Pension Schemes Bill
Written evidence submitted by the National Association of Pension Funds (NAPF) (PS 10)
Overview of NAPF response
1. The National Association of Pension Funds (NAPF) is the voice of workplace pensions in the UK. We speak for over 1,300 pension schemes that provide pensions for over 17million people and have more than £900billion of assets. We also have 400 members from businesses supporting the pensions sector. We aim to help everyone get more out of their retirement savings. To do this we promote policies that add value for savers, challenge regulation where it adds more cost than benefit and spread best practice among our members.
2. We have long supported greater risk-sharing in pension arrangements, and broadly welcome the creation of a framework that enables scheme members to share risk with each other or with a sponsoring employer and thereby potentially allow for greater certainty around outcomes in retirement. The Bill as drafted, however, creates the risk that all existing schemes will need to check their status against new definitions of defined benefit and defined contribution. It is not clear that this step is necessary to create the regulatory framework for shared risk and collective schemes to operate. Costs for schemes must be kept to a minimum under the new plans, and any necessary costs must be clear and transparent, so that schemes are able to plan effectively.
3. Collective schemes already exist and operate successfully, to a degree – in the Netherlands, for example – but this is in part down to specific cultural and societal frameworks that do not necessarily translate to a UK context. For example, in the Netherlands membership of a pension scheme is compulsory, and the Dutch pension system is highly regulated. Furthermore, recent developments in the Netherlands have highlighted that their pension system is not working as well as has been suggested – particularly when it comes to the unintended consequences of intergenerational risk-sharing, which has led to reduced payments and is causing disquiet among younger scheme members. Consequently, there seems to be a movement towards a system that more closely resembles the large scale DC schemes that operate in the UK.
4. Both collective benefits and risk sharing may well play a role in our future pension system. However, there are more pressing issues given the Government’s determination to press on, simultaneously, with Freedom and Choice and the governance and charging issues addressed in Better Workplace Pensions. We have included as Appendix 1 a list of questions, which the Government needs to address well before next April. We are concerned that there remains a lack of clarity around the Guidance Guarantee, and that the Government faces a huge challenge in having the required structures and framework in place to ensure that guidance is able to be delivered in April 2015, when the new pension freedoms come into effect.
Categories of pension scheme
5. We are longstanding advocates of shared risk pension provision as a means of giving savers greater certainty and confidence. However, given the competing priorities of automatic enrolment, Freedom & Choice and Better Workplace Pensions, we do not believe it is an immediate concern for many employers. In particular, automatic enrolment has caused large employers – always the most likely to be able to bear the sharing of risk – to choose or extend a pension scheme to cover all their staff and ensure it is fit for automatic enrolment. We should not expect many of them to quickly unravel that decision and introduce a risk-sharing scheme.
6. The approach the Bill takes to facilitating risk sharing creates unnecessary expense and ambiguity for current schemes. In particular, it introduces new definitions of "defined benefit scheme", "risk-sharing scheme" and "defined contribution scheme". It is not obvious which schemes fit into which category. Many final salary schemes would appear to be "risk-sharing schemes" as now defined. While we think there may be some merit in defining a "collective defined contribution" scheme and regulating for this type of scheme specifically, there is no reason to further define categories of schemes.
7. The Impact Assessment fails to specify or quantify the costs and benefits of the proposals, and for the reasons above, we think that the costs to existing schemes of determining where they sit in the new regime will be substantial. The NAPF believes it is essential that the Government clarifies the specific circumstances under which existing schemes – and ultimately scheme members - would face additional costs to determine what scheme they would qualify as under the new definitions. We are unsure as to why, where the definition of a scheme is already clear and does not stand to change under the new framework, such a scheme should incur costs to be told this.
General changes to pension schemes
Restricting transfers out of public service defined benefit schemes
8. We broadly support maintaining freedom for the individual to transfer out of a DB scheme, whether to a DC or collective benefits arrangement. However, we are concerned that there are no unnecessary costs or burdens for schemes and look forward to further clarity around how this would work for both the scheme and the individual saver. Pension schemes also need to be taking this time to revisit their insufficiency reports so they are in a position to apply any deduction they believe is required to a members’ transfer value from next April.
9. We believe that the benefits of collective saving have been somewhat "oversold" as a means of reducing the volatility of income between generations and providing higher returns. The potential for higher returns come from the lower costs associated with scale administration and investment and the ability to remain in return-seeking assets for longer, neither of which are unique to collective schemes. The reduced volatility comes from active management of risk, which can be achieved through investment strategies such as target date funds which do not require pooling of members’ assets.
10. We do see a potential role for collective benefits in providing retirement solutions which combine an element of the certainty offered by annuities with the scope for post-retirement growth offered by drawdown products. However, even here it is unclear how collectivism generally fits with two other major current pension trends – namely, automatic enrolment, under which all large employers have already selected their pension provision and default investment approach, and the Freedom and Choice agenda, which encourages people to manage their retirement income on an individual basis.
Guidance and decision-making
11. In light of the new pension freedoms announced by the Chancellor, the need for guidance to be given to savers around what to do with their pension pots has arguably never been more apparent. However, with only a few months until the new freedoms come into force there is an urgent need for further clarity about what will be provided and how it will be delivered. The need for signposting is clear, as is the need for the Government and the FCA to have in place from the outset a method of measuring the quality and effectiveness of the guidance service, as well as the availability of independent financial advice for those using the service.
12. The NAPF response to the FCA consultation on the Guidance Guarantee highlighted the need for the standards and rules for signposting the Guarantee to be clarified by early October if the required systems are to be in place and clear messages are to be delivered to pension savers from April 2015 and beyond. Trustees are starting to send out wake-up packs to members who will retire next April. They need to start preparing scheme members and giving them information now, and are not in a position to do so. This could lead to confusing, inconsistent messages being sent to members.
13. We also recognise the challenge of engaging savers with the new Guidance service and getting them to the point of making an informed decision. NAPF research shows over a third of people already do not feel capable of making a decision around what to do with their pension savings. When it comes to next April, the figure could be higher still.
14. Next April will be a confusing time for those retiring. They may have heard about the new freedoms but their own scheme may not yet have developed the systems to deliver all of these. Some new products available on the market may carry risks and costs that are not immediately apparent to those retiring and some may only be accessible through a financial adviser, access to which could be costly for some. It is not yet clear exactly how FCA regulations on the sale and delivery of drawdown products will change but without change, many modest pension savers may remain excluded from the drawdown market. Neither is it apparent how the annuity market will look next year, with the potential for choice in this sector to be much reduced.
15. Faced with complex decisions and a complex marketplace, those retiring in 2015, even with the help of guidance, may struggle to make a decision. Some may be in a position to defer making a decision while others may have an urgent need for some money. Taking their pension as cash to invest it or spend it elsewhere might seem the easiest thing to do, even where a regular income might serve them better.
16. For some savers, it may be attractive to transfer out of their DB scheme and into a DC scheme to take advantage of the new pension freedoms. The Chancellor’s recent announcement of the abolition of the 55% tax rate on drawdown pension funds when the holder dies may well make a transfer more attractive to some people. As is the case more generally, however, it will be important that savers fully understand the implications of transferring out of a DB scheme and take FCA-regulated advice. Schemes will need to know that the individual has taken advice but it remains unclear how they will be able to do this and where the burden of proof will lie – whether with the individual, through written or oral confirmation of their advice, or with the scheme itself.
17. The NAPF is concerned that situations could arise where an individual receives their Guidance but this does not leave them in a position to make a decision about what to do with their pension savings. Not everyone will have the financial resources to seek further advice from an Independent Financial Adviser (IFA), nor will they necessarily be able to turn to friends and family for advice. It has been suggested that full financial advice, covering the full range of at-retirement options, could cost up to £1,000. NAPF research indicates that of those who want to receive independent financial advice, fewer than half (43%) are willing to pay anything for it, with only 3% willing to pay over £300. This reinforces the scale of the challenge that the Guidance Guarantee will be required to address and the shortfall in financial awareness and capability that many will be relying on it to make up.
18. The NAPF is increasingly of the view that pension scheme members will need more than just Guidance. Many large employers already provide services to members that go beyond that envisaged for the Guidance service; either through seminars to scheme members, access to individual advice or on-line information. However, not all employers and schemes have the resources to be able to deliver these additional services and the charge cap may cause some schemes to draw back from offering these benefits.
19. Some schemes are clearly developing their own drawdown capability but the number of trust-based schemes able to do this is likely to remain small in the near future. It also remains unclear whether schemes can nudge their members into drawdown or how they can promote the service to existing scheme members without risking this being seen as advice or a conflict of interest in seeking to keep the member and their money inside the scheme.
20. One option that could help scheme members make a decision that delivers the income that they expect from their savings is to allow schemes / trustees to design and promote a simplified set of solutions that they believe will deliver good outcomes for their members. These solutions would perhaps have to meet certain standards, including: not being prohibitively expensive, meeting certain risk criteria, being approved by trustees, and being clearly and adequately communicated. However, for schemes to feel confident in delivering these, they would need assurance that there could be no comeback from the member and that trustees were protected from any claims of misselling.
April 2015 Pension Reforms: 101 Known Unknowns
This document summarises the questions and uncertainties that remain to be resolved (as at October 2014) in order for the full range of new pension freedoms to be made available to members of DC pension schemes and for the implementation of Better Workplace Pensions to take place. Some of these questions set out in this document have been partially answered by command papers, draft regulations, and legislation that is being considered by Parliament. However the questions cannot be considered to be fully answered until the legislation receives Royal Assent and regulations are made, as schemes and their service providers cannot make expensive system changes without that certainty.
1. Have structures been put in place at HMRC to detect members who exceed their annual allowance?
2. How will the reduced allowance affect beneficiaries who inherit a member’s flexi-access fund and take drawdown from it, if at all? Will it vary according to whether or not the individual takes an income? Will this differ according to the member’s age at death?
3. Will dependants receiving income as a result of annuity guarantee periods be allowed to take these funds as lump sums once again? How will such lump sums be taxed?
4. Is the before/after age 75 distinction likely to remain?
5. Why is it OK for those taking drawdown from inherited funds to not be taxed (if death before 75) but beneficiaries who choose to buy an annuity to have to pay marginal rate of tax?
6. When will schemes have to move from the 45% tax rate to marginal rate on payments to beneficiaries?
Some answers expected in amendments to Taxation of Pensions Bill currently before Parliament.
7. What changes will be made to annual statements? For example, will CETV estimates be required for DB?
8. Will schemes still have to do projections of fund value / income in retirement at all and particularly when member in drawdown?
9. What changes will be made to wake-up letter and other OMO-related communications requirements?
10. Will there continue to be different open market option procedures for contract-based and trust-based schemes?
11. How will trustees be required to signpost members regarding the availability of the guidance guarantee?
12. Which points in time will be relevant for trustee signposting, given that decisions for DC members about how they are likely to want to take their benefits will start affecting their investment strategies as they get into their 50s?
13. Will AVCs on DB and funded public sector schemes be covered by the same disclosure requirements as DC schemes?
14. How will schemes be required to notify members of:
o the requirement for advice on transfer from DB to DC?
o the reduction in the annual allowance where they have taken flexi-access funds?
o The tax and benefit implications of taking their pension as a lump sum?
Some answers expected in secondary regulations laid before Parliament in early 2015. Some issues awaiting FRC review of annual statements? Some issues may require new guidance from TPR.
15. Will any changes be made to members’ rights to transfer from a DC scheme, in order to facilitate freedom and choice?
16. Will there be any changes to the way that cash equivalent transfer values are required to be calculated as a result of the new legislation?
17. How will the right to transfer work where the scheme operates an underpin and the benefit may be either DC or DB on date of retirement, depending on how well the investments have performed.
18. How will the new rules on transfers work with the open market option regime?
19. Will there be different transfer regimes for contract-based and trust-based schemes?
20. Will the Government be coming up with more effective ways to police against scammers who are likely to try to take advantage of confusions caused by the new flexibilities?
21. Will trustees and managers be given additional responsibilities regarding policing the destination of transfers?
o If so, how does this fit with the right of the member to take a transfer?
o Will trustees and managers be given any additional tools to combat transfers to dubious destination schemes?
22. Will there be a threshold below which advice is not required? (There was a reference to the £30K trivial lump sum threshold in the announcement as somehow relevant.)
23. Current requirements regarding the content of wake-up letters, etc in relation to the OMO are no longer appropriate and in fact may be misleading where members have an option to take a lump sum or transfer to some form of drawdown. What is being done with the OMO regime, which no longer appears to be fit for purpose?
24. What will trustees need to seek from members as proof that advice has been taken?
25. How will the advice requirement interact with trustees’ duties to assure themselves that the arrangement is not fraudulent, now that "liberation" is acceptable under the tax laws?
26. Under what circumstances will the statutory discharge now available to trustees when a statutory CETV is taken be available on transfers by right?
27. What actions by an employer make a transfer employer incentivised (so that the advice must be paid for by the employer)?
28. How, if at all, will the CETV calculation be changed given the new circumstances in which transfers may be requested?
29. Will trustees receive further guidance on how and whether to reduce CETVs in order to protect remaining members of an underfunded scheme?
30. Will advice be required where a benefit within a scheme is transformed from defined contribution to defined benefit?
31. Will there be any restrictions on partial crystallisation of DB benefits in lump sum form, for example, payment of the value of non-statutory inflation increases in lump sum form to the member as an UFPLS, so long as advice is taken?
32. What steps will be taken to prevent schemes styled as occupational DB schemes from evading the DB to DC advice regime?
33. Will there be any move to control charges to members from transferring and receiving schemes?
34. What sorts of measures will be in place to prevent schemes styled as occupational schemes from misrepresenting charges, investment strategies and other aspects of their offering to individuals who may transfer in order to take advantage of enhanced flexibilities offered?
Some answers expected in amendments to Pension Scheme Bill to be laid before Parliament in late October 2014 and some in regulations will follow in the Spring.
35. Will schemes be allowed to automatically transfer members to another scheme offering a drawdown facility and, if so, how and under what conditions?
36. Will schemes be allowed to ‘promote’ their own or others drawdown solutions without wandering into advice? Will the Government facilitate schemes helping their members choose a drawdown scheme without independent advice?
37. How should schemes deal with members who simply cannot make a choice?
38. Will schemes still be able to default members into an annuity at age 75 if the scheme rules currently require it?
39. Will there be new regulations on suitability and disclosure for trust based schemes offering drawdown (and UFPLS) and, if so, what form will these take, what will they include and when will they be published?
40. Will there be any impediments to charging members who use flexible access, as opposed to spreading the admin costs across all members?
41. Will a charge cap or other restrictions be applied to FAD?
42. Will current rules regarding the timing of taking tax free lump sums remain?
43. Now that the "death tax" has been removed from crystallised pension arrangements held for members under age 75, what sorts of differential treatment will remain for funds such crystallised funds, as opposed to uncrystallised funds? Will the only difference be the availability of a tax free sum?
44. Will there be regulation around the conversion of a capped drawdown fund to a flexi-access drawdown fund?
45. Will it be possible to inadvertently convert a capped drawdown fund to a flexi-access drawdown fund?
46. Will or should there be anything to prevent providers from simply cashing out small pots as uncrystallised pension lump sums where members are given notice of right to transfer instead?
47. Will FCA rules (and equivalent DWP regs) for drawdown also be applied to UFPLS? What disclosures will be required at point of withdrawal and on-going?
48. Will there be a different regulatory regime around annuities that may reduce over a pensioner’s lifetime? If so, who will develop the regulatory regime, FCA, DWP, Treasury?
Answers expected in form of primary or secondary regulations from DWP and new rules developed by FCA in due course?
49. What brand will the guidance service operate under and how will schemes have to describe the guidance?
50. Will the guidance service be promoted by the government?
51. What form will the guidance take?
52. Who will be required or given responsibility for providing the guidance?
53. How will F2F guidance be delivered and how accessible will this be?
54. Who will be entitled to the guidance and at what point(s) in their lives?
55. What information will be included in the guidance?
56. What outcome is guidance designed to deliver?
57. Will schemes have to track whether members have sought guidance?
58. What signposting will be required of trustees?
59. What signposting will be required of providers of contract-based schemes?
60. How will the performance of guidance be measured?
61. What will the roles of FCA be in monitoring delivery of the guidance guarantee?
62. What steps will be taken to keep a level playing field regarding delivery of the guidance guarantee to members of contract-based and trust-based schemes?
63. Must/should administrators demand proof that guidance has been sought before paying or transferring benefits? If so, how does this fit with the member right to transfer?
64. Can schemes provide or arrange for alternative guidance in lieu of that provided by the Government? If so, will this be regulated in any way?
65. How soon can we expect to see progress towards "pension passports" for members seeking guidance?
o Will there be a central repository of information? Who will that be?
o What disclosure requirements will be expected of trustees and managers?
Some answers expected in amendments to Pension Scheme Bill to be laid before Parliament in late October 2014 and some in regulations will follow in the Spring.
66. The current override would allow trustees or managers of a scheme to pay benefits in line with the new tax flexibilities at their discretion on a case by case basis without altering the scheme rules or recourse to the employer. Is it intended that this override (which is very unusual) will remain, or might the process for occupational schemes be managed under section 68 Pensions Act 1995, as is usually the case.
67. Is the statutory override applicable to scheme rules (including rules referencing protected rights) intended to protect spouse’s benefits?
68. Will the override be extended to allow schemes to adopt charging structures related to the new flexibilities?
69. Assuming the power remains as drafted, will TPR be giving any guidance on the circumstances in which trustees would be justified in using or failing to use this power?
70. Currently, the TCLS is only available if all benefits across all schemes, including crystallised benefits, are less than £30K and all must be taken within one year. Now that TCLS will be available only in respect of DB benefits, will funds taken from or remaining in DC schemes continue to count towards the £30K limit?
71. Are any plans afoot (eg the pension passport) to make the pension benefits easier to detect?
72. Will the regulations pertaining to contracted out benefits be amended to allow the new flexibilities apply to guaranteed minimum pensions?
73. Under recent case law, pension benefits accessible to the member are now accessible to creditors as well. Will steps be taken to protect at least some of the pension savings of members over the age of 55 from creditors, now that the entire pot can be taken as a lump sum?
74. Many earmarking orders on divorce award the spouse a percentage of "the maximum lump sum available", based on the assumption that the maximum lump sum will come to 25% of the pension’s value. Now that the maximum lump sum can come to the value of the entire pension, is anything going to be done to prevent these awards from being enforced literally under the new regime?
75. How will the new flexibilities apply to schemes in PPF assessment?
76. Are steps being taken to ensure that lump sums are not taken by highly-paid employees immediately prior to assessment?
77. Will the rule that QROPS must in certain circumstances pay at least 70% of UK tax-relieved monies as income be retained?
78. How and when will minimum pension age change?
79. Will the next government make further changes to pension tax?
80. Will the next government limit the freedom & choice?
81. Is tax relief on pensions sustainable in F&C environment?
82. To whom will the charge cap apply?
o All members, including deferreds?
o How would this be accomplished in contract-based schemes?
o Active members only?
o Post-April contributions only?
83. How is this consistent with the desire that deferred members be subject to the same charges as actives?
84. What charges will be counted towards the charge cap?
85. How will charges taken from contributions or as annual lump sum charges be limited?
86. Can the industry expect any help from the Government come April in communicating to members why their investments, or the direction of their contributions, has changed?
87. Will there be any regulations or guidance concerning the efforts of trustees and providers to communicate the change?
88. How and how often will it be calculated – and what happens when market volatility changes the fund on which the charge has been taken?
89. Will it be permissible to charge separately for transfers, outside of the charge cap?
90. How and when will schemes need to report compliance with the charge cap?
91. How will compliance be monitored?
92. Will trustees be entitled to take charges from the fund of a member who has been in the default fund to cover the cost of advice at member request?
93. Can a member who is enrolled in the default fund be charged separately for:
o a transfer
o an uncrystallised funds pension lump sum
o when he or she chooses any of these options?
94. Are there any plans to provide waivers from the charge cap where there is a guaranteed return?
95. What will trustee chairs have to include in their annual statements?
96. What transaction costs should be reported in annual statements when there is no agreed definition?
97. Will there be any requirement on fund managers to disclose transaction costs, and if so what form will that requirement take?
98. What deadlines will trustee chairs have to meet in publishing their reports?
99. What will the requirements for independence and term limits for members of master trust boards?
100. How should trustees assess value for money?
101. How will providers IGCs interact with employers and their own governance arrangements?
Some answers expected in Government response paper and draft regulations in late October 2014. Legislation not expected to be made until early 2015, making it difficult to schedule system changes.