Pensions Legislation: The Oncoming Train
It just never ends, does it? Gone are the days when 'all' an employer had to worry about was managing the defined benefit pension scheme deficit. Since the advent of automatic enrolment in 2012, pension provision for workers has come onto everyone's radar. This article looks ahead from within the turbulence created by non-stop tinkering with pensions legislation to warn of what else is coming.
The limits to pensions tax relief have repeatedly been altered, with the lifetime allowance slashed from £1.8m to £1.5m in 2012, reduced again to £1.25m in 2014, and about to be cut down to £1m next year. Higher earners have been offered Fixed Protection 2012, Fixed Protection 2014, and Individual Protection 2014. The annual allowance has also been dramatically reduced, from £255,000 to just £50,000 in 2011, and again in 2014 to £40,000. Simplification it isn't.
Hardly an environment to encourage investment in pensions, you might feel. Who knows what will happen next? (This article is being written in late June, while we nervously await the Budget on 8 July.) The Government is being urged from all sides to agree to set up an independent retirement savings commission, to develop the kind of long-term strategy consensus which politicians alone cannot. What we need above all are stable and predictable rules governing pension saving.
This year everyone is trying to accommodate the pension flexibility rules in last December's Taxation of Pensions Act, supplemented by the Finance Act 2015. For once the entire pensions industry seems united in pleading for a pause: no more changes while we get to grips with the last lot. While last year's Budget bombshell has certainly stimulated new interest in pensions, especially in new ways to get money out and pass it on to later generations, it has also created a problem in managing expectations.
As with everything else in the UK, 'terms and conditions apply'. For a start, flexible access is essentially limited to money purchase (DC = Defined Contribution) pension arrangements, and members normally have to be at least 55. There are different possibilities – flexible drawdown and the 'uncrystallised pension funds lump sum' (UFPLS), to name two - but the law does not oblige any DC scheme or provider to offer the full range. Drawdown in particular is expensive to administer; it's hard to see many scheme sponsors taking on the additional cost burden. Oh, and whichever way you go there are tax implications for the member too, which can be hard to communicate.
Some new rules about transferring from a defined benefit (DB) arrangement have combined with flexible access to DC benefits to stimulate member interest in transfers, while creating hoops and hurdles to frustrate them – for good reason, many would acknowledge. Flexible access has also boosted the nefarious activities of pension liberation scammers – a major and ever-growing threat to combat which all pension providers need to divert time and money.
The latest distraction on the horizon is a Government proposal to allow annuity holders to assign their future income to a third party, in exchange for a lump sum. For a host of practical reasons this is unlikely to work, but at a time when new legislation to limit charges and improve scheme governance is just being introduced, the last thing providers need is another costly diversion of resources.
Back to auto-enrolment: if as an employer you thought you'd 'been there, done that', think again: you have to do it all over again every three years. The largest employers face their first cyclical automatic re-enrolment exercise this autumn. Most employers have not even reached the starting line yet, though. While every employer whose PAYE Scheme on 1 April 2012 had at least 50 employees has passed their staging date, they amount to just 3% of the total number of employers.
The avalanche of small and micro employers, most of whom have never offered a pension to employees and know little about the issues involved, is a huge and imminent challenge. The payroll and pensions industries are working hard to cope with the projected 'capacity crunch' next spring, but will there be enough help for employers who want to take advantage of legislative changes since 2012?
And there's more: much more looming. The coalition government put something called 'pot follows member' on the statute book, in the 2014 Pensions Act. If and when actually brought into force, this will mandate automatic transfer of small pension pots when a 'qualifying member' (more 'complification') leaves a DC pension after being auto-enrolled. Steve Webb was all set to start this in autumn 2016. We shall see whether the new government persists in loading this extra administration burden onto providers.
For sponsors of occupational DC schemes, another blow this year comes with the abolition of short service refunds from 1 October, except where the member leaves within 30 days of joining the scheme. This will remove a convenient funding cushion, presently available from retained employer contributions when a member leaves in the first two years.
It's early days with the new government, of course. But for employers the signs are not good. Before the General Election the Conservative Party manifesto promised to taper the annual allowance from £40,000 down to just £10,000 for higher earners with 'annual income' (to be defined!) between £150,000 and £210,000. It would not raise a huge amount of extra tax, but the sheer complexity of implementation looks formidable. Ironically the last Labour government proposed something similar; swiftly scrapped by the incoming coalition.
Meanwhile many employers are still burdened by the long goodbye to defined benefit (aka final salary) pensions. As if the inexorable growth in funding deficits was not enough, next year the sun sets on contracting-out. The challenges that brings include how to cope with the loss of the rebate, and the tar pit that is GMP (guaranteed minimum pension) reconciliation. There are differences in all schemes between the GMP liabilities a scheme thinks it has and what HMRC records show; you might guess whose view is likely to prevail. More cost!
So much to cope with; it's hardly surprising that the watchword among employers these days when it comes to pensions is often simply 'compliance'. Many will not go beyond the absolute minimum (and even feel threatened by that). Who can blame them? Since the abolition of the default retirement age in 2011, and the demise of well-funded final salary pensions which used to offer a way of facilitating affordable early retirement, employment costs have only been going in one direction.
Is there any good news to draw from this maelstrom? Perhaps. With pensions undeniably in the spotlight, people are becoming more aware of the need to take control of funding for their later life. In the recruitment field, a remuneration package that offers more than the minimum might be an attractive differentiator.
Ian Neale is a Director and co-founder with Gary Chamberlin of the pensions legislation specialists Aries Insight. He has over 25 years’ experience of serving the pensions industry in a mission to help administrators and others make sense of the legislation. The Aries Pensions System explains all the requirements, not only of UK pensions law but covering a range of overseas regimes as well. A frequent communicator, often quoted in the pensions press, his passion is to save people time. Ian is a science graduate of Monash University (Melbourne) and Loughborough University.