Pensions update: Pension transfers, MAPS, PPF update and more

Pensions

• FCA publish GC20-01 guidance consultation - Advising on pension transfers
• NHS pension scheme extends voluntary scheme pays election deadline
• The future of the Triple Lock is being called into question
• PPF publishes updated PPF 7800 Index - June 2020
• TPR issues superfunds guidance
• MAPS: Impacts of COVID-19 on financial wellbeing

 

FCA publish GC20-01 guidance consultation - Advising on pension transfers

(AF3, FA2, JO5, RO4, RO8)

The aim of the guidance consultation according to the Financial Conduct Authority (FCA) is to improve the suitability of defined benefit transfer advice and the outcomes for individual consumers. It also states that it aims to give advisers the confidence to give good advice, so that they and their professional indemnity insurers can see the benefits of less unsuitable advice, making the pension advice market more sustainable going forward.

The consultation is on the non-Handbook guidance which is designed to help advisers understand the Handbook guidance and rules in practice. The guidance provides examples of good and bad practice to help advisers develop good practices within their firms. In addition, the consultation covers:

• a scheme data template that is designed to help advisers understand what data they need to get from a DB scheme for the advisory process; and

• an updated version of the joint FCA/The Pensions Regulator (TPR) branded factsheet: ‘Guide for Employers and Trustees on providing support with financial matters without needing to be subject to regulation’.

This consultation is open for three months, closing on 4 September 2020 and contains 22 questions. Responses can be sent via the on-line form or via email to gc20-01@fca.org.uk.

NHS pension scheme extends voluntary scheme pays election deadline

(AF3, FA2, JO5, RO4, RO8)

The voluntary scheme pays election deadline has been extended by three months for members of the NHS pension schemes.  The normal deadline for making the election is 31 July but has been extended until 31 October to allow senior clinicians more time during the COVID-19 response.  The deadline relates to annual allowance charges incurred in the 2018/19 tax year. 

Voluntary scheme pays can be used where the client’s annual allowance charge has arisen due tapering or where the combined inputs to two sections of the scheme exceed £40,000. 

Those wishing to use scheme pays should have already declared their annual allowance charge in their tax returns which had a deadline of 31 January 2020.  However, some will have completed these on an estimated basis and so the extension will give more time to determine the correct figures before making an election.

Note, however, that where voluntary scheme pays is used for annual allowance charges in 2018/19, HMRC can charge interest from the tax due deadline of 31 January 2020.  Therefore, it is still better to help client’s make their election as soon as possible. 

The extension to the deadline will be reviewed again in July.  The deadline for the use of mandatory scheme pays remains as 31 July.

As a reminder, for 2019/20 a special interim measure applies and any annual allowance charges for clinical staff that arise due to NHS scheme pension inputs (excluding AVCs) will be covered by employers for those working for NHS England and NHS Wales.  The process will still require members to calculate any annual allowance charges, complete their self-assessment returns and make their scheme pays election in the normal way.  The employer will then make a contractual agreement to pay them additional income in retirement equivalent to the reduction in pension. 

The future of the Triple Lock is being called into question

(AF3, FA2, JO5, RO4, RO8)

A report on the front page of the Financial Times has added weigh, highlighted how the triple lock could cost the Government dearly, if no changes are made.

To understand why, first consider the fundamentals of the Triple Lock. The increase each April is the greater of:

1. 5%;
2. Consumer Price Inflation to September of the previous year; and
3. Average earnings growth.

It is 3. which is causing concern in the Treasury. This third component of the Triple Lock has never been precisely defined in law, but as a House of Commons’ briefing note on the Triple Lock observes, since 2012 the increase used has been that of average weekly earnings to July in the previous year.

To quote the Office for National Statistics, earnings estimates “…are not just a measure of pay rises as they also reflect changes in the number of paid hours worked and changes in the structure of the workforce, for example, more high-paid jobs would have an upward effect on earnings growth rates”. The latest average weekly earnings numbers, published on 16 June, for the period February-April, show a sharp drop in earnings growth on total pay (including bonuses) to 0.98%, from 2.34% for the previous period (January-March).

What happened between the two was that the effects of COVID-19, both in terms of fewer hours worked, and, crucially, the Coronavirus Job Retention Scheme (CJRS), have come into play. By the time July is reached, the CJRS will be influencing the full three-month period, suggesting that yearly earnings growth could be negative.

For the 2021/22 State Pension uprating, negative earnings growth will almost certainly mean that the 2.5% floor bites – if Triple Lock continues. CPI inflation is likely to be well below 2.5% - the reading for May 2020 was just 0.5% and the economic scales are tipped towards disinflation (or even deflation), rather than inflation. A real terms increase of perhaps 2% for pensioners could be a hard sell for a Government faced with rising levels of unemployment.

However, a bigger problem looms for the 2022/23 uprating, which will be based on earnings growth in the year to July 2021. If – big if, admittedly – the UK economy is close to a post-COVID-19 normalisation by July 2021, working hours will be higher than in July 2020. There will also not be 9.1m jobs furloughed, most with correspondingly reduced pay. As a consequence, year-on-year earnings growth in July 2021 could be significant, even though overall it does little more than cancel out the drop recorded for the year to July 2020. For the Triple Lock as it currently exists, a jump in earnings recorded in July 2021 will feed through to higher State Pensions, while the previous year’s dip will have been relegated to an irrelevant factor. Add in the bite of the 2.5% floor in 2021/22 and real terms growth in State Pensions could be more than 5% over the next two years.

PPF publishes updated PPF 7800 Index - June 2020

(AF3, FA2, JO5, RO4, RO8)

Since July 2007 the Pension Protection Fund has published the latest estimated funding position, on a s179 basis, for the defined benefit schemes in its eligible universe.

June 2020 update highlights

• The aggregate deficit of the 5,422 schemes in the PPF 7800 Index is estimated to have increased to £176.3 billion at the end of May 2020, from £128.5 billion at the end of April 2020.

• The funding ratio decreased from 93.1 per cent at the end of April 2020 to 90.9 per cent.

• Total assets were £1,769.4 billion and total liabilities were £1,945.7 billion.

• There were 3,621 schemes in deficit and 1,801 schemes in surplus.

• The deficit of the schemes in deficit at the end of May 2020 was £290.1 billion, up from £256.4 billion at the end of April 2020. 

TPR issues superfunds guidance

(AF3, FA2, JO5, RO4, RO8)

The Pensions Regulator (TPR) has published guidance giving the green light for so-called DB pension “Superfunds”, (also referred to a DB Consolidators) ahead of government moves, but has warned it wants to see ‘stringent’ standards and a robust regulatory framework for this new approach.

DB superfunds offer a way for employers to consolidate existing schemes, by replacing the sponsoring employer with a capital-backed vehicle or a special purpose vehicle (SPV). They create a large retirement savings fund which includes different company schemes, meaning participating employers are no longer liable for member benefits.

TPR’s guidance is for those setting up and running a superfund ahead of the government’s proposed legislative authorisation and supervision framework. Anyone seeking to run a superfund or new business model aimed at running on a scheme without a sponsor, is advised to contact TPR about their plans before launching.

TPR’s guidance, which comes into force immediately, sets out the regulator’s expectations for how DB consolidator superfunds and other new models must show they are well-governed, run by fit and proper people and are backed by adequate capital. It also explains how they will be assessed and regulated.

TPR said trustees need to be certain that a transfer to a superfund is in their members’ interests. They should also only consider using a superfund or new business model once TPR has completed its assessment.

TPR will be providing more information for trustees and employers in the coming months, and said it has set out its interim expectations on how these new schemes will run, ahead of any specific legislation dealing with superfunds, in order to ensure a robust framework for their operation. TPR will work with government to keep the operation of the interim regime under review and act if it appears changes are required.

Guy Opperman, minister for pensions, said: “The publication of today's interim regime for DB superfunds is a big step towards a healthier and stronger pensions landscape. Well-run superfunds have the potential to deliver more secure retirement incomes for workers, while allowing employers to concentrate on what they do best - running their businesses. I look forward to learning from the experiences from the interim regime, which will provide valuable insights as we develop and finalise our plans for a longer-term legislative solution.”

TPR said capital adequacy is among the most important areas of the interim regime as under the superfund model for DB schemes there will be no employer covenant.

TPR will require superfunds to hold sufficient assets to meet the promises to savers with a high degree of certainty. This will include the requirement for the scheme’s liabilities to be calculated using specific assumptions set out in TPR’s guidance and for additional assets to be held in a capital buffer.

TPR Chief Executive Charles Counsell said: “Our priority is the protection of savers. In line with our clear, quick and tough approach, we are setting out now how our interim regime will assess and regulate superfunds, including new models, so there can be no doubt about the standards we expect before the government’s permanent authorisation regime comes into force. We have set a high bar to ensure savers can have confidence in superfunds should their pension be transferred into one in the future. We have taken bold action now to ensure that the market develops in the best interests of savers, particularly as the impact of the COVID-19 crisis may prompt some sponsoring employers and pension trustees to consider what they can do to meet defined benefit pension promises in the future.”

MAPS: Impacts of COVID-19 on financial wellbeing

(AF3, FA2, JO5, RO4, RO8)

On 2 June the Money and Pensions Service published a report entitled: “Impacts of COVID-19 on financial wellbeing”.  This sets out, in some detail its findings on the many-layered adverse impacts of COVID-19 on peoples’ financial wellbeing in the UK.  The report draws on insights and research from over 100 secondary sources. MaPS has also announced an additional £37.8 million to fund the provision of debt advice and other support for people suffering money difficulties in the wake of the Coronavirus outbreak. Early analysis by MaPS predicts the number of people needing help with debt will climb for at least the next 18 months – increasing by over 60% and peaking around the end of 2021.