April 2012
DC SPOTLIGHT
Spring Special:
Planning is essential to address pension reform. INSIGHT • INFORMATION • LEADERSHIP
INSIDE
>
Auto-enrolment There is more to consider than pensions
Budget review
Working longer Can we improve the situation?
CONTENTS
IN THIS ISSUE Auto-enrolment: It’s complex
Page 04
Once the pension challenge has been addressed, is there anything else to consider to comply with auto-enrolment?
Budget overview
Page 06
The pensions industry breathed a collective sigh of relief after the recent Budget, with no changes to higher-rate tax relief and announcements on state pension reform.
Personal allowance increase triggers auto-enrolment changes
Page 06
Government plans to increase the income tax threshold to £9,205 as at 6 April 2013, and to £10,000 p.a. before the next election have shifted the goal posts for the roll-out of autoenrolment. It is likely that many employers will seek to re-run the financial analysis to ascertain the impact that auto-enrolment will have on them.
Auto-enrolment delayed
Page 08
The Government has announced that the timetable for the implementation of automatic enrolment will be adjusted so that small businesses are not affected by the reforms during the current Parliament.
Forced to work longer?
Page 09
Figures released by the Office for National Statistics (ONS) show that people are working longer than they used to. Is this because they are choosing to, or because they are being forced to? As employers, can we help to improve this situation?
What the Test-Achats case means for occupational pensions
Page 10
Occupational pensions will be exempt from a European Directive which is set to make it compulsory for insurers to adopt the same prices for men and women.
Trivial commutation extended to personal pensions
Page 11
From 6 April 2012, funds of £2,000 or less held in personal pension arrangements will be able to be paid out as lump sums to individuals aged 60 or over, provided certain conditions are met.
Consultation on integrating tax and NICs
Page 12
HM Treasury has published a paper on plans to integrate the operation of tax and National Insurance contributions.
Short service refunds
Page 15
The Pensions Minister has trained his sights on short service refunds from defined contribution (DC) schemes and is planning to abolish them from 2014, provided a solution can be found to make transfers of small pots easier.
2 Xafinity DCSPOTLIGHT April 2012
FOREWORD
Foreword It seems that you can’t watch the television, listen to the radio or read a newspaper without seeing a headline about pensions these days. Within this edition of DC Spotlight we consider a number of topical issues being raised. The Budget has had an impact on pensions, though not to the extent initially feared. The Government’s decision not to make any significant changes to pension’s relief in the Budget has been greeted with a cautious sigh of relief by many. The announcement helps put an end, at least for the moment, to the recent damaging uncertainty kicked off by the Treasury at a time when Government policies to encourage pension savings are still in the process of being formulated. The Personal Allowance will be increased to £8,105 for 2012/13 and to £9,205 for 2013/14. This increase is greater than the minimum required and is part of the plan of the coalition Government to ultimately raise the allowance to £10,000. However in contrast from 2013/14, those over State Pension Age are to lose their right to the age related Personal Allowance, meaning that in the future a greater proportion of real retirement income will become subject to income tax. This is at a time when the impact of historically low gilt yields, increasing longevity, the spectre of Solvency II and European Equality legislation are significantly impacting the amount of pension income that can be achieved through the purchase of an annuity. There is a crucial need for people to focus on saving more for retirement. Whilst not a DC benefit, State Pension Benefits form an important foundation block for most individuals pension planning, but their format and structure is continuing to change. We are generally living longer and because of this, the State Pension Age is (again) increasing. But for those who have made it to State Pension Age, the Government has announced that it will continue to honour the ‘triple lock’ protection against inflation. The Government will automatically review the State Pension Age at regular intervals to keep up with life expectancy. Details of the new plans will be announced in the summer by the Office for Budget responsibilities.
From an investment perspective, it has been a turbulent period, with significant events within Europe and the wider world impacting investment performance. Credit rating downgrades and quantitative easing continue to impact members of DC pension arrangements. And all of this against the backdrop of the implementation of the largest single change to pension provision in living memory: Autoenrolment. The Government has confirmed that auto-enrolment will progress, though timescales have been delayed for many. The financial thresholds and triggers for assessing who should be auto-enrolled and the minimum levels of contributions that must be paid have also changed. As we move into April, firms pass the key milestone of 1 April 2012 which will determine their Staging Date for auto-enrolment purposes. 2012 will be a complex and busy time. We invite you to join us at a specially convened auto-enrolment conference to listen to leading Government, pensions and HR experts discuss how to control the costs and risk faced by your organisation. The speakers will address crucial topics such as payroll pitfalls, human resource challenges; total reward implications, flexible benefit and salary sacrifice complexity, and financial risks. At the end of the day, auto-enrolment will be complex, principally because it’s not just about pensions, but many firms have yet to recognise and address this! ■
Alongside the new legislation, changes to the treatment of deferred member benefits are being planned to make it easier for individuals to ‘group’ benefits together into one arrangement.
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SPRING 2012 CONFERENCE
Spring 2012 Conference – 22 May, London
Auto-enrolment:
It’s complex – it’s not just pensions! ■
Payroll pitfalls
■
Human resource challenges
■
Total reward implications
■
Flexible benefit and salary sacrifice complexity
■
Financial risks
Pension, reward and communication consultants will also present, to support you to truly plan for the forthcoming legislation, now that the detail is known. Many firms have planned for the pension aspects, but have you fully considered the broader complexity that auto-enrolment will entail? Further details about the conference can be accessed from www.xafinity.com/conference. Book your place now by contacting your usual Xafinity consultant, e-mailing events@xafinity.com, or calling 0207 4691908.
4 Xafinity DCSPOTLIGHT April 2012
Conference Speakers will include: ■ Steve Webb, MP, Minister of State for Pensions ■ Dr Ros Altmann, Director General, Saga ■ Charles Cotton, Chartered Institute of Personnel and Development ■ Karen Thomson, Associate Director, Chartered Institute of Payroll Professionals ■ Philip Davies, Employment Partner, Eversheds ■ Alan Pickering, Chairman of Life Academy and BESTrustees’ ■ Neil Esslemont, the Pensions Regulator
PENSION REFORMS
The Olympic dream – 5 further hoops to get through 2012 will be a defining period for pension provision. Increasing governance requirements and changes to equality rules, the abolition of the default retirement age, tax reforms and auto-enrolment will all present new, often high, hurdles to overcome. But once the pension challenges have been addressed, is there anything else to consider to comply with auto-enrolment? The answer is yes....5 further hoops exist! Auto-enrolment is not just a pensions issue; it will impact your human resource, payroll, pensions and finance functions. Broader reward and benefit provision will also be affected and care needs to be taken to mitigate costs and reduce risks.
1. Human resources and payroll considerations Auto-enrolment will impose significant issues for payroll and HR functions. Cost, risks and workload will increase. Employers will need to decide whether to recruit and train resource to address the requirements, much of the workload for which will peak once every three years. Consideration should be given to the adequacy of existing human resource and payroll systems. It may be possible to outsource this activity to a specialist who can undertake all, or part, of the auto-enrolment process on your behalf.This may mean that expensive and time-consuming changes to existing HR or payroll software will not be required. It will be important to consider which approach will best mitigate the specific cost, risk and extra work you face.
3. Consider broader legislative challenges If an employer blindly follows auto-enrolment requirements, they may inadvertently fall foul of equality legislation. Similarly, care must be taken not to breach the Data Protection Act when maintaining records as to who has been auto-enrolled and opted-out.TUPE legislation will also impose further complexity. Auto-enrolment compliance is clearly important, but care must be taken to consider broader legislation when reviewing the type, format and delivery of solutions to meet their auto-enrolment challenges. Whilst a plethora of solutions are being marketed, care should be taken to ensure that the solution selected is robust and addresses all of the risks that the employer faces as the consequences on the employer of non-compliance are severe.
4. Mitigate costs and risks Employers need to be able to balance the risks and benefits of specific future contribution rates against the costs of various options for change.
Understanding the implications of different scheme designs from a cost and risk perspective will be essential. It will be important to effectively plan by precisely modelling key factors, exploring alternative strategies and helping your key stakeholders to arrive at the combination of measures that most closely suits your corporate objectives, priorities and timelines.
5. Total reward When reviewing the design of benefits provided to employees, it is important not to lose sight of the employer’s corporate objectives. Cost, while important, can only be assessed against the value employees place on the benefits provided from a recruitment, retention and motivational perspective. Auto-enrolment will be complex, but addressing it correctly could increase the value that your employees place on the pension and broader benefits you provide, maximising your return on investment in your key resource; your employees. â–
2. Avoiding inducements and prohibited activity Employers must ensure they do not take, or are perceived to take, any action with the purpose of attempting to induce a jobholder to opt-out of a pension scheme. Perception as well as reality is important here. Care will need to be taken when devising, and reviewing, existing communication programmes, salary exchange and flexible benefits arrangements in order that legislation is not inadvertently breached.
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BUDGET OVERVIEW
AUTO ENROLMENT
Budget overview
Personal allowance triggers auto-enrolment changes
The pensions industry breathed a collective sigh of relief after the recent Budget, with no changes to higher-rate tax relief and announcements on state pension reform. The announcement helps put an end, at least for the moment, to the recent damaging uncertainty kicked off by the Treasury at a time when Government policies to encourage pension savings are still in the process of being formulated. With increasing longevity, there is a crucial need for people to focus on saving more for retirement. The introduction of a single-tier state pension is seen by many as a “breakthrough moment” that will show people the value of saving for their old age. However, from 2013/14 those individuals of State Pension Age or greater will lose their right to existing additional age related personal allowances as all UK workers and retirees are gradually brought into line from a personal allowance perspective. This, combined with increasing pressures on annuity rates will make effective retirement support increasingly important. The cut in the highest rate of income tax from 50p to 45p from 6 April 2013, offers an opportunity for high earners to maximise reliefs in the 2012/13 tax year, making use of any unused carry forward reliefs, before the income tax rate is cut as at 6 April 2013. They now have until 5 April 2013 to maximise their use of the deemed annual allowance for 2009/10 through to 2012/13 at 50% rate of tax relief. Changes to the personal income tax allowance to over £9,000 could reduce the number of employees eligible for auto-enrolment, which could save companies up to £100m each year in pension contributions. At the same time, it has emerged that the revised auto-enrolment implementation schedule will net the Government £380m in reduced tax relief on pension contributions, according to budget documents. ■
6 Xafinity DCSPOTLIGHT April 2012
Government plans to increase the income tax threshold to £9,205 as at 6 April 2013, and to £10,000 p.a. before the next election have shifted the goal posts for the roll-out of auto-enrolment. It is likely that many employers will seek to re-run the financial analysis to ascertain the impact that auto-enrolment will have on them.
AUTO ENROLMENT
The change in the allowance has had a consequential impact on auto-enrolment thresholds and will lead to unintended complications for employers.
DWP Consultation Response In its response to the consultation on revision proposals for the auto-enrolment earnings trigger and qualifying earnings bands, the Department for Work and Pensions (DWP) has proposed an auto-enrolment Earnings Trigger of £8,105; a lower limit for Qualifying Earnings of £5,564; and an upper limit for Qualifying Earnings of £42,475. This aligns the earnings trigger with the PAYE tax threshold and the qualifying earnings bands with the Lower and Upper Earnings limits. In its response, the DWP stated a key message emerging from the consultation was that simplicity is critical to the success of automatic enrolment and that simplicity is best supported by aligning automatic enrolment triggers and thresholds with existing payroll thresholds. Despite this, the Government has stated that a lock-in to any particular approach may not be suitable or sustainable in the event of any future developments in the structure of tax and National Insurance, changes in expected savings patterns or in economic
circumstances, so it is important that flexibility to review the thresholds and triggers for future years is retained. The response noted that the Government recognises the advantages of alignment with the income tax and National Insurance contributions thresholds. However, it does not discuss what will happen in 2013/14 when the Upper Earnings Limit is set to fall from £42,475 to £41,450 as a result of the recent Budget.
What does this mean in practice? From April 2018, a minimum of 8% of Qualifying Earnings (taxable earnings between £5,564 and £42,475 (2012/13 terms)) will have to be contributed, with at least 3% being paid by the employer. A sliding scale will apply prior to this date. Alternatively, an employer will be able to certify that they meet auto-enrolment requirements via one of the following bases:
at least 85% of the total earnings for all relevant individuals; or ■ 7% of pensionable pay (3% from employer) provided that the pensionable salary is 100% relevant earnings. This means that minimum contributions are now due in respect of at least £2,541of income. However, perhaps more significant is what happens next. Under the original legislation, all of the auto-enrolment thresholds would have increased with national average earnings each year. The Government has changed the law so that it can adjust these numbers however it sees fit. It is keeping its cards close to its chest when it comes to how this power will be used in future. It is important that employers keep this aspect of auto-enrolment under close review. ■
■ 9% of basic pay (at least 4% from the employer); or ■ 8% of basic pay (at least 3% from employer) provided that total basic pay is
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AUTOMATIC ENROLMENT
Auto-enrolment delayed The Government has announced that the timetable for the implementation of auto-enrolment will be adjusted so that small businesses are not affected by the reforms during the current Parliament. It has been confirmed that automatic enrolment will start on time, from October 2012, and will apply to all employers in due course. However a revised timetable has been confirmed.
Revised timetable for Staging Dates All employers with an existing staging date of on or before 1 February 2014, those with over 250 employees, are unaffected by this change. This means that no large employer will have to make any changes to their plans – which are in many cases already advanced.
immediately if paying earnings which attract PAYE deductions in respect of any worker.
1 October 2017. Contributions will increase to 3% from 1 October 2018.
Revised timetable for increasing minimum contributions
The Government plans to publish a consultation document on the detail of these changes shortly. Draft regulations and an impact assessment will be published alongside the consultation document. The table below sets out the revised automatic enrolment dates for all employer sizes. â–
The Government has delayed the increase in the minimum rate of employer pension contributions from 1% to 2% of banded earnings from 1 October 2016 to
Medium sized employers, those with between 249 and 50 employees, will be re-allocated auto-enrolment dates between 1 April 2014 and 1 April 2015. This means that the implementation dates of some of these employers will be up to nine months later. However, this still means that around 70% of eligible workers will be automatically enrolled before the end of this Parliament compared with around 75% under previous arrangements. Small employers, those with fewer than 50 employees, will be allocated automatic enrolment dates between 1 June 2015 and 1 April 2017. New employers setting up businesses from 1 April 2012 and up to and including 30 September 2017 will have automatic enrolment dates between, and including, 1 May 2017 and 1 February 2018. Any new employer setting up from 1 October 2017 onwards will be required to comply
2012
2013
2014
2015
2016
2017
2018
Minimum Contributions (Qualifying Earnings) Employer
1%
2%
3%
Employee
1%
3%
5%
Staging Date Payroll Numbers
50,000+
8 Xafinity DCSPOTLIGHT April 2012
500+
50+
All
WORKING LONGER
Forced to work longer? Figures released by the Office for National Statistics (ONS) show that people are working longer than they used to. Is this because they are choosing to, or because they are being forced to? As employers, can we help to improve this situation? Average retirement age increasing The ONS data indicates that the average retirement age has increased from 63.8 years to 64.6 years for men and from 61.2 years to 62.3 years for women between 2004 and 2010. The figures also show that the peak ages for men leaving the labour market are 64 to 66 years, while for women the peak ages are 59 to 62 years, meaning that retirement peaks around the State Pension Age. Some people are choosing to work longer, but more and more are finding themselves staying at work because their savings and pension are inadequate. They often get a shock when they find they have to keep working while their friends retire. A key concern is that society isn’t putting enough aside for its older age and, importantly, are not starting to save early enough. There is a generally accepted view that people are working longer because of inadequate savings and pensions and thus it is logical that we will have to spend more time at work. But,
are there other aspects that we can do to optimise the value that employees receive from their pension benefits?
Increasing value from the same contributions Developing effective communication strategies to help members to make informed decisions with regards to their retirement planning is key. To achieve this, as much of the complexity needs to be taken out of retirement planning as possible. Members need to be able to understand that by contributing £200 per month and targeting a long-term return of 4% p.a., they may achieve their desired retirement income with a high degree of certainty. Conversely, if they wish to contribute less, they could adopt a more adventurous strategy, targeting a long-term return of 7% p.a., but they need to appreciate that they may not reach their desired target and may achieve less than the more cautious strategy would have provided.
Continual review of all aspects is important if members are to effectively plan for their future. Each cannot be taken in isolation. For example, if a member experiences better performance than expected they could elect to target a higher level of benefits. Alternatively, if they choose to retain the same target, they could either reduce the levels of contributions they make or adopt a less risky investment strategy. This would provide greater certainty of achieving their targeted level of emerging benefits. Conversely, if a member’s investment experience is worse than anticipated, the member could choose to increase their contribution or adopt a less cautious investment strategy. Employees should be educated to understand the impact that an investment strategy may have on the required levels and timing of contributions. Only in this way can an individual decide when to join a pension arrangement, select the level of contributions to make and choose an appropriate investment strategy to adopt. ■
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OCCUPATIONAL PENSIONS / STATE PENSION BENEFIT
Men to put their faith in Trust Occupational pensions will be exempt from a European directive which is set to make it compulsory for insurers to adopt the same prices for men and women. Following on from the Test-Achats case,in March 2011, the European Court of Justice ruled that gender-based pricing of insurance products was incompatible with human rights and would therefore be outlawed with effect from 21 December 2012. However, in a communication document published on 22 December 2011, the European Commission confirmed that the directive only covers private insurance and pensions. It stated: “Some insurance products, such as annuities, contribute to retirement income”. The Directive, however, only covers insurance and pensions, which are private, voluntary and separate from the employment relationship, employment and occupation being explicitly excluded from its scope. Equal treatments with men and women in relation to occupational pensions is covered by Directive 2006/54/EC of the European Parliament and of the council of 5 July 2006 on the implementation of the principle of equal opportunities, and equal treatment of men and women in matters of employment and occupation.
What does this mean? It appears from this communication as if gender differences will be allowable when purchasing annuities from trust-based schemes, but not so with contract-based DC schemes. Assuming the insurance market will be able to accommodate this differential, this raises the possibility of arbitrage in that male annuities could be secured via the trust based scheme whereas female annuities would be secured on unisex rates eg via an immediate vesting personal pension. However, further confirmation is awaited from the European Commission with regard to this interpretation of the communication. ■
10 Xafinity DCSPOTLIGHT April 2012
State Pensions Benefit From April 2012, the Basic State Pension has risen by 5.2% to £107 per week. Pensions for married couples have risen to £171.85 per week. The Government has stated that it recognises that household budgets have been squeezed by inflation caused by rising food and energy prices this year. It stated that the increase represents a ‘commitment of fairness to those who have worked hard all their lives’.The confirmation from the Government quelled rumours that it may change the rules by which it calculates its “triple lock” under which pensions would rise in line either with wages, inflation (as measured by CPI) or 2.5% - whichever is highest. However, due to the increasing life expectancy, and to help manage the cost of state pensions, it is proposed that the State Pension Age be increased to 67 between 2026 and 2028 and 68 from 2044. The Government is also considering how the State Pension Age could better reflect changes in life expectancy in the future. This could lead to further changes. It will be important to keep these changes under review and carefully communicate the outcomes in order that they may plan for their futures. ■
The Government is also considering how the State Pension Age could better reflect changes in life expectancy in the future. This could lead to further changes.
PERSONAL PENSIONS
Trivial commutation extended to personal pensions From 6 April 2012, funds of £2,000 or less held in personal pension arrangements will be able to be paid out as lump sums to individuals aged 60 or over, provided certain conditions are met.
Lump sums can be made regardless of the value of the individual’s total pension savings and in addition to any trivial commutation payments from occupational pension schemes that the individual may have received. However, an individual can only have two such lump sum payments in their lifetime.
The measure is intended to help individuals aged 60 or over who have pension savings preventing them from using the lifetime trivial commutation rules to access small personal pension pots. The changes will put personal pension arrangements on a level playing field with
occupational schemes, which have been able to pay lump sums of £2,000 or less as authorised payments since April 2009. As such these new payments will normally be taxed by allowing for 25% of the lump sum to be paid tax-free with the rest taxed as earned income. ■
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TAX / LIFE EXPECTANCY
Consultation on integrating tax and NICs HM Treasury (HMT) has published a paper on plans to integrate the operation of tax and National Insurance contributions (NICs). The likely direction of travel is to have NICs assessed in each tax year rather than in each pay period and to apply them to an individual’s earnings in a tax year – consolidated across all employments rather than on each employment separately as at present.
determining income tax. However, the Government remains of the view that NICs should retain their linkage to contributory benefits and should continue only to be levied up to State Pension Age. This consideration, and the likely retention of employer NICs, means that a full merger is not on the horizon. ■
HMT may also move the definition of earnings subject to NICs towards that used for
Fixed Protection and Life Assurance In the period up to the reduction in the Lifetime Allowance (from £1.8m to £1.5m) from 6 April 2012, individuals had the opportunity to apply for Fixed Protection to circumvent the impact of this reduction. One of the requirements in receiving this Fixed Protection is that there should be no further relevant benefit accrual after 6 April 2012. Whether or not an individual can continue to have death benefits (life cover) and keep Fixed Protection depends on the type of arrangement providing the death benefits. Broadly speaking, where the benefit is under a registered pension scheme, then if it is “money purchase” in nature then any contribution or premium paid after 5 April 2012 would cause a loss of Fixed Protection. HMRC is aware, however, that concerns had been raised about the views it had recently expressed in relation to the position where insurance has been taken out to cover the potential cost of paying defined benefit lump sum death benefits. In particular, whether any limitation to the proceeds of the policy would mean that the benefit is actually a money purchase one. Belatedly, following extensive lobbying, HMRC clarified the position somewhat on 30 March 2012:
12 Xafinity DCSPOTLIGHT April 2012
■ If the death benefit promised under a registered pension scheme is a defined benefit one (e.g. a lump sum death benefit of 4 times final salary) and will be paid in full regardless of whether or not the benefit is insured, then continuing to provide death cover should not cause a loss of Fixed Protection. This is because a death in service benefit is not considered to be part of a member’s pension rights. ■ If the defined benefit as set out above is backed by an insurance policy and that policy will not pay out more than the lump sum death benefit but may contain restrictions which, if they apply, will result in an amount payable to the scheme (or payable directly to the beneficiaries identified by the trustees) which is less than the unrestricted defined lump sum death benefit, then Fixed Protection will not be lost. This is provided the reduced benefit can be expressed as a defined benefit (and HMRC has set out some examples). ■ If the death benefit promised is not “defined benefit” then it is deemed to be “money purchase”. Here cover may only continue with the member keeping Fixed Protection
if it is provided by a policy established before 6 April 2006 and certain prescribed conditions are met. Fixed Protection would automatically be lost where contributions are made after 5 April 2012 to a policy set up on or after 6 April 2006. Fixed Protection will also be lost if a new life assurance arrangement under a registered pension scheme is created or amended on or after 6 April 2012. Care is particularly required where death benefits under a registered pension scheme are payable “on death as an active member of the scheme”. If, as a result of Fixed Protection, an individual is no longer an active member of the scheme, but the employer intends providing the same level of cover “on death as an employee”, then we believe the change in payment conditions may constitute a “new arrangement” under the Finance Act 2004. This would in itself cause a loss of Fixed Protection if the “new arrangement” was made on or after 6 April 2012. So, it would be necessary to have this in place by no later than 5 April 2012 in order to avoid a subsequent loss of Fixed Protection. An important point to note is that these issues are only relevant if death benefits are provided under a registered pension scheme as defined in the Finance Act 2004. If benefits are instead provided under an excepted life policy, they are outside of the registered environment and continuation of cover in whatever form will have no impact on Fixed Protection. Clearly, the extent of any potential problem will vary greatly between arrangements. At Xafinity we are more than happy to work with advisers and their clients in looking at these arrangements. ■
UNUSED ANNUAL ALLOWANCE / GENDER REASSIGNMENT
New interpretation on ‘carry forward’ of unused Annual Allowance HM Revenue & Customs (HMRC) has issued revised guidance on how ‘carry forward’ from the tax years before 2011-12 should be calculated for the purpose of the Annual Allowance (AA). This reflects a change to its interpretation of the legislation in how ‘carry forward’ works in relation to these years. Under this interpretation, some members may now have higher unused allowances to ‘carry forward’. Generally, the changed approach should be in a member’s favour. Members that reduced their savings, because of the earlier understanding, had an opportunity to take advantage of the revised interpretation before 5 April 2012.
However, where the input in any of the three tax years before 2011-12 exceeded the deemed AA of £50,000, the excess is simply ignored rather than using up any available allowance from an earlier year, as HMRC had originally stated. This represents a change not only from HMRC’s original guidance but also, it appears, from the policy intention.
For the purpose of ‘carry forward’, the Pension Input Amount (PIA) should be calculated in the same way as for the years 2011-12 onwards.
It should be noted that this interpretation does not apply in relation to carry-forward from tax years on or after 2011-12. ■
Members that reduced their savings, because of the earlier understanding, had an opportunity to take advantage of the revised interpretation before 5 April 2012.
Gender reassignment Transsexual women will be able to apply for an increased state pension in recognition of having deferred their entitlement in respect of periods prior to the implementation of the Gender Recognition Act (GRA) on 4 April 2005. This applies to those born between 23 December 1919 and 3 April 1945, and who have undergone gender reassignment surgery at some point during the period between the implementation of the Social Security Directive on 23 December 1984, and the coming into force of the GRA. ■
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SMPI CHANGES
PENSIONS TAX RELIEF
Managing SMPI changes
High Earners missing out on pensions tax relief
A new version of the actuarial guidance for Statutory Money Purchase Illustrations (SMPIs) for effective dates after 5 April 2012 holds out the prospect of lower projected incomes, and will need careful consideration.
Studies illustrate that more than 400,000 UK pension scheme members could be missing out on hundreds of pounds in annual contributions by failing to claim tax relief.
The Board for Actuarial Standards published the long-awaited version 2.0 of Technical Memorandum (TM1) for SMPIs just before Christmas. It applies to benefit statements with effective dates after 5 April 2012, but providers can continue with the old version if the statements are issued before 21 December 2012. The key changes in the new document are: ■ Providers of SMPIs (such as trustees and insurance companies) must take proper account of potential investment returns from the current and anticipated future investment strategy when setting the long-term investment assumption used in their projections, and the reasons for the preferred approach should be documented. The figure of 7% per annum still features, but is now simply a maximum when setting the investment returns before charges. ■ The annuity mortality assumptions have been updated to reflect current market practice. It is important that fiduciaries consider with their advisers the investment return assumptions. They should also look at wording to accompany the SMPI and consider ways of managing members’ responses to projections that may well be lower than previous years’ statements, due to updated mortality assumptions, lower gilt yields and potentially lower future investment return assumptions used in the projections. ■
14 Xafinity DCSPOTLIGHT April 2012
Changes to self-assessment requirements have left many members of contract-based pension plans unaware that higher rate tax relief is not automatically applied to their contributions. The concern is that very few higher rate taxpayers complete tax returns which means they’re not automatically claiming the higher rate relief on their pension contributions. For an employee earning £60,000 a year and contributing 5% into his pension, this would mean missing out on £600 a year in contributions. All employees in contract-based plans automatically receive basic tax relief of 20%, but those earning more than the 40% income tax threshold have to apply to receive the higher tax relief. Where contract-based arrangements are used, it is important that employers clearly communicate with their employees to explain the position. ■
All employees in contract-based plans automatically receive basic tax relief of 20%, but those earning more than the 40% income tax threshold have to apply to get the higher 40% tax relief.
SHORT SERVICE REFUNDS
Short service refunds The Pensions Minister has trained his sights on short service refunds from defined contribution (DC) schemes and is planning to abolish them from 2014, provided a solution can be found to make transfers of small pots easier. Proposals are expected to be published later in the year. The Department for Work and Pensions (DWP) estimates that without change, 370,000 small pension pots (under £2,000) will be created each year by 2017. Many members of occupational pension schemes with less than two years’ service opt for a refund of their contributions instead of retaining pension benefits. This could undermine the Government’s plans to increase private pension savings, particularly amongst younger members and low earners – the target population for automatic enrolment. Hence, the DWP has announced that it intends to legislate as soon as possible to stop early leavers from occupational DC schemes taking a refund of their contributions. It expects this change to be in force from 2014, provided it is able to facilitate the transfer of small pension pots at the same time. With this in mind, the DWP issued a consultation document (consultation closed on 23 March 2012), outlining three approaches: changes to the current voluntary process, automatic transfers to an aggregator scheme and automatic transfers to an employee’s next scheme. Each option has drawbacks, and whichever approach gets the green light, it will face serious challenges.
Changes to the current voluntary system This approach could include: requiring schemes to provide additional information which might make members initiate transfers, simplifying forms and requiring all schemes to accept transfers-in of any size. However, it has one obvious drawback in that it does not tackle the issue of member inertia, which casts doubt on its potential effectiveness. This option might be introduced in addition to one of the automatic transfer options below.
Aggregator scheme The second option would see small pots (defined as less than £2,000, the trivial commutation limit) automatically transferred into an ‘aggregator scheme’ (possibly the National Employment Savings Trust (NEST), but it could be a number of schemes for example, the NAPF is advocating the use of mastertrusts in general, in this regard) when the member leaves an employer.This initially looks to be the most pragmatic approach of those in the consultation. However, for NEST, it faces the drawback that unless NEST levies an up-front charge for transfers-in there could be a crosssubsidy from contributing members to those who transfer in.
Pots follow the employee The third option would be to transfer any small pension pot automatically from an individual’s previous employment into their new employer’s automatic enrolment scheme. This would require the set up of a new electronic platform to operate the process and it is unclear who would bear the cost for this. Refunds paid to employees who opt-out within one month of being automatically enrolled into a DC scheme will be unaffected. Amongst the conditions that the DWP has suggested would apply to the proposed automatic transfers are; firstly that an electronic system/database would be required, secondly that the member would have the option to opt-out of an automatic transfer, and thirdly that the transfers would need to be unadvised business (there should not be a requirement for financial advice before the member transfers). It will be important to keep this position under review to understand the impact that it may have on pension scheme design and communications. ■
The information contained in this DC Spotlight should not be relied upon for detailed advice or taken as an authoritative statement of the law. Any decisions should be taken on the advice of an appropriately qualified professional adviser.
Xafinity DCSPOTLIGHT April 2012 15
Xafinity is one of the UK’s leading specialist providers of pension, employee benefits and payments expertise, with 170 years’ experience. The group provides consulting, software, resourcing, training and business process outsourcing services that enable public and private sector organisations to deliver employee benefits more efficiently. In 2011 Xafinity was recognised as Third Party Administrator of the Year at the UK Pension Awards and in 2010 won the award for Pension Software Provider of the Year for the fifth time in six years. At the Pension and Investment Provider awards in 2010 Xafinity won Best Pension Administration Software and in 2009 were voted the best Third Party Administration Provider. Xafinity is the accredited software supplier to the UK Principal Civil Service Pension Scheme.
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