On one level it’s business as usual regardless of Brexit as our everyday life and pension law advice continues. This also seems to be largely the case for the DWP and pensions, despite the political turmoil and change of Ministers. The emphasis seems to be on pushing forward legislative change that aims to continue UK domestic goals like safeguarding members’ pension rights and ensuring that employers (and employees) are not overburdened by too many extra pension costs at a time when the broader horizon remains fluid. It is less clear what might happen to EU or ECJ derived pension changes – particularly where the benefit of these is not immediately apparent.
The 2016 Pensions Bill – master trusts protection for members is ongoing
The extra regulation and security for master trusts is still very much on the agenda as the DWP want to ensure that master trusts used for auto-enrolment have sufficient money to cover the costs of a transfer to another scheme if the master trust is forced to close or wind up without dipping into members’ money and potentially trustees of such trusts will have to meet certain standards of qualification to ensure fit and proper governance standards. We can also expect the ongoing consolidation of what pension guidance is available to continue. It is less clear where the DWP have got to with the proposed cap on early exit fees and the removing of barriers to the access of pension freedoms but it would be logical for the DWP to continue with these as they will provide some real benefits for members and can be implemented at a relatively low cost to the providers.
Increases to auto-enrolment contributions is delayed but will be introduced
Increases to auto-enrolment contributions for workers and employers, planned for April 2017 are now delayed until April 2018, as announced by the DWP. This delay remains controversial but it is probably the prudent approach.
GMP equalisation - uncertain
Few members, schemes or employers will be pushing for UK legislation on this requiring action to be taken. For most members this is a paper exercise that won’t significantly alter the benefits they receive from a scheme but it will be another pension cost for employers and will create difficult legal and administrative problems for trustees so it’s hard to see the Government giving it any priority.
PPF and FAS compensation caps - uncertain
Proposed changes to PPF and FAS compensation caps for long serving members whose benefits are currently cut back are derived from EU law and ECJ decisions. The PPF changes for this have already been budgeted for by the PPF and, in theory it could be introduced at no extra cost for employers or schemes. There is draft legislation waiting just to be implemented but its implementation has already been deliberately delayed by the Government. This is not good for the individuals concerned who have been campaigning long and hard for this.
However the Court of Appeal’s judgment on Hampshire v the PPF issued on 28 July 2016 will inevitably delay matters. This is on whether the current limits to the PPF cap are legally correct and it shows there is not sufficient clarity on the point. The Court of Appeal has decided to ask the EU Court of Justice for a ruling on how directly enforceable EU law (in the form of Article 8 of the Insolvency Directive) is on the PPF and whether it effectively overrules the terms of the Pensions Act 2004 on this point going back to the date when this Directive should have been properly implemented by the UK. The case was brought by a group of members from the Turner & Newall pension scheme. It will be interesting to see what happens to this type of claim with Brexit on the horizon. The UK legislation was only going to affect the level of the PPF cap going forward from the date of the UK legislation so there is a significant difference between the two outcomes.
Impact on DB pension scheme funding and investment – to be monitored
IORPS II, if implemented, is due to have a significant impact on DB pension scheme funding and further delays to this controversial change are probably a good thing as this was not that appropriate for UK schemes even in its further diluted form. Similarly the new EU wide securities investment and trading requirements arising from MiFID II were to have a huge impact on the investment management aspect of pensions. They remain highly controversial and from the UK perspective are generally thought of as more bureaucracy and cost so it could well be a good thing if this is never implemented. Likewise, the European Market Infrastructure Regulation would provide more safeguards against counterparty risk but what happens with it as a result of Brexit could become highly political. So far as pension scheme funding itself is concerned, the overall deficit of the DB funds increased post Brexit by £155 billion as at end of June 2016 according to figures released by Willis Towers Watson for the FTSE 350 companies. Baroness Altmann warned before she resigned, that companies may have to pay extra contributions to their DB schemes before they pay dividends. Alternatively use of alternative asset structures as an alternative form of funding may become more popular again - once money goes into a scheme it’s almost impossible to get it out again. However there are some companies that will prefer to continue to pay higher employer contributions to their pension schemes to stop those schemes having to disinvest and lock into low returns in order to be able to pay the monthly pensioner payroll. Of course the funding problems of some schemes would be ameliorated if the Government legislated to allow all DB schemes to benefit from the change in indexation from RPI to CPI – many still have to provide RPI based indexation because of how their scheme rules are drafted. It will be interesting to see whether there will be any changes to the Pensions Regulator’s powers to allow it to stop a takeover if it would be detrimental to scheme members, as suggested by the outgoing Chairman of the PPF, Lady Judge but probably this is a step too far.
Trustees and employers are still keenly monitoring their investment strategies to maximise returns versus risk and the position on this changes on an almost daily basis so trustees need to be sure they can act sufficiently nimbly if action is needed. Similarly employer covenant assessments require constant watching. There was some talk by Baroness Altmann, before she resigned, about schemes investing in infrastructure as a safe haven but will the investment products continue to develop to make this an option for any but the very largest pension schemes? Continued member communication by trustees and/or employers and providers remain essential and particularly for DC members. Potentially different member communications should be issued for individuals with DC savings approaching their planned retirement date and those who are not yet there.
Reclaiming of VAT for trustee driven pension services - uncertain
The reclaiming of VAT for trustee pension driven services is of significant importance to employers as it helps them manage some of their pension costs. In light of this trustees should still consider putting in place plans for VAT recovery which should work subject to HMRC clarification later this year. However this is all essentially EU and ECJ driven so it is difficult to know quite where we will end up with it.
Ministerial manoeuvres and political considerations
Damian Green has been appointed as the new Work and Pensions Secretary, replacing Stephen Crabb and Baroness Ros Altmann is replaced by Richard Harrington as the new Parliamentary Under Secretary of State at the DWP. All this change is not that good for the continuity of pension policy, particularly when pension deficits are soaring and political intervention maybe necessary to manage this. It has however given Baroness Altmann the opportunity to begin pension campaigning again for the under-dog and the DWP strenuously deny that the change in job title for the new incumbent means a down grading in the importance of pensions at the DWP.
The triple lock for state pensions and the state pension age may have to be further reviewed in the light of the Brexit vote but these are highly political matters and according to the Prime Minister the triple lock will not come under review until 2020 at the earliest. Although pension tax changes were seen as George Osborne’s baby, the potential gains from this are too great for this just to lapse. Changes to salary sacrifice must be regarded as part of this. Similarly we don’t know yet where we will end up with the secondary annuity market, that was due to be implemented from April 2017. The concept is already popular with some consumers and insurance companies but not with the financial advisers where mandatory advice above annuities of a de minimis level is needed. We’ve also had no formal announcement on the fate of the Lifetime ISA, and the concept remains popular with consumers. On the commercial side, the proposed Tata Steel restructuring also remains highly political and what happens here could have major ramifications for other DB schemes. However the changes in Government will potentially have an impact and Tata Steel itself is pulling back as well, although some restructuring through sales/joint enterprise may yet proceed.
Other points of interest are whether there will be a continued increase in QROPS as non UK nationals look at transferring their UK pension savings aboard? Our QROPS clients report a marked increase of interest in this. They are also looking at what will happen to the pension arrangements of our expats retired in the EU. Pension scams are also likely to increase in a climate of zero or negative interest rates as the unscrupulous scammers continue to prey on the vulnerable, the naive or the foolhardy, exploiting any gaps in cyber security or data protection or the weakness of human nature.
Where will it end – currently no one knows but there’s one certainty, there’s no risk of pensions law being forgotten about