After the Christmas and New Year break, and with Blue Monday behind us, thoughts turn to the year ahead and this briefing looks at what we can expect in terms of positive pensions developments over the next 12 months.
While it is difficult to remember a time when the political background has been less certain, this briefing does not intend specifically to discuss the “Brelephant in the room”. In any event, the outlook will probably have changed yet again between writing and publication.
There is much about which to be upbeat in the outlook for pensions in the immediate future and below we take a whistle-stop, optimistic look at some of the expected key developments over the coming year.
Auto-enrolment - record numbers of savers
The full implementation of auto-enrolment has ensured that just under 10 million more people are now saving for a pension since the initiative was introduced in 2012.
From the start of the next tax year on 6 April 2019, the lower end of the qualifying earnings band will rise from £6,032 to £6,136, and the upper end from £46,350 to £50,000, with the earnings trigger for auto-enrolment remaining frozen at £10,000.
In addition, from 6 April 2019, minimum employer contributions will rise from 2 per cent to 3 per cent of qualifying earnings, with total minimum employer and jobholder contributions (including tax relief) rising to 8 per cent of qualifying earnings. The step-up in contribution levels in April 2018 did nothing to dampen enthusiasm for auto-enrolment, with an extra £4 billion being saved in a year. Again, there is no indication that the increase in contribution rates will lead to a spike in the number of individuals opting out of pension saving, as had been feared by some commentators.
Recent DWP data shows that the majority of surveyed employers support the Government’s proposal to lower the auto-enrolment age threshold from 22 to 18. There has also been a positive reaction to DWP proposals considering a removal of the lower end of the qualifying earnings band, so that contributions are referenced to a jobholder’s full earnings up to the upper end of the band.
A further improvement to the auto-enrolment regime would be the recognition of those in net-pay schemes for pensions tax relief. Such a change would give a meaningful boost to the savings of workers who earn less than the income tax personal allowance and who are denied pensions tax relief simply by not being members of relief-at-source schemes. It is also hoped that attention should turn in 2019 to pension savings provision for the self-employed.
Master trusts – deadline for authorisation approaches
The two key dates for master trusts in 2019 are 31 March 2019 by which applications for authorisation must be submitted to TPR, and 30 September 2019, the deadline for TPR to make its final decisions. Master trusts not making the grade will be obliged to close but those achieving authorisation will have demonstrated a successful upscaling of service and will offer a quality pensions arrangement to members.
The first tranche of authorised schemes is expected to be confirmed by TPR in Q1 of 2019, with further approved master trusts being announced in monthly batches.
CDC schemes – watch this space
The framework for collective defined contribution (CDC) schemes is expected to develop in the coming year, following the DWP’s consultation in November 2018 setting out its proposed legislative structure. CDC schemes have been used in the Netherlands and Denmark, and the Royal Mail is developing a scheme as an option for its employees.
CDC schemes would offer a target retirement income that is not guaranteed. The DWP proposes that they will need to be established as trust-based occupational schemes and registered with HMRC. They will also have to be authorised and supervised by TPR, and their benefits would be classified as money purchase benefits.
Consultation on the proposals closed on 16 January 2019 and primary legislation will be required to introduce the new framework. It is possible that the implementation measures will be included in the Pensions Bill 2019. Although publication of the Bill may be as early as Summer 2019, Royal Assent is unlikely before 2020.
Improvements in DB funding – stronger TPR and funding code update
Based on the contents of the DWP’s White Paper of March 2018 and subsequent consultations, there is likely to be a substantial Pensions Bill this year.
Probable changes include new powers for the Pensions Regulator to levy civil and criminal fines and amendments to its anti-avoidance powers. It is also anticipated that there will be new provisions applying when a sponsoring employer is involved in a corporate transaction, along with enhanced information gathering powers for TPR.
Consultation is also expected from TPR on a revised DB funding code of practice. The new code is due to set clearer parameters around prudent technical provisions and appropriate recovery plans. In addition, a “comply or explain” regime will be introduced under which the effectiveness of investment and risk management strategies will need to be demonstrably effective in delivering the scheme’s long-term funding objective.
Industry-led innovation - DB consolidation and value for money
Further developments are expected in the form of the introduction of DB “superfunds”, the new consolidation vehicles for DB funds. Regulation of entry into a superfund is due to be achieved by way of a “superfund gateway” under which only those schemes that are unable to buy out benefits will be able to join. Consultation is currently underway and related provisions are likely to appear in the new Pensions Bill 2019.
Pensions dashboard – schemes will need to provide data
In December 2018, the DWP confirmed that the dashboard initiative will now go ahead. The aim is to give savers a one-stop shop where an accurate picture of all their benefits is provided including, in time, the State pension entitlement.
Initially this will be on a non-commercial basis hosted by the newly-launched Single Financial Guidance Body, and then subsequently by commercial dashboards provided by the pensions industry. The data to populating the dashboards will be provided by pension schemes, on a mandatory basis, to a single "pension finder service", overseen by a newly established industry delivery group.
Subject to the outcome of its consultation (which closes on 28 January 2019), the DWP expects that some schemes, such as newly-authorised master trusts, will start to supply data to dashboards on a voluntary basis from 2019/20.
Dashboards are likely to become the delivery mechanism for member disclosure requirements under the IORP II Directive (transposed into UK law on 13 January 2019), such as the provision to all members, including deferreds, of annual benefit statements.
New SIP requirements – are schemes ready for October?
The DWP scrapped its controversial proposal for a “statement on member views” in relation to environmental, social and governance (ESG) issues to be included in (mainly) occupational DC schemes’ Statements of Investment Principles. Instead, this has been replaced with an optional policy on non-financial factors, including not only members' ethical concerns, but also social and environmental impact matters and quality of life considerations.
New requirements include a duty to take into account “financially material considerations” which are defined as including ESG issues, including climate change. The Financial Conduct Authority is adopting a parallel approach on proposed requirements for ESG and climate change matters to be considered in relation to workplace pension schemes when making investment decisions.
New regulations include several changes to the way schemes currently prepare and revise their investment disclosure documents, including their SIP and the changes need to be implemented by 1 October 2019. The DWP has revised its statutory guidance on the reporting of costs and charges to take the changes into account - specifically the requirement for certain schemes to publish their SIP and an implementation statement on it on a publicly available website.
Schemes should start to consider how to implement the new requirements, as there may be a considerable amount of work to do before October 2019.
Scheme governance – IORP II
The effective date for EU member states to effect the Directive on the activities and supervision of institutions for occupational retirement provision (IORP II) was 13 January 2019, although UK legislation is already largely compliant with the new Directive. Its obligations in relation to risk evaluation and disclosure, including the provision of benefit statements to all members, came into force from the same date.
Clarification from the Courts on some long-running cases
Some appeals that are likely to clarify various pensions issues in 2019 include:
The Court of Appeal is due to decide whether to uphold financial support directions issued by TPR against five ITV group companies.
British Airways v Airways Pension Scheme
The Supreme Court is due to hear an appeal on whether the trustee’s decision to exercise its unilateral power of amendment to introduce discretionary pension increases was invalid.
Burgess v BIC UK Ltd
The Court of Appeal will decide whether the recovery of overpayments through the equitable right of recoupment is subject to the 6-year limitation period. The High Court held recoupment was an equitable “self-help” remedy and therefore operated by means of adjustment to future pension payments.
Lloyds Banking Group
One of the biggest cases in 2018, which answered many questions about how to equalise guaranteed minimum pensions, is due to make a re-appearance. A further hearing is expected to consider GMP issues relating to transferred-in and transferred-out benefits.
Safeway v Newton
The ECJ is due to hear a reference form the Court of Appeal on whether the principle of equal treatment prohibits a retrospective amendment to equalise normal pension age between the sexes.
And finally, some confirmed key dates
- 9 January – pensions cold-calling ban in force.
- 13 January – IORP II Directive in force.
- 1 February – consultation closes on DB superfunds.
- 29 March – UK due to withdraw from EU, at the time of writing….
- 31 March – master trust authorisation application deadline.
- 31 March – scheme return and PPF deadline (note this date is a Sunday, so 29 March should be treated as the working deadline).
- 6 April – auto-enrolment increased contributions apply.
- 1 October – new SIP requirements in force.
An action-packed year ahead is promised on the pensions front. Even without the volatile political backdrop offering possibilities of a no-deal Brexit, a second referendum or another general election, the next few months are likely to be anything but dull.