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Technical update July 2017

ARTICLE — 7 Jul 2017

Nigel Oakley

Nigel Oakley

Head of Technical Services

Hot topics

General Election update

A General Election was held on 8 June 2017. This has resulted in a hung Parliament and a Conservative government has been formed with support from the Democratic Unionist Party (DUP).

The Conservative Party manifesto suggested that:

  • Additional powers may be given to the Pensions Regulator to help to prevent any recurrence of the pension issues that have faced schemes such as the BHS Pension Scheme in the past;
  • There may be changes to the State Pension age following on from the previously commissioned review; and
  • There will be a change to the way that State Pensions increases, from a triple-lock approach to a double-lock from 2020.

However, the DUP manifesto included a pledge to retain the State Pension triple-lock and as part of the agreement with the DUP it has been confirmed the triple lock will not be altered or dropped.

As part of personnel changes within the new government, David Gauke MP was appointed Secretary of State for Work and Pensions on 11 June 2017, after previous roles at HM Treasury since 2010.

Guy Opperman MP has been appointed Parliamentary Under Secretary of State for Pensions and Financial Inclusion. His parliamentary experience has been as a Whip and Parliamentary Private Secretary to various ministers. It will be interesting to see what is meant by the additional role of financial inclusion but he has already commented that automatic enrolment has been a huge success and that he looks forward to the Government’s efforts to build on it.

How this could affect you:

It is too early to predict whether there will be any significant changes to legislation or regulations that will affect the railway pension schemes as a result of the new government. The reduction in the government’s majority along with Brexit negotiations means there may be a reduction in the appetite to introduce significant changes impacting pensions.

 

Queen’s Speech

The Queen’s Speech was delivered on 21 June 2017.

The Queen’s Speech was dominated by Brexit but did contain a couple of references  relevant to pensions. These were:

  1. Summer Finance Bill 2017 – This will include a range of tax measures including those to tackle avoidance. No further details are known but it could include the reduction in the money purchase annual allowance that was dropped from the previous Finance Bill.
  2. Financial Guidance and Claims Bill - which seeks to combine three financial advice bodies – The Money Advice Service (“MAS”), The Pensions Advisory Service (“TPAS”) and Pension Wise – into one. 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, which suggests that any implementation of the Conservative manifesto plans in this area may be deferred until later in Parliament.

How this could affect you:

Due to the current lack of detail as to what the Summer Finance Bill 2017 will include it is too early to predict whether there will be any significant changes which will affect the railway pension schemes.

The Pensions Regulator’s Annual Funding Statement

The Pensions Regulator (TPR) published its annual funding statement on 15 May 2017 and is aimed at all trustees and employers of defined benefit (DB) schemes but primarily those undertaking valuations with effective dates in the period 22 September 2016 to 21 September 2017. The valuation of the RPS falls within this period.

The main points of the statement were as follows:

  • TPR’s analysis shows that whilst most major asset classes have performed well, increasing scheme asset values, these gains have not been sufficient to compensate fully for the increased scheme liability values as a result of continued low gilt yields.
  • The setting of discount rates should be appropriate and prudent and that the rationale behind setting them should be sound, with the methodology documented.
  • When considering valuation submissions, TPR will measure the level of investment risk being run relative to the employer’s covenant strength and will intervene where it believes that risk is inappropriate.
  • Trustees are encouraged to seek funding now in the case of employers whose covenant supports that.
  • TPR promises to be more interventionist than before where it believes that schemes are not being treated fairly – particularly where recovery plans are being extended unnecessarily and where the employer covenant is constrained and payments to shareholders are being prioritised over payments to the scheme.
  • As part of TPR’s drive to raise governance standards they have stated their intention to take a tougher approach where schemes fail to submit their valuations within the 15 month statutory timescale for finalising a valuation.

How this could affect you:

As the RPS valuation falls during the period covered by the Annual Funding Statement, this means the Trustee and sponsoring employers could be impacted.   

 

Other developments

Green Paper - Security and Sustainability in Defined Benefit Pension Schemes

The Department for Work and Pensions (DWP) Green Paper on the future of DB schemes called ‘Security and Sustainability in Defined Benefit Pension Schemes’ closed on 14 May 2017.

The Green Paper set out the government’s belief that there is no single or immediate crisis in DB pensions, nor that the overall regulatory regime is unsatisfactory. As such, it suggests that fundamental changes are not required. However, it also recognised that there is a case for some changes to help employers and trustees manage liabilities as well as balancing the need to protect members’ benefits.

The Green Paper did not provide any definite policy proposals. However it focused on seeking views on possible changes in the four broad areas of funding and investment, employer contributions and affordability, member protection and consolidation of schemes.

How this could affect you:

It remains to be seen what, if anything, the government will decide to do as a result of this consultation.

 

Pension Schemes Bill

The previous Queen’s Speech on 18 May 2016 had announced that there would be a new Pensions Bill and this received Royal Assent on 27 April 2017.

The Pension Schemes Act 2017 focus is 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 TPR had voiced concerns about the quality and viability of some master trusts.

The Act introduces a new supervisory regime for master trusts. This includes 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.

It is understood that aspects of the operation of TPR’s new supervisory regime will be set out in draft secondary legislation in the summer or autumn and it is expected that this will be consulted on in due course.

The structure of the Industry Wide Defined Contribution (IWDC) arrangement means that this is likely to be considered a master trust under the Act and, therefore, directly impacted by the 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.

The Act also amends existing legislation to support the government's intention to cap early exit charges and ban member-borne commission charges in certain occupational pension schemes. 

How this could affect you:

The bill may only have limited impact on the shared cost arrangement of the RPS. However, due to the structure of the Industry Wide Defined Contribution (IWDC) arrangement, it may be considered a master trust in which case it 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.

 

Money Purchase Annual Allowance reduction

The MPAA was introduced in April 2015 with 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.

It was announced in this year’s Spring Budget that the Money Purchase Annual Allowance (MPAA) was to be reduced from £10,000 to £4,000 with effect from April 2017. However, in order to get the Budget-related legislation finalised before Parliament was dissolved for the General Election, the MPAA reduction change was removed from the Finance Bill 2017, which received Royal Assent on 27 April 2017.

How this could affect you:

It is still possible that the change will be implemented by the new government, possibly as part of the Summer Finance Bill 2017 although it is not clear if a later or retrospective implementation date might apply.

 

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 10 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.

The previous government was due to respond to John Cridland's review of the state pension age by 7 May, but this was delayed due to the General Election. The new government can be expected to progress this in the forthcoming Parliament. However, it has already been confirmed that the triple-lock guarantee will not be removed, as part of the agreement with the DUP.

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.

 

Background information

DWP Consults on Draft Section 75 Regulations

DWP published a consultation on 21 April 2017 seeking views on the draft Occupational Pension Schemes (Employer Debt) (Amendment) Regulations 2017. Also included was a response to the call for evidence on Section 75 employer debt in non-associated multi-employer defined benefit pension schemes, which was originally published in March 2015.

The draft regulations propose an option for an employer in a multi-employer scheme (whether the employers are associated or not) to defer the requirement to pay an employer debt following an Employer Ceasing Event. It is proposed that an employer which has ceased to employ at least one person who is an active member’ can use this approach when the following conditions are met:

  • A funding test to show the scheme will have sufficient and appropriate assets to cover its technical provisions after the deferred debt arrangement takes place.
  • The Trustee must give the written consent to the deferred debt arrangement, providing the arrangement would not be detrimental to the scheme or its members.
  • The scheme must not be in PPF assessment period and not likely to start such a period in the next 12 months.
  • The scheme is not winding up.

The deferred debt option would not be open to employers who are reconstructing, but would be open to those who are already in a ‘grace period’.

How this could affect you:

This may impact or increase the options of multi-employer schemes when a Section 75 debt is triggered and will be of most relevance to employers in the Omnibus Section of the RPS.

 

TPR publishes DB investment guidance

The Pensions Regulator published new DB investment guidance on 30 March 2017.

This guidance is for trustees of occupational pension schemes providing defined benefits (DB) and aims to provide trustees with practical information, examples of approaches that could be taken and factors to consider when investing scheme assets to fund defined benefits.

Some of the key points from the guidance are: 

Governance: TPR expects trustees to have suitably documented investment governance arrangements so effective decisions can be taken in a timely manner. In addition, trustees should monitor their own effectiveness and take action where weaknesses are identified.

Investment strategy: TPR maintains that a good investment strategy will: involve effective governance, delegation and monitoring; form part of an integrated risk management process; have stable scheme objectives and long-term plans; have total risk consistent with risk appetite; involve risk-taking that is understood and balanced; and allow for the scheme’s future cash flow and liquidity requirements.

Timeliness: The guidance emphasises the importance of monitoring scheme’s investments and funding levels regularly based on the scheme’s circumstances. Following these reviews, trustees need to actively consider whether to take action in response.

How this could affect you:

The guidance provides useful information for those who are unfamiliar with investment issues for DB schemes.

Brexit Update

On 29 March 2017, the UK gave notice under Article 50 of the Treaty on European Union of the UK’s intention to leave the EU, meaning that the UK is expected to withdraw from the EU by the end of March 2019. There is no immediate impact on UK pension law or regulations but what impact there will be 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, exit from the EU is likely to give the UK government the scope to gradually amend legislation that has been influenced by Europe. 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 and, perhaps most significantly, the new EU Directive on the activities and supervision of Institutions for Occupational Retirement Provision (“IORP Directive”) came 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 that looks at the implications for pensions of the decision for Britain to leave the European Union.

How this could affect you:

The effects of the UK’s departure from the EU 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.

 

Data Protection

The General Data Protection Regulation (GDPR) comes into force in May 2018 with the aim to harmonise 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.

Although the UK already expected the need to comply with the GDPR, the government has signaled its intention to replace the Data Protection Act 1998 with a new Data Protection Bill that will be in alignment with the GDPR as part of the Queen’s Speech.

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.

 

Funding levels video

A new funding levels video is now available on the employer website. This video provides an explanation of how different funding levels, shown in valuation reports, are required and calculated. To view it, please follow the link below.

https://vimeo.com/224062373/7618357811 

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