Pensions: FCA publishes statement on reviewing DB transfer redress guidance

Contents

• Workplace pension participation
• The State Pensions Triple Lock will be disapplied for 2022/23
• FCA publishes statement on reviewing DB transfer redress guidance
• Overseas Transfer Charge & UK resident transfers to Gibraltar & EEA QROPS
• TPR: Employers: Don’t neglect your automatic enrolment duties
• No appeal against PPF compensation cap decision

 

Workplace pension participation

(AF3, FA2, JO5, RO4, RO8)

The Department for Work and Pensions (DWP) has published its update to April 2020 of workplace pension participation covering both private and public sector defined benefit (DB) and defined contribution (DC) schemes. As that April cut-off date is just after the start of the pandemic in the UK, the DWP has also used HMRC real time data to provide some information for 2020/21. The release’s main highlights are:

• Private sector participation was unchanged at 86%. This is still less than the public sector coverage, but the gap is now much smaller than even four years ago  

 

 

• Private sector contributions totalled £58.9bn in 2019/20, a fall of 0.3%. For each eligible saver that equated to £2,059, a drop of 3.6%. In the pre-automatic enrolment era of 2011/12 the corresponding figure was £4,275.

• £36bn (61%) of private sector contributions were paid by employers whose contributions rose by 1.1% on the previous year.

• Private sector employee contributions fell by 3.6% to £15.9bn, with a further £7bn accounted for by tax relief.

• In 2020/21, the rate at which all employees stopped contributing decreasedslightly compared to previous years to about 0.7%. Similarly, contribution rates were virtually unchanged.

• To take a longer-term view of contributions, the DWP uses the definition of ‘persistent saver’ as someone who participates in one year and then at least two of the following three. Using this definition shows a persistency fall to a rate of 63% in the private sector (for 2017-2020) from a peak of 75% for 2012-15. However, the decline needs treating with caution as the ‘Evidence Indeterminate’ category (aka ‘Don’t know’) rose from 24% to 36% over the same timeframe. Those defined as ‘not persistent’ fell from 2% in 2012-15 to just 1% in 2017-20.

COMMENT

What stands out in this survey is not the recent year-on-year changes, which are small, but the gap between total contributions per eligible saver for the public and private sector: £7,140 against £2,059. The gap was much narrower (£5,718 v £4,275) in 2011/12, underlining that while private sector workplace provision has improved dramatically – more than doubling since that period – average contributions have moved just as fast in the opposite direction.

 

The State Pensions Triple Lock will be disapplied for 2022/23

(AF3, FA2, JO5, RO4, RO8)

While the focus was on the Prime Minister’s long awaited announcement about Social Care reform combined with national insurance (NIC) increases, the DWP issued  a statement on how it would handle another tricky issue: the operation of the Triple Lock for 2022/23 State Pension benefits. 

The DWP’s solution is more brazen than some had expected: the earnings element of the Triple Lock will simply not apply for increases from next April. Instead, for 2022/23 only, the basic and new State Pension will increase by the greater of: 

• 5%; and 
• CPI inflation to September 2021. 

The latest (July) reading of the CPI is 2.0%, although the Bank of England’s Monetary Policy Report projected it to be around 3% by September. 

The DWP estimates that growth in earnings to July (the Triple Lock’s previous earnings benchmark) would be ‘between 8% and 8.5%’. The latest reading (for June) is 8.8%. What some commentators had suggested was that the earnings measure could be averaged over two years, i.e. looking back to pre-pandemic 2019. The July 2020 earnings growth was -1.0%, which pointed to a ‘normalised’ growth of about 4% a year. By ditching earnings completely, the DWP (or, more accurately, probably the Treasury) dodges all of the impact of the real (i.e. above inflation) earnings growth seen as the UK economy has recovered.   

The DWP estimates that the switch to a 2.5%/CPI Double Lock will ‘…mean a difference of around £4 or 5 billion in basic and new State Pensions expenditure in 2022/23, when comparing with the higher of 2.5% or expected price inflation.” 

That is a coy way of describing the true impact. The saving is not a one-off, but an annual reduction in expenditure as all future increases will be from a lower base than would otherwise have been the case. Viewed another way, the Double Lock tweak is worth about a third of what the NIC and dividend tax increases announced on Tuesday will produce each year. It might have been more honest – if politically unwise – to have included the measure in the bundle social care announcements. 

Although the Triple Lock is not in legislation, the Double Lock will require the DWP to introduce a Social Security Uprating and Benefits Bill, just as it produced a one-year-only Act last year to cope with negative earnings growth. The problem for the DWP is that the law still says basic and new pensions increase in line with earnings. 

COMMENT 

The one-year Double Lock is de facto another piece of revenue raising announced on 7 September. It is a pity that, repeating the experience of social care, the development of an equitable replacement for the Triple Lock has once again been kicked down the road in favour of a temporary fudge. 

 

FCA publishes statement on reviewing DB transfer redress guidance

(AF3, FA2, JO5, RO4, RO8)

The FCA has published a statement confirming that it will start its periodic review of guidance for unsuitable pension transfer advice, which dictates how companies must calculate any redress due, and issue the guidance by the end of 2021. The FCA first published transfer guidance in October 2017 (FG17/9) and committed to review the guidance at least every four years. The statement also sets out its expectations of companies whilst the review is ongoing, including clarifying how companies should be applying or interpreting the guidance in certain areas. It is worth reading to the end of the FCA’s statement, which states:

Impact on consumer’s tax position and/or benefits entitlement

Where redress is paid in the form of a lump sum, it should be adjusted to take account of the consumer’s individual tax position and wider circumstances.

For tax, firms should:

• check if the consumer is a non-taxpayer,

• check if any payment would change the consumer’s marginal tax rate,

• adjust the redress payment accordingly so that the consumer is not disadvantaged by the payment.

For wider circumstances, firms should:

• check if the consumer receives means tested benefits,

• check if any payment would change the consumer’s eligibility for means tested benefits,

• adjust the redress payment accordingly so that the consumer is not disadvantaged by the payment.

 

Overseas Transfer Charge & UK resident transfers to Gibraltar & EEA QROPS

(AF3, FA2, JO5, RO4, RO8)

With the UK’s exit from the EEA at the time of Brexit, it was assumed by many that the final curtain had come down on QROPS transfers for UK residents wishing to manage their lifetime allowance (LTA) position by use of a transfer to a QROPS, typically based in Gibraltar or Malta. This has been reinforced by the steep decline of transfers to QROPS over the last few years.

However, it is worth noting that this is not in fact the case. A transfer to a QROPS by a UK Resident scheme member will not trigger the 25% Overseas Transfer Charge. This is borne out by the changes made to section 244(C) of Finance Act 2004 in February 2021 which now, Referring to the exclusion to the Overseas Transfer Charge, is entitled: “Exclusion: receiving scheme in EEA state or Gibraltar, and member resident in UK or EEA state.” It defines the term “relevant territory” as being the UK and an EEA State”. Regulation 39 of the Taxes (Amendments) (EU Exit) Regulations 2019 (SI 2019/689) add means reference to the UK includes Gibraltar.

The wording now reads:

(1)	This section applies to a transfer to a QROPS established in an EEA state or Gibraltar.
(2)	If the transfer is a recognised transfer, the transfer is excluded from the overseas transfer charge if during the relevant period-
	(a)	the member is resident in a relevant territory (whether or not the same relevant territory throughout that period), and
	(b)	there is no onward transfer-
		(i)	for which the recognised transfer is the original transfer, and
		(ii)	which is not excluded from the charge.
(3)	If the member is resident in a relevant territory at the time of the recognised transfer mentioned in subsection (2), it is to be assumed for the purposes of this section that the member will be resident in a relevant territory during the relevant period; but if, at a time before the end of the relevant period, the transfer ceases to be excluded by subsection (2) otherwise than by reason of the member's death-
	(a)	that assumption is from that time no longer to be made, and
	(b)	the charge on the transfer is treated as charged at that time.
(4)	If the transfer is an onward transfer ("transfer B"), the transfer is excluded from the overseas transfer charge if during so much of the relevant period as is after the time of the onward transfer-
	(a)	the member is resident in a relevant territory (whether or not the same relevant territory at all those times), and
	(b)	there is no subsequent onward transfer that-
		(i)	is of sums and assets which, in whole or part, directly or indirectly derive from those transferred by transfer B, and
		(ii)	is not excluded from the charge.
(5)	If the member is resident in a relevant territory at the time of transfer B, it is to be assumed for the purposes of subsection (4) that the member will be resident in a relevant territory during so much of the relevant period as is after the time of transfer B; but if, at a time before the end of the relevant period, the transfer ceases to be excluded by subsection (4) otherwise than by reason of the member's death-
	(a)	that assumption is from that time no longer to be made, and
	(b)	the charge on transfer B is treated as charged at that time.
(6)	In this section "relevant territory" means the United Kingdom or an EEA state.

 

TPR: Employers: Don’t neglect your automatic enrolment duties

(AF3, FA2, JO5, RO4, RO8)

The Pensions Regulator (TPR) has published a new blog entitled Employers: Don’t neglect your automatic enrolment duties. In the blog, Director of Automatic Enrolment Mel Charles discusses the effects of the COVID-19 pandemic on business and warns employers that they should not neglect their workplace pensions duties, no matter the situation their business finds itself in. He added: “Employers must continue to assess staff, carry out re-enrolment duties and put new staff into a pension. We also urge start-up businesses now opening their doors to make sure they enrol eligible staff into a pension and complete their declaration of compliance on time.”

Mr Charles concluded: “We have all overcome great obstacles since March 2020 and there will be yet more testing times to come. While we can expect more change and more upheaval, our commitment to workplace savers remains constant. We will continue to support employers to do the right thing so that staff receive the pensions they are due.”

 

No appeal against PPF compensation cap decision

(AF3, FA2, JO5, RO4, RO8)

The Pension Protection Fund (PPF) has announced that the DWP has chosen not to appeal the July decision of the Court of Appeal to the Supreme Court, with the effect that the PPF compensation cap is now unlawful and no longer operative. As a reminder, the cap limits the compensation for members who transferred to the PPF before they reached retirement age to around £35,000 pa (depending on age). The PPF estimated in last year’s accounts that the future cost of removing the cap for those who were already in the PPF would be in the region of £200m.

The PPF confirms that it will continue to pay members their current level of compensation until it has planned its implementation of the judgment, with back payments presumably payable to those who continue to have their pensions restricted.

As yet there has been no adjustment to the guidance for undertaking PPF-related valuations, so whilst schemes can currently continue to allow for the cap, although it is expected that it will be removed in future versions of the guidance.

 

 

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