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Technical update October 2017

ARTICLE — 2 Nov 2017

Nigel Oakley

Nigel Oakley

Head of Technical Services

Hot topics

PPF announces 2018/19 levy estimate

The Pension Protection Fund (PPF) has announced that the levy estimate for 2018/19 will be set at £550m, just over 10% lower than the 2017/18 estimate and seeks comments on proposals regarding: 

  • Narrowing the range of levy rates used for the ‘best’ levy bands (band 1-4);

  • Updating the allowance for investment risk in the levy calculation through asset and liability stresses; and

  • Simplification of the reporting requirements for certain types of transfers.

The PPF also confirmed it will implement the majority of proposals consulted on in March for the third levy triennium, including:

  • Using credit ratings and the Standard and Poor’s credit model for regulated financial entities in addition to the Experian model;

  • Using five new scorecards in the Experian model;

  • Simplifying the certification of deficit reduction contributions;

  • Maintaining the use of monthly scores, though only six months’ scores will be used in 2018/19; and

  • Proceeding with changes to the requirements for contingent assets, although they have stated they will consult separately on changes to standard the forms.

The PPF is consulting on the draft levy rules for 2018/19 and some other proposals up to 1 November and will finalise the rules and publish the levy determination in December.

How this could affect you:

The PPF’s impact assessment shows that nearly two-thirds of schemes are likely to see a reduction in their levy and around 20% seeing an increase if the new rules had applied in 2017/18. However, larger companies without a credit rating are likely to see significant increases in their levy as it is expected they will  foot a higher share of the bill.

Video: How the PPF levy is calculated

As the Pension Protection Fund (the PPF) levy invoices for 2017/18 start being received we wanted to provide you with some more information as to how the PPF levy is calculated.  This short video includes an explanation as to how the PPF levy will be calculated for the 2017/18 levy year. We also look at a couple of examples to help explain this.

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The video can also be found on the Employer Portal if you prefer to view it there.

Supreme Court decision regarding same-sex spouse provisions

The Supreme Court has ruled in the case of Walker v Innospec that same sex partners (spouses or civil partners) need to be treated in the same way as opposite sex spouses when it comes to survivors' pensions. The Court determined that the exemption in the Equality Act 2010 allowing schemes to only have to equalise survivors’ pensions built up on or after 5 December 2005 is inconsistent with the relevant EU Directive and is therefore invalid.

How this could affect you:

Most Sections of the RPS and the other railway pension schemes are unaffected by this decision as they already provide survivor’s pensions in respect of all pensionable service.

State Pension age review

Following changes made to the State Pension age in recent years, a system of regular reviews of the State Pension age was introduced by the Pensions Act 2014. The first of these reviews, under the leadership of John Cridland CBE, a former Director General of the CBI, was published on 23 March 2017. His main recommendations were:

  • That it should rise to age 68 over a two year period starting in 2037 and ending in 2039, seven years earlier than the currently legislated 2044-46 step up.

  • The triple lock should be withdrawn in the next Parliament.

  • State Pension age should not increase more than one year in any ten year period, assuming that there are no exceptional changes to the data.

  • Early access and regional or individual variations in SPA should be rejected on the grounds of complexity, but some new flexibility is recommended in the form of options for partial deferred retirement.

In July, the government published its proposal to bring the rise in SPA forward, as recommended by John Cridland. The increase to 68 between 2037 and 2039, seven years earlier than originally proposed, will affect people born between 6 April 1970 and 5 April 1978 whose SPA is currently 67. They will see it increase to between 67 years 1 month and 68 years, depending on their date of birth. For people born after 5 April 1978 there is no change and their SPA will remain at 68.
 
The government also indicated that in order to keep the State Pension sustainable and maintain fairness between generations in the future, it will aim for the proportion of adult life to be spent in receipt of State Pension to be ‘up to 32%’ in the long run. A 32% timetable is stated as being consistent with the average proportion of adult life spent above SPA over the last 25 years.
 
Any changes to the SPA would require primary legislation and as such subject to full Parliamentary approval. The next review, which will conclude by 2023, will consider whether rises beyond 68 are needed and when.
 
The government also said that it agrees with other points raised by the John Cridland report, including a wider package of measures to help people plan for their retirement, to work longer where they can and to support people who cannot work.

How this could affect you:

Changes to the State Pension age will have little direct impact on the RPS but will impact when some members can receive their state benefits.

Other developments

Pensions Regulator update

In September, the FCA and the Pensions Regulator issued a joint guide for employers and trustees on providing support with financial matters without needing to be subject to regulation.
 
An employer or trustee will only need authorisation from the FCA if they are providing investment advice and if they receive a ‘commercial benefit’. The general provision of information does not require them to be authorised by the FCA. However, care needs to be exercised to ensure that the intention to provide information cannot be misconstrued as advice.
 
The  guide sets out how employers and trustees can help in promoting pensions and other financial workplace benefits, what advice they should not give and suggests they signpost certain areas that members can turn to, such as The Pensions Advisory Service, the Money Advice Service (MAS) and Pension Wise.
 
The Regulator has also published its description of who it considers to be a professional trustee. Generally, a person will be considered a professional trustee if:

  • His or her business includes the provision of trustee services; and/or

  • He or she has represented themselves to one or more unrelated pension schemes as having expertise in trustee matters.

The definition is published alongside an explanation on how it will use its powers to impose monetary penalties. In most cases, it is expected that higher penalties will apply to professional trustees.
 
The Regulator has also launched a campaign called 21st Century Trusteeship – raising the standards of governance. The campaign’s aim is to outline how those involved in running schemes can take action to meet expected standards and what action the Regulator will take if they don’t improve. The focus initially will be on emphasising the fundamental importance of good governance.
 
Targeted emails will direct trustees, scheme managers, employers and advisers to a new page on TPR’s website where they will find specific and relevant content which sets out clear standards that TPR expects schemes to meet.

How this could affect you:

As an employer you might wish to help your employees with financial matters. This joint factsheet gives some information on the things you can do without the need to be authorised.

PLSA DB Taskforce report

The Pensions and Lifetime Savings Association (PLSA) has launched the final report of its Defined Benefit (DB) Taskforce – 'Opportunities for Change'.
 
The DB Taskforce was set up by the PLSA in March 2016 to undertake a review of the challenges currently facing funded DB pension schemes and to make recommendations to government which will (a) help ensure the sustainability of open DB schemes and (b) help closed DB schemes run more efficiently and ultimately secure member benefits.
 
An interim report published in October 2016 indicated that many DB pension schemes are under severe pressure and without change the likely outcome will be hardship for members or sponsors.
 
A second report, ‘The Case for Consolidation’ , examined four models of consolidation, and argued that full merger into a new type of ‘Superfund’ could deliver materially better outcomes for members, reducing risks to their benefits and the risks of their sponsor defaulting.   
 
The final report makes three main recommendations:

1. A new chair's statement for DB scheme trustees – to be produced annually;
2. Making it easier to standardise and simplify benefits; and
3. Helping schemes backed by weaker covenants to benefit by exchanging covenants for funding.

How this could affect you:

There is no impact at present but any recommendations and government actions as a result will be monitored.

Pension scams

On 21 August 2017, DWP and HM Treasury published a response to last December’s consultation on how to tackle pension scams. Among the proposals listed in the consultation, the government stated it will:

  • Ban all cold calls in relation to pension – cold calling is the main mechanism used in pension scams, however the government believes there may be benefits for extending the ban to all electronic communications including e-mail and text messages.
  • Limit the statutory right to a transfer – the government intends to put new legislative restrictions on member’s statutory right to a transfer. Under the proposal a member will only have a statutory right to transfer where the receiving scheme is:
  • Make it harder to open fraudulent schemes – the government proposes to introduce legislation aimed at ensuring only active companies can register a pension scheme with HMRC. Dormant companies will only be able to register a pension scheme in rare legitimate circumstances.

In addition, the Work & Pensions Select Committee has announced the launch of an inquiry into whether and how far the pension freedom reforms are achieving their objectives. The inquiry will also consider whether policy changes are required, recognising concerns around pension scams. 
 
The Select Committee is inviting evidence to be submitted in response to its call for evidence by 23 October 2017.

How this could affect you:

We are encouraged by the government’s willingness to look at measures to counter the increase in pension scams and would encourage employers to warn their employees of the potential risks.

Queen's Speech and Autumn Budget 2017

The Queen’s Speech was delivered on 21 June 2017 and was dominated by Brexit but did contain a couple of references relevant to pensions. These were:

  • Summer Finance Bill 2017 – The Finance Bill 2017-18 was published on 8 September 2017 and included the facility to allow up to £500 paid towards pension advice to be exempt from income tax along with the reduction in the Money Purchase Annual Allowance from £10,000 to £4,000 to be backdated to 6 April 2017.

  • Financial Guidance and Claims Bill – This will combine the Money Advice Service (“MAS”); The Pensions Advisory Service (“TPAS”); and Pension Wise into one body. The draft Bill received its First Reading in the Lords and was published on 22 June 2017.

There was no mention of any additional powers being provided to the Pensions Regulator, although it is expected that this may be picked up in a government White Paper on defined benefit pensions, which is expected to be published later this year.
 
As a separate development, the government has announced that the Autumn Budget will be delivered on 22 November 2017.

How this could affect you:

Our communications have indicated that a retrospective implementation date might apply to the reduction in the Money Purchase Annual Allowance since it was dropped from the earlier Finance Act and some members may be impacted by this retrospective reduction.

Background information

Data Protection

The General Data Protection Regulation (GDPR) comes into force in May 2018 with the aim of harmonising the current data protection laws in place across the EU member states.
 
The GDPR will apply to EU citizen’s data regardless of where the controlling or processing of that data takes place. This means that any organisation based outside the EU (including the UK once it leaves the EU) which processes the personal data of EU citizens will have to comply with the GDPR.
 
Having signalled its intention to replace the Data Protection Act 1998 in the Queen’s speech, the government published the Data Protection Bill on 14 September 2017. The Bill will implement the derogations and exemptions permitted in the GDPR.  It will also implement the EU’s Law Enforcement Directive, create a data protection framework for the Intelligence Services and confirm the Information Commissions Office duties, functions, powers plus the enforcement provisions.

How this could affect you:

Trustees, employers and pension providers should start preparing now for the GDPR as, despite Brexit, the GDPR and subsequently the new Data Protection Bill will apply in the UK from next year.

British Steel Pension Scheme deal

The Pension Regulator (TPR), Tata Steel UK (TSUK) and the British Steel Pension Scheme (BSPS) trustees have been negotiating a deal to restructure the BSPS.
 
On 11 August, TPR issued a statement giving initial approval to a proposal from TSUK to the restructure. The restructuring will be done through a regulated apportionment arrangement (RAA), which will enable TSUK to separate from the BSPS. As part of the agreement, the BSPS will receive £550 million from Tata Steel Group and a 33% equity stake in TSUK.
 
Following the completion of the RAA, scheme members will be given the option to either:

  • transfer to a new pension scheme, which will be sponsored by TSUK; or

  • remain in the existing scheme, which will transfer to PPF.

Formal approval to the RAA is expected to be granted by TPR within 28 days of initial approval of the deal, provided the decision is not referred to the Upper Tribunal by any of the parties who are directly affected by this decision.   TPR have confirmed that they have only granted clearance to the proposal after ensuring it met strict criteria designed to stop employers abusing the RAA mechanism. This included that the business would have become insolvent within the next 12 months if the RAA had not taken place and would have left the BSPS without its sponsoring employer.
 
A group of former members of the scheme have written to the trustees of the new pension arrangement to ask that pension benefits accrued prior to 1997 are uprated in line with inflation arguing that failure to do this could result in members facing poverty in retirement.

How this could affect you:

This is expected to have little direct impact on the RPS but is of interest relating to how RAAs can operate.

With kind regards,
 
RPMI Technical Team

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