselves with the new requirements applying from April 2015. We recommend that, as soon as the legislation is in its final form, trustees put in place an action plan for their pension arrangement to ensure that the governance and charging measures are addressed.
Pension scheme trustees and sponsors should only seek to transfer members’ benefits to a defined benefit (DB) consolidator if there is no “realistic prospect of buyout in the foreseeable future”, The Pensions Regulator (TPR) says.
Guy Opperman says two page, simpler statements as well as an annual ‘season’ in which to issue them could be transformative steps for the UK pensions industry
A second pensions bill is likely during the “life of this parliament”, according to pensions and financial inclusion minister Guy Opperman.
A “legitimate debate and discussion” is needed over future auto-enrolment (AE) contribution rates, says Guy Opperman, and that could take place next year.
Julian Mund writes about planning for the future and the four challenges he sees for the pension industry over the next five years.