EB News Service

A fortnightly summary of the important changes in employee benefits law & practice

15th November 2010, London:   

NEWS

Auto-Enrolment and NEST update

NEST Corporation, the trustee body of NEST (National Employment Savings Trust), has announced that it has confirmed its long-term contract for fund administration services with State Street Corporation. The contract runs until 24 October 2020, with the option to extend for up to five years beyond then. The fund administrator manages the movement of members' contributions from the scheme administrator (TCS - see below) to the appropriate fund managers, according to NEST's investment strategy.

NEST has also confirmed its 10-year administration contract with Tata Consultancy Services (TCS), running until 30 June 2020 (with the option to extend for up to five years beyond then). The contract covers all aspects of scheme administration, including web-based enrolment, record keeping, contribution collection and details of each individual's retirement pot.

NEST has revealed details of five investment mandates too, including a passive global equity fund, as well as exposure to UK gilts.

The first mandate, for a passive global equity fund, will employ either the MSCI World or FTSE World global indices as benchmarks, while the second mandate will be for a passive UK gilts fund employing the FTSE Actuaries All Stocks index as a benchmark. Additional mandates include a index-linked fixed interest fund and a low-risk cash management fund or product. The fifth and final mandate will be for a diversified beta fund.

All five mandates will favour a pooled investment approach and must be suitable for a UK defined contribution scheme. They have been submitted to the Official Journal of the European Union and will be posted there shortly.

Finally, it is understood that NEST will offer more than 50 target date return funds at launch with savers placed into a fund timed to meet their designated retirement age. The 52 target date funds will be composed of the five core funds, above. NEST is also planning to allow charge-free switches if a saver decided to change the date at which they retired.

It is looking to launch a Shariah-compliant fund and a socially responsible fund in addition to its five core investment mandates.

Solvency II rules should not apply to pension funds, according to senior politicians

Senior politicians have asserted that Solvency II rules should not be extended to pension funds. Speaking at the Conference on the recently published Green Paper on Pensions in Brussels, UK minister for pensions Steve Webb, said that there was "no compelling evidence" that the rules are appropriate for occupational pension schemes. He added: "In the UK, employer-sponsored occupational pension scheme and insurance companies are totally dissimilar as institutions. Occupational schemes don't seek custom on the open market - they provide employee benefits only for a specific employer". His view was supported by Dutch minister of social affairs and labour, Paul de Krom.

Budget and Finance Bill update

The Chancellor of the Exchequer, George Osborne, has confirmed that the Budget will take place on Wednesday 23 March 2011. Full coverage of the Budget will be available at - http://www.hm-treasury.gov.uk/2011_budget.htm in March.

The Office for Budget Responsibility (OBR) will publish its updated forecast for the economy on Monday 29 November.

On 9 December 2010, the government will publish draft clauses for Finance Bill 2011 together with updates on recent consultations. Responses or updates on the following consultations will be published:

• Tax policy making: a new approach;
• Simplification of Corporate Capital Gains for companies;
• Pensions Annuitisation;
• Furnished Holiday Lettings; and
• a number of areas relating to HMRC's powers review.

Ahead of this, the Government will publish the outcome of consultations that have been carried out on a number of anti-avoidance measures.

OTS Tax Reliefs Review: Comprehensive list of reliefs published

There are over 1000 reliefs in the UK's tax system the Office of Tax Simplification (OTS) has revealed.

As part of the important work in reviewing Britain's tax system, the OTS has published the first ever comprehensive list of the UK's tax reliefs and allowances on its website, and is now inviting comments and views from those who use them.

The 1042 reliefs demonstrate the challenge facing the OTS, which has also published details of the review criteria and methodology which will be used to evaluate the effectiveness and relevance of the reliefs, before reporting back later in the year.

The OTS team, which includes secondees from a variety of tax and accountancy firms, will use the review criteria, together with their experience and expertise, to provide independent advice on the reliefs, and make recommendations to the Chancellor on ways to simplify the tax system.

To view the full list of tax reliefs, see -  http://www.hm-treasury.gov.uk/d/ots_taxreliefs_list_081110.xls.

BT Pension Scheme deficit could be reduced by £2.9bn as a result of 'RPI' to 'CPI' move

BT has announced that the deficit in the BT Pension Scheme will be reduced by around £2.9bn as a result of the reforms introduced by the Government on pension revaluation and increases

The Government has announced that, from April 2011, the Consumer Prices Index (CPI), rather than Retail Prices Index (RPI), will be used as the basis for determining the rate of inflation for the statutory revaluation and indexation of occupational pension rights.

BT says that due to the history of its Scheme, many of the scheme provisions are based on those of public sector schemes, and so the change announced by the Government automatically applies. As a result, CPI rather than RPI will be used from April 2011 for the uprating of both pensions in payment and pensions in deferment.

According to BT, the impact of this decision reduces the IAS 19 accounting valuation of the Scheme's liabilities by around £2.9bn and at 30 September 2010 BT's total pensions deficit was £5.2bn (under the IAS19 accounting rules) compared with £7.9bn at 30 June 2010.

LEGISLATION

Updates to Disclosure Regulations to facilitate 'e-communication'

Amendments to Disclosure of Information Regulations, in respect of members of occupational, personal and stakeholder pension schemes, have been laid before Parliament. The legislation - The Occupational, Personal and Stakeholder Pension Schemes (Disclosure of Information) (Amendment) Regulations 2010 (SI 2010/2659)  - will come into force on 1 December 2010.

The revisions permit schemes to use methods of electronic communication (that is, e-mail and putting the information on a website) to provide information to members. Members will be able to opt out of receiving information by electronic means, in which case their scheme will have to provide the information by post.

Defined contribution schemes will be able to provide more concise information to members in their annual benefit statement than is currently permitted, but members will be entitled to receive detailed information upon request.

See - http://www.legislation.gov.uk/uksi/2010/2659/contents/made.

RESEARCH

DWP working paper: No 87: Research on Predictions of Incomes in Retirement

The Department for Work and Pensions has published a Working Paper which presents the findings from research on the nature and cognitive basis of people's predictions of income in retirement. The main aims were to investigate not only the extent to which people are able to predict their potential income in retirement, but also what sort of information and reference points they use and the attitudes and behaviours this reveals. The main findings were as follows:

• The research found that when asked to think about and predict their own income in retirement, people often tended to focus on their various individual potential sources of income such as pensions, savings and property rather than income ‘in the round'. People also tended to conflate the income they thought they would have at retirement with the income they felt they would need and/or they aspired to. 
• Unsurprisingly, people varied greatly in the ease with which they were able, and indeed willing, to predict their income in retirement. Some spontaneously drew on quite detailed awareness of multiple sources of income while others needed significant prompting, even to just hazard a guess. The sample of people interviewed could be allocated across four groups according to the ease with which they were able and willing to make predictions. The main differentiating factor determining group membership was attitude to and engagement with their financial future, while age, current income and number of planned income streams were also significant.
• People adopted three different approaches when making their predictions: guesses, rules of thumb and financial calculations. There was a broad ‘read across' between the four groups identified and the approaches adopted, although there was some overlap in approaches used between and within the groups. Rules of thumb varied, from using current income comparisons to projecting forward individual income streams.

The full research is available at - http://www.dwp.gov.uk/newsroom/press-releases/2010/nov-2010/dwp150-10-021110.shtml.

'OTHER'

When Should the State Pension Age Increase to 66? - Government response

The Government has published further details to show how the increase in state pension age will be delivered. The Command Paper can be found online at: www.dwp.gov.uk/spa-66-review  

As announced in the Spending Review 2010, the increase in the state pension age for both men and women will be brought forward by six years so that it will be age 66 by April 2020.

The increase in state pension age from 65 to 66 will be phased in from December 2018 at a rate of three months' increase in state pension age every four months, so that it will be age 66 by April 2020 for both men and women.

To allow for this, the timetable for equalisation of women's state pension age will be accelerated by two years. The equalisation timetable will be adjusted from April 2016 (when women's state pension age will be age 63) so that women's state pension age reaches age 65 by November 2018, rather than April 2020.

Legislation implementing these changes will be introduced in 2011. The changes are expected to result in a total net saving of £30.4 billion between 2016/17 and 2025/26 (when the state pension age was due to have reached age 66 under existing legislation).

The government is now considering the current timetable for the planned increase to state pension age to 67 by 2036 and 68 by 2046 and will bring forward proposals in due course.

FSA CP10/26: Pension reform - Conduct of Business changes

The Financial Services Authority (FSA) is consulting on changes to its handbook following government reforms to workplace pension schemes. The policy proposals broadly fall into two categories: the use of group personal pensions (GPPs) for automatic enrolment; and protecting consumers in the changing pension landscape.

Group personal pension schemes

The consultation paper proposes to make a number of additions and changes to Handbook text relating to GPPs, including:

• making it clear that automatic enrolment does not fall within the scope of the Distance Marketing Directive (DMD)*; and
• clarifying that FSA and DWP rules for cancelling and opting out are interchangeable and that only one process needs to be followed - in essence providing a single solution rather than two different, potentially confusing and costly procedures to follow.

* DMD prohibits inertia selling of distance contracts, i.e. a lack of a response cannot be taken as consent.

Protecting consumers in the changing pension landscape

The FSA already has rules in place to mitigate the risk of poor advice being given in relation to occupational pension opt-outs, but these do not currently apply to GPPs. To ensure those automatically enrolled into a GPP receive the same protections as those who are part of an occupational pension, the FSA propose to extend the scope of its rules to cover all workplace schemes - including GPPs.

Similarly, the FSA proposes to extend rules around additional contributions to encompass all workplace schemes. Currently the Handbook stipulates that advisers must consider arrangements within an existing workplace scheme before recommending alternatives, but this does not include GPPs.

See - http://www.fsa.gov.uk/pages/Library/Policy/CP/2010/10_26.shtml.

Pensions Regulator update

'ERI' statement

According to the Pensions Regulator, employer related investment (ERI) can be a risk in both defined benefit (DB) and defined contribution (DC) schemes.

To assist those involved in the investment of pension scheme assets, the Regulator has set out a summary of its approach to regulating this area. This statement:

• Includes examples of some of the ways that trustees might try to reduce the risk that their scheme breaches ERI legislation.
• Also addresses the potential risks involved in some of the more innovative funding mechanisms being employed to fund defined benefit (DB) schemes, such as the asset backed funding arrangements used by, for example, Marks & Spencer and John Lewis.

To view the ERI statement, see - http://www.thepensionsregulator.gov.uk/doc-library/statements.aspx

Comment

The Statement outlines the approach which the Regulator wants Trustees to take and also how the Regulator will assess structures such as those alluded to above. In summary:

• The Regulator wants trustees to notify it of these arrangements regardless of whether they form part of a formal recovery plan, and to make full disclosure of the existence of these structures to scheme members.
• The Regulator has not expressed any formal view on whether any characteristics of these structures could, in its opinion, because such structures to breach the restrictions on employer-related investment. Instead, the Regulator wishes to focus on the effects of the structure.
• The Regulator has stated that it will look for these structures to provide "demonstrably better protection to members' benefits than available alternatives that do not carry risk of breach [of self-investment rules]".

The Statement also outlines some of the key terms which the Regulator expects to see within these arrangements and, in particular, a requirement that there is a suitable alternative arrangement in place in the event that the arrangement is deemed to be in breach of employer-related investment requirements.

Some legal firms have commented that there are parts of the Statement which may not be entirely helpful for trustees. In particular, the list of features which the Regulator is looking for in the arrangements can in some cases be unrealistic and trustees may be deterred from entering into arrangements simply because they cannot tick all the boxes on the Regulator's list.  Alternatively, the Regulator's Statement could cause delays in what is often very time sensitive negotiations. Also, there is a potentially difficult hurdle of demonstrating that the arrangement provides "demonstrably better protection to members" than alternative funding arrangements.

Ultimately, a Statement does not have the force of law, and while trustees will need to have regard to it, trustees will continue to have scope to assess the benefits of their specific structure.

The Purple Book

Also available from the Regulator is the 5th edition of the Purple Book (Pensions Universe Risk Profile)  - a joint publication by the Pension Protection Fund (PPF) and The Pensions Regulator. It focuses on the risks faced by DB schemes, predominantly in the private sector.

The main focus in each year's Purple Book is the position at the end of March for the year in question, and a comparison of how risks have changed over the previous year.

The data set used for the purposes of the book covers 6,596 DB schemes, with approximately 12 million members. The book sets out some statistics to illustrate the risks facing schemes during the year, including:

• The number of schemes entering PPF assessment in the first quarter of 2010 was 20% higher than in the two years before the recession.
• Schemes with sponsoring employers in the communications industry had the highest average insolvency probability (3.82%), followed by construction and the retail trade (both 1.9%).
• The sponsors of schemes with liabilities of more than £50 million had a higher insolvency probability where the scheme was in surplus than employers of schemes with equivalent liabilities that were in deficit.
• Schemes with sponsoring employers in the manufacturing sector represented 31% of schemes in the PPF-eligible universe, but were disproportionately represented among schemes in PPF assessment (of which they were a little over 50%).
• 2,826 schemes were in surplus during the year to March 2010, up from 978 the previous year.
• The book also notes that the PPF has an 83% probability of meeting its objective of being self-sufficient by 2030

Download your copy of the Purple Book at -

http://www.thepensionsregulator.gov.uk/doc-library/research-analysis.aspx#s2098

Pensions Regulator updates retirement guides

The Pensions Regulator has published updated booklets on its website.

• Making your retirement choices - Think before you choose is aimed at helping members make decisions about retirement income and contains information about annuities and the open market option. Although defined contribution schemes must offer members the open market option, few members choose to shop around when the time comes to select an annuity.
• Guide for employers - Talking to your employees about pensions has been produced jointly with the FSA with the aim of helping employers answer questions from their employees about retirement. The Regulator notes that "recent research shows that many members will face a very steep learning curve in the period before they retire". The updated guides are intended to make this process easier for members.

See - http://www.thepensionsregulator.gov.uk/doc-library/campaigns/dc.aspx

DC "Myners Principles"

The final set of DC principles has now been published and can be found at http://www.thepensionsregulator.gov.uk/about-us/principles-igg-dc.aspx#s3717.  A summary of the responses to the consultation and the changes made to the draft Principles is also available via the link. As a reminder, the six Principles are:

• Clear roles and responsibilities - aiming to help ensure that firm foundations are in place for the process of investment governance.
• Effective decision-making - decisions relating to investment governance must be taken on a fully informed basis and that the processes must be sound.
• Appropriate investment options - to make certain that investment options take account of the range of risks and needs within the scheme membership.
• Appropriate default strategy - determining that an appropriately designed investment strategy is offered for members who prefer not to make a choice.
• Effective performance assessment - the performance of the chosen investment options must be monitored.
• Clear and relevant communication - to ensure that members are provided with clear, relevant and timely information so they can make an informed choice about where to invest.

PPF update

Updated Statement of Investment Principles

The Pension Protection Fund has updated its Statement of Principles as part of the continuing development of its investment strategy. The main changes to the Statement of Principles (SIP) mean an extension of the PPF's hedging strategy to include the potential use of bond repurchase agreements, and securities lending. This activity remains in line with the PPF's general low-risk approach to asset management. To see the updated SIP, go to - www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/SIP_November_2010.pdf.

PPF Reports Significant Improvement in 2009/10 Balance Sheet

Figures published by the Pension Protection Fund reveal that the £1.2 billion deficit it reported in 2008/09 has been replaced in 2009/10 by a reserve of almost £400 million over liabilities. The figures appear in the PPF's 2009/10 annual report which shows that the organisation's improved funding position was mainly the result of financial markets performing better, solid investment returns and less costly claims. See - http://www.official-documents.gov.uk/document/hc1011/hc05/0529/0529.pdf

DWP update

DWP business plan for 2011-2015 sets out timetable for reform

The DWP has published its business plan for 2011-2015 on its website. Among the pensions-related changes are the switch to CPI as the basis on which public-sector pensions will be increased (to take place in April 2011), the implementation of automatic enrolment into pension schemes (beginning in October 2012) and a review of the employer debt rules (to be published in October 2011). See - http://www.number10.gov.uk/wp-content/uploads/DWP_FINAL2.pdf

DWP: Benefit and pension rates

This leaflet is a general guide to standard benefits and the basic rates of benefits from October 2010. It sets out some rules on extra amounts payable for dependants and on how income and savings can affect entitlement to benefits. See - http://www.dwp.gov.uk/docs/bra5dwp.pdf.

DWP: Contracted-out pensions

This leaflet is a general guide on contracting-out of (leaving) the additional State Pension to build up benefits in an alternative pension scheme. From 6 April 2012, the government is ending contracting-out on a money purchase basis. See - http://www.dwp.gov.uk/docs/pm7.pdf.

HMRC: Pension Schemes Newsletter 42

This issue of the HMRC newsletter includes items on the new Pension Industry Stakeholder Forum, Code of Practice 10 - Reversion to normal time limits for enquiries, the restriction of pensions tax relief and secondary legislation. Contents are:

• The new Pension Industry Stakeholder Forum
• Code of Practice 10 - Reversion to normal time limits for enquiries
• Restriction of pensions tax relief (Employer-financed retirement benefits scheme (EFRBS) and the special annual allowance)
• Secondary Legislation
  • The Registered Pension Schemes (Modification of the Rules of Existing Schemes) Regulations
  • The Taxation of Pension Schemes (Transitional Provisions) (Amendment) Order

See - http://www.hmrc.gov.uk/pensionschemes/ps-newsletter42.pdf

Technical Actuarial Standards: Answers to FAQs for Practitioners

The Board for Actuarial Standards has published the Frequently Asked Questions (FAQs) developed in response to issues raised by practitioners in relation to Technical Actuarial Standards (TAS). The answers given are based on materials provided in the Scope & Authority of Technical Standards, Conceptual Framework for TAS, consultations and the analyses of responses consultations, and the Significant Considerations documents issued alongside the TAS. The FAQs can be found at:

www.frc.org.uk/images/uploaded/documents/Answers%20to%20FAQs%20version%201%20October%202010.pdf.

 

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