Technical update January 2017

ARTICLE — 20 Jan 2017

Welcome to the latest edition of out Technical update, providing you with an overview of the most recent developments within pensions.

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Hot topics

Government consultation on GMP equalisation

The government has launched consultations on: 

1. a proposed new methodology to equalise guaranteed minimum pensions (GMPs) and
2. a GMP conversion methodology

Both were developed by an industry working group set up to consider the issues, and followed an earlier proposed methodology in 2012, which was widely dismissed as being too complex and costly.

The updated proposed method uses a GMP conversion approach which involves valuing the benefits accrued between 17 May 1990 and 5 April 1997 and comparing them with the corresponding value if the member was the opposite sex. Equalisation is achieved by taking the higher of the two values.
This higher of two values, plus the value of any other benefit to be converted, (typically GMP in respect of any pre-17 May 1990 period during which a GMP accrued) can then be converted into a revised non-GMP pension benefit.
Compared to the 2012 ’dual record‘ proposal, the conversion process would be a one-off calculation, and would appear to be simpler and therefore less costly to implement.
In addition, the advantage of this method is that once it’s done, not only will the inequalities issue have been resolved, there will be an opportunity to remove the complexity and restrictions generated by GMPs and the associated anti-franking requirements. However, the proposed method would be calculation intensive, and there are likely to be many data issues, especially for pensioners.
There would also be a need to complete GMP reconciliation work before the conversion process. The consultation also includes various amendments, mainly to tidy up the legislation governing formerly contracted-out rights and help improve scheme administration, provide clarity and review past contracting-out regulations. The consultation closes on 15 January 2017.
How this could affect you:
Whilst the proposed method, if adopted, would not be compulsory it would seem likely that the majority of schemes including the Railways Pension Scheme (RPS) would look to adopt this method or something similar. Due to the scale and complexity involved in GMP equalisation it is anticipated this would be a significant project for the RPS and other schemes.

Autumn Statement

The Chancellor of the Exchequer, Philip Hammond, delivered this year’s Autumn Statement on 23 November 2016. It was the first Autumn Statement or Budget since the EU referendum in June 2016 and the last Autumn Statement of its kind, as the Chancellor announced that the main Budget is being moved to the autumn from next year, although the Spring Budget will still take place in 2017.
The Autumn Statement included very little news which has a direct impact on the running of the railway pension schemes or most other occupational pension schemes, with the only announcements in this respect being:

1. A proposed reduction in the Money Purchase Annual Allowance (MPAA) from £10,000 to £4,000 with effect from April 2017. A consultation has been launched relating to this proposal. The MPAA was introduced in April 2015 as a reduced level of annual allowance for future money purchase contributions when an individual has already accessed their pension benefits using aspects of the new pension flexibilities such as flexible drawdown and full encashment.
2. An announcement that the government will consult on measures to help combat pension scams, such as the possibility of banning cold calling in relation to pensions and giving powers to block suspicious transfers. A consultation has since been launched on this.
3. The retention of the triple-lock for the State Pension, in the short term at least.
4. The Autumn Statement also announced an end to the tax and National Insurance (NI) advantages of many types of salary sacrifice arrangements. However, as expected following a government consultation on this issue earlier this year, the use of salary sacrifice for pension purposes, as well as for a small number of other purposes, will remain allowable and subject to the same tax and NI advantages as present.

How this could affect you:
Whilst there was little in the Autumn Statement that will directly impact the RPS the announcements are expected to have some indirect impact on members. We are particularly encouraged by the government’s apparent willingness to look at measures to counter the increase in pension scams. We expect that the Trustee may look to work with RPMI to consider setting a framework to use for blocking transfers, where appropriate, assuming the powers to allow this go ahead.

State Pension increase

The Department for Work and Pensions (DWP) has confirmed that the state pension will increase in line with earnings at 2.5% for 2017/18 under the triple lock guarantee. Pensioners entitled to the full new State Pension will see their weekly payment increase from £155.65 to £159.55. Those who receive the full basic State Pension will see their weekly payments increase from £119.30 to £122.30 from April 2017.
As reported in the Autumn Statement, the Chancellor has committed to retain the triple-lock for this Parliament, even though earlier in November the Work and Pensions Committee called for the government to scrap the triple lock pledge. As part of a Work and Pensions Committee report on intergenerational fairness, it concluded that the state pension triple-lock guarantee is unsustainable.
How this could affect you:
As this announcement is in relation to the State Pension it is not expected to have a direct impact on the RPS, although the increase in the basic State Pension will impact the offset used in calculating contributions and benefits, where applicable. 

Pension Schemes Bill

A new Pension Schemes Bill is currently making progress through Parliament, with its focus being on protecting savers in master trust arrangements in order to maintain confidence in pension savings. The introduction of automatic enrolment into workplace pension schemes has resulted in an expansion of the master trust market, and the Pensions Regulator (tPR) had voiced concerns about the quality and viability of some master trusts.
Once enacted, the Bill will introduce a new supervisory regime for master trusts. This will include a requirement for them to be authorised by tPR before they open to members and an ongoing supervision framework, including the submission of annual accounts to tPR by both the scheme and any scheme funder.
The Bill will also amend existing legislation to support the Government's intention to cap early exit charges and ban member-borne commission charges in certain occupational pension schemes.
The Bill did not include, as it was expected it would, clauses to create a single financial guidance body responsible for delivering debt advice, money and pensions guidance to the public, as currently provided by The Pensions Advisory Service (TPAS), Pension Wise and the Money Advice Service (MAS). However, this is still expected to go ahead and the next steps will involve consulting on the best way to design a single body model.
Several members of the House of Lords have highlighted a lack of legislation in the Bill for defined benefit pension schemes and raised concerns about current pension accounting standards.
How this could affect you:
The Bill is expected to have limited impact on the Shared Cost arrangement of the RPS. However, due to the structure of the Industry Wide Defined Contribution (IWDC) arrangement this is considered a master trust and therefore would be directly impacted by any new supervisory regime for master trusts, unless regulations allow for exemptions in this area for schemes such as the RPS. Consequently, the Trustee and RPMI are monitoring developments in this area.

Other developments

Green Paper on the future of DB schemes

Pension Minister Richard Harrington has confirmed that DWP will issue a Green Paper on the future of defined benefit (DB) schemes in early 2017. The Minister has suggested this will focus on scheme funding valuation and investment issues, in particular whether alternative investment vehicles, instead of gilts, should be considered more often. He also added the government may consider the price inflation index used by schemes and the practicalities of scheme consolidation.
It seems likely that the timing of the Green Paper will coincide with the conclusions of the inquiry into DB pensions law and regulation, and the operation of the Pension Protection Fund (PPF) and the Pensions Regulator (tPR), this inquiry started in summer 2016.
How this could affect you:
We will need to wait for more details to emerge before determining how much of an impact the Green Paper may have.

EU Referendum

Although it has been expected that ’Article 50‘ would be triggered by the end of March 2017, meaning that the UK would withdraw from the EU by the end of March 2019, the High Court ruled on 3 November 2016 that Parliament must vote on whether the UK invokes Article 50.
The ruling is now being considered by the Supreme Court and the outcome of this may influence the timing of the triggering of Article 50. In addition, the impact and terms of a withdrawal from the EU, as well as the impact on UK pensions, are unknown but should become clearer over the coming months and years.
In the short term, EU laws will retain their powers within the UK but, in due course, an exit from the EU is likely to give the UK government the scope to gradually amend legislation which has been influenced by Europe to date.
However, a significant amount of EU pension-related legislation is already written into UK law and other elements are expected to be written into the government’s Great Repeal Bill. In either case, there would need to be a justifiable cause and appetite to amend the legislation, as changes would cost time and money, so there may not be any immediate or significant reduction in legal requirements for UK pension schemes.
As well as those items of EU law already in force, there are also items which are not. Perhaps most significantly, the new EU Directive on the activities and supervision of Institutions for Occupational Retirement Provision (‘IORP Directive‘) comes into EU law in January 2017 and, ordinarily, would need to be implemented into UK law within two years. It is not yet known how the requirements of the IORP Directive will be dealt with.
Over time, we may also expect to see some changes relating to pension case law, as UK courts may no longer need to consider the views of the European Court of Justice when interpreting legislation. The House of Commons Library has updated a briefing paper which looks at the implications for pensions of the decision for Britain to leave the European Union.
How this could affect you:
The fallout from the result of the EU referendum will be far reaching and will no doubt impact pension schemes such as the RPS but we will need to wait to see what the actual impact will be.

Secondary annuities market proposal cancelled

The previous Chancellor of the Exchequer, George Osborne, had proposed that the pension flexibility regime should be extended to allow people to sell annuities they had already bought.
The present government has now announced that the plan has been cancelled. This followed an extensive consultation period, following which the government concluded that creating the conditions to allow the emergence of a vibrant and competitive market, with multiple buyers and sellers of annuities, could not be balanced with sufficient consumer protections. In addition, although there has been demand for the sale of annuities, few firms had indicated that they would be prepared to buy them.
How this could affect you:
No annuities were provided for within the RPS but this U-turn by the government may impact some former members of the IWDC arrangement who have used their funds to purchase annuities from external organisations.
Background information

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 is in progress, under the leadership of John Cridland CBE, a former Director General of the Confederation of British Industry (CBI).
The review will report to the government in time for it to announce recommendations by May 2017. An interim report and consultation on issues being considered by the review was published on 13 October 2016.
The consultation period will run until 31 December 2016, and considers aspects such as whether an alternative to a universal State Pension age could be implemented which would meet the principles of affordability and fairness, reflecting the fact that life expectancies differ amongst groups of the population.
How this could affect you:
Changes to the State Pension age will not directly impact the RPS. However, if a system of a personal State Pension age was introduced as opposed a universal State Pension age for all this may mean bridging pensions (level pension option) would become administratively impractical.

Reports on long-term sustainability of DB pension schemes

Both the Pension and Lifetime Savings Association (PLSA) and the Confederation of British Industry (CBI) have recently published reports looking at the sustainability of defined benefit (DB) schemes.
The PLSA report is part of their DB Taskforce initiative, with the DB Taskforce's Interim Report being published at PLSA’s annual conference in October 2016. The main findings of the Interim Report are that the following areas should be reviewed:

1. The potential for scheme consolidation, which could help secure more economically viable schemes better able to deliver value to scheme members and their sponsors, especially in relation to small schemes.
2. The ways in which changes to the pension system could deliver better solutions to scheme resolution and remove regulation that adds cost but has little or no tangible benefit.
3. The approach to benefit design and benefit changes, so a more flexible approach could be implemented to help sustain schemes.
4. The approach taken in relation to the sharing of risk.
The DB Taskforce has indicated that recommendations and policy solutions will be published in March 2017 as part of a final report.
The CBI's report highlights the long-term nature of pension schemes and suggests that in pure cash terms, UK defined benefit schemes are relatively well-funded with well over £1 trillion of assets to meet future liabilities.
However, recognising the problems facing DB schemes, the CBI calls for: more flexibility in scheme funding plans, ensuring schemes can use a modern inflation measure for indexation, addressing the impact and consequences of a 'gilts plus' approach to valuing scheme liabilities; and assisting pension scheme investment in more illiquid assets, including infrastructure.
How this could affect you:
There is no impact at present but any resulting recommendations and government actions will be monitored.

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