Technical Update January 2018

ARTICLE — 4 Apr 2018

January 2018

Welcome to our Technical update, providing you with an overview of the most recent developments within pensions and what they might mean for schemes.

We hope you find it useful and should you have any feedback or suggestions, please get in touch with us:

Hot topics

Autumn Budget 2017

The Chancellor of the Exchequer, Philip Hammond, delivered the Autumn Budget on 22 November 2017. This was the second Budget announcement of the year, due to the transition from a Spring Budget to an Autumn Budget, and is the first under the current government.

The Budget did not contain any significant pension-related announcements. However, it did confirm that:

• The Lifetime Allowance will increase by the September 2017 CPI figure of 3% to £1,030,000 effective from 6 April 2018; and

• In April 2018, the full basic State Pension will increase by £3.65 per week to £125.95 per week, and the ‘single-tier’ new State Pension will increase by £4.80 per week to £164.35 per week, also in line with the September 2017 CPI figure of 3% (and as per the triple lock).

For shared cost sections of the Railways Pension Scheme and the British Transport Police Force Superannuation Fund, which increase pensions in line with Orders made under the Pensions (Increase) Act 1971, it is expected that the 2018 Order will provide for a 3% increase from 9 April 2018, reflecting the September 2017 CPI figure.

How this could affect you:

The announcements regarding the Lifetime Allowance and State Pensions do not directly impact the RPS, although the increase in the basic State Pension will impact the offset used in calculating contributions and benefits (where applicable).

The increase in the Lifetime Allowance will be welcomed by those members who will be taking their benefits after 5 April 2018 and have benefits valued in excess of 
£1 million.

Draft Scottish Budget 2018/19

The draft Scottish Budget for 2018/19 was delivered on 14 December 2017 and contained the following proposed changes to income tax rates:

• a new starter rate of 19p for earnings over £11,850 and up to £13,850;
• a freeze on the basic rate at 20p for earnings over £13,850 to £24,000;
• a new intermediate rate of 21p for earnings over £24,000 to £44,273;
• an increased higher rate of 41p for earnings over £44,273 to £150,000; and
• an increased top rate of 46p for earnings over £150,000.

HMRC has confirmed that it will work closely with the Scottish Government and pension providers “on the implications [of these changes] for pension tax relief, and to clarify how the mechanisms for providing relief will operate in respect of Scottish pension savers”. HMRC has also published a newsletter for pension schemes on relief at source for Scottish Income Tax.

How this could affect you:

It is HMRC’s responsibility to identify employees who will pay the Scottish Rate of Income Tax and decide what tax they pay. Employers, and pension providers, should only use a Scottish tax code if HMRC tells them to. HMRC intend to provide confirmation of the residency tax status of scheme members for the first time in January 2018. At present, the proposed changes to Scottish income tax rates set out above have not been finalised.

PPF levy rules for 2018/19

On 19 December, the PPF published its policy statement and the final levy rules for 2018/19. Many of the proposals in its September consultation paper have been adopted. In particular:

• The levy estimate has been set at £550m, just over 10% lower than the 2017/18 levy estimate;
• The Risk-Based Levy Scaling Factor is 0.48, the Scheme-Based Levy Multiplier is 0.000021 and the Risk-Based Levy Cap is 0.5%;
• A narrower range of levy rates will be used for the strongest employers in the ‘best’ levy bands (bands 1-4);
• The allowance for investment risk in the levy calculation, through asset and liability stresses, has been updated as proposed and additional guidance has been provided regarding the allocation of alternative assets for the asset stress test calculations;
• The proposed changes to the Experian scorecard model, including use of credit ratings, have been adopted (albeit with some minor adjustments); and
• Revised contingent asset forms will be published in mid-January 2018, although contingent asset arrangements entered into before the new forms are published will not need to be re-executed for 2018/19.

However, there are two notable simplifications of the original proposals:

• Whereas the PPF had suggested that most PPF compliant contingent assets would need to be recertified for the 2019/20 levy year, it is now confirmed that only those with a monetary cap will require recertification. The parties to such contingent asset agreements will have until the end of March 2019 to recertify them. However, other common forms of agreement (such as guarantees covering a proportion of the s179 liability or the full s75 liability) will remain valid for future levy calculations with no action required. 
• As well as simplifying the certification of deficit reduction contributions for all schemes as proposed, the PPF has also confirmed that all investment expenses (including consultancy expenses) may be ignored when certifying deficit reduction contributions.

How this could affect you:

Now that the levy rules have been finalised, employers should look to confirm the estimated 2018/19 levy for their schemes and review any mitigating actions such as certifying deficit reduction contributions. As part of this, the Pension Protection Score portal run by the PPF and Experian should be viewed to get information on your employer’s new Pension Protection Score to reflect the changes.

Those schemes putting in place new PPF compliant contingent assets for the 2018/19 levy will need to use the revised forms unless these arrangements are entered into before the new forms are published in January 2018. 

Most information for the 2018/19 levy must be provided, via Exchange, by midnight on 31 March 2018, although any hard-copy paperwork (for example for guarantees) will need to be with the PPF by 5pm on 29 March 2018 and there are later deadlines for the certification of deficit reduction contributions and full block transfers that have taken place before 1 April 2018.

Auto enrolment review

In late 2016, the government announced that a review of auto-enrolment would take place in 2017 to consider how the original auto-enrolment policies could be developed further. The findings of this review were published on 18 December 2017 and contains the following key proposals:

• Contributions should be based on all earnings up to the top of the qualifying earnings band, rather than those above the lower earnings limit (which is currently £5,876); and
• The age requirement for auto enrolment should be reduced from 22 to 18.

The government is planning to implement the proposed changes to the auto-enrolment framework in the mid-2020s.

How this could affect you:

Any changes resulting from the review will ultimately impact the auto-enrolment processes that employers need to follow and, if applicable, contribution levels to defined contribution schemes. However, as the government has suggested that the changes proposed are implemented from the mid-2020s, no immediate action is required.

Consultation on draft regulation (Master Trusts)

On 30 November 2017, the DWP published draft regulations setting out details of the authorisation and supervisory regime for master trust schemes under the Pension Schemes Act 2017. The aims of the new regime are that: 

• Members of master trust schemes have equivalent protections to members in other types of pension schemes;
• The risks specific to master trust scheme structures (which include the size and scope of schemes, lack of employer engagement, diverse business models and other factors that influence their financial resilience and viability) are proportionately and proactively regulated; and
• There is an appropriate balance between preventing risks occurring and giving the Pensions Regulator (TPR) powers to intervene when necessary  

As part of the authorisation process, TPR will assess applications from master trusts on the following five criteria:

• Specified key people involved in the scheme must be ‘fit and proper’;
• The scheme must have a sound business strategy and be financially sustainable;
• Each scheme funder must submit audited accounts and annual accounts;
• Appropriate systems and processes must be in place relating to records, risk management and resource planning; and
• The scheme must have an adequate continuity strategy.

The DWP is proposing two fee levels for applications:

• A flat fee for new master trust schemes of no more than £24,000:
• A flat fee for transitional master trust schemes of no more than £67,000 - this higher fee is based on the expectation that there will be more work involved in processing applications from existing schemes.

The consultation closed on 12 January 2018 and regulations are expected to come into force from October 2018.

How this could affect you:

The RPS, including the IWDC Section, is classified as a master trust and falls under the scope of these regulations. Therefore, the RPS will be subject to the new authorisation regime, when this comes into force, and RPMI will be working with the Trustee to plan for this. The Trustee has provided a response to the consultation.

Safeguarded benefits and advice requirements

Following the government’s consultation earlier in the year, The Pension Schemes Act 2015 (Transitional Provisions and Appropriate Independent Advice) (Amendment No.2) Regulations 2017 were made on 12 December 2017 and will come into force on 6 April 2018. 

The regulations aim to simplify the process by which trustees and scheme managers value members’ “safeguarded benefits” when determining whether that member is subject to independent financial advice requirements. Safeguarded benefits include defined benefit pensions and lump sums as well as defined contribution pots where there are guarantees such as guaranteed pension conversion terms.

The regulations also require that a member (or survivor) with “safeguarded-flexible benefits” is sent a personalised risk warning when he/she requests a transfer quotation or payment. This personalised risk warning must include a ‘prominent’ statement regarding the risk of losing potentially valuable guarantees and a projection of the income that the guarantee might provide, compared to the income that a pension pot of the same size would purchase in the open market.

How this could affect you:

BRASS benefits in a small number of sections are classified as “safeguarded-flexible benefits” due to the conversion terms in the rules. Therefore, the regulations will apply in respect of members with benefits in these sections with effect from 6 April 2018 so there will be additional wording added to transfer value quotations for these sections.

Draft regulation on bulk transfers of formerly contracted-out benefits without consents

On 21 December 2017, the DWP published the consultation on the draft Contracting-out (Transfer and Transfer Payment) (Amendment) Regulations 2018. The draft regulations aim to enable bulk transfers of contracted-out benefits, to newly established schemes that have never been contracted-out, to take place without member consent under specified conditions.

These conditions, which apply in addition to those for any ‘without consent bulk transfer, are as follows:

• the rights of members must not be adversely affected by the transfer; and 
• the same protections must be provided by the new scheme (for example, regarding pension increases in payment), as members would have received had the transfer been to another formerly contracted-out scheme.

The consultation closes on 17 January and the new regulations are expected to come into force from 6 April 2018.

How this could affect you:

The draft regulations will generally have a minimal impact on the RPS although they may assist with any cases where there TUPE transfers are required to newly created sections.

Other developments 

Finance (No.2) Bill 2017-19

Following the Autumn Budget on 22 November 2017, the latest Finance Bill was published on 1 December 2017.

The Bill includes new powers for HMRC to register and deregister certain pension schemes in order to tackle pension scams and fraudulent schemes. The Bill also includes powers for HMRC to refuse to register master trusts not authorised by the Pensions Regulator, or occupational pension schemes whose sponsoring employer has been a dormant company for a continuous period of one month.

The measures in the Bill will be considered in Parliament and, once given Royal Assent, are intended to come into force on 6 April 2018.

How this could affect you:

We welcome the government’s measures to counter fraudulent pension schemes and encourage employers to continue to warn their employees of the potential risks of pension scams.

DWP consultation on Disclosure of Cost, Charges and Investments in DC Schemes

On 26 October 2017, the DWP launched its consultation ‘Disclosure of costs, charges and investments in DC occupational pension’. This consultation sought views on how information relating to costs and charges should be published and made available to members of DC occupational schemes, including schemes offering money purchase benefits for AVC arrangements – the objective being to build confidence in pension saving.

The DWP proposed that the Chair of Trustee’s annual governance statement should be extended to include the following information:

• The cost and charges for the default arrangement(s) and each alternative fund option; and
• An illustration of the compounding effect that these costs and charges have on members’ pension savings.

This information will need to be made publically available online and each member receiving an annual benefit statement will need to be told where they can find this information. The consultation also proposed that trustees be required to disclose certain information on the scheme’s pooled funds to members and recognised trade unions, on request.

The consultation closed on 6 December 2017 and the amending regulations and statutory guidance are expected to come into force on 6 April 2018.

How this could affect you:

The Trustee will be responsible for complying with the new disclosure regulations when these come into force.

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