7 days

7 Days is a weekly round up of developments in pensions, normally published on Monday afternoons. We collate this information from key industry sources, such as the DWP, HMRC and TPR.

In this 7 Days

ACA 2016/17 Smaller Firms’ Pension Survey

The ACA has published its latest survey report into the pension savings of employees in smaller organisations (those employing fewer than 250 employees). Smaller firms and their employees comprise 60% of the UK private sector labour force.

Amongst other things, the report finds that 36-40% of employees at the smallest employers are typically ineligible for auto-enrolment. The report notes that, while auto-enrolment has boosted workplace pension coverage, with savings levels “woefully low, opt-outs rising and around 12 million workers missing out, big challenges need to be addressed”. It sets out policy recommendations, including lowering the earnings trigger, and simplifying of the compliance regime.

CPS publishes report on “Low interest rates and the Global Economy”

The Centre for Policy Studies (CPS) has published a report on the effect of low interest rates, entitled “Stop Depending on the Kindness of Strangers”.

The report looks at the impact of long-term low interest rates and quantitative easing on pension funds, amongst other areas. It concludes that the “unconventional monetary policy” has obliged them to invest in low-yielding government bonds, “exposing them to significant risk should interest rates rise sharply in the future.”

FCA warns of risks from “smarter scams”

On 24 January 2017, the FCA published an alert warning pension scheme operators that they are at risk from “smarter scams”. Remarking on the evolution of scams, it notes that “scammers are becoming increasingly sophisticated in developing products designed to defeat firms’ due diligence efforts”, effectively obscuring the nature of the ultimate underlying investments.

The alert highlights some of the current risks arising from authorised firms failing to carry out appropriate due diligence on investment offerings, and encourages them to review the effectiveness of their systems and controls.

FCA alert on accepting business from unauthorised introducers or lead generators

On 24 January 2017, the FCA also updated its alert on investment advisers’ and authorised firms’ responsibilities when accepting business from unauthorised introducers or lead generators. The alert states that many authorised firms do not have adequate input or control over the advice they are ultimately responsible for giving to customers, noting that “this has been particularly evident in relation to advice on switching and transfer/conversion of pension benefits. We have specific concerns where this advice involves movement of pension pots to unregulated, high risk, illiquid products, whether they are based in the UK or overseas”.

The alert sets out various warning signs and action points, linking back to its other materials on scams and transfers.

FCA issues warnings on transfers and pension scams

The FCA issued a further alert on 24 January 2017, highlighting its requirements when advice is given on pension transfers.

As a pension transfer is usually irreversible, the FCA states that “it is particularly important that firms advising on pension transfers ensure that their clients understand fully the implications of a proposed transfer before deciding whether or not to proceed […] We expect a firm advising on a pension transfer from a DB scheme or scheme with safeguarded benefits to consider the assets in which the client’s funds will be invested as well as the specific receiving scheme”.

FCA rules require a comparison to be made between the benefits likely (on reasonable assumptions) to be paid under a DB scheme or other scheme with safeguarded benefits and the receiving scheme. The comparison should cover the likely expected returns of the assets, the associated risks, and all costs and charges that will be borne by the client. Therefore, “generic assumptions for hypothetical receiving schemes” should not be used.

The alert sets out further important considerations for firms providing pension transfer advice in specific circumstances, including in the cases of insistent clients, and for overseas transfers.

FCA to consult on pension transfer redress methodology

The FCA’s Regulation round-up for January 2017 notes that the FCA intends to consult during Q1 of 2017 on updating the methodology used to calculate the redress due where unsuitable advice is given on transfers from DB occupational pension schemes to personal pension schemes. This consultation had originally been due later in 2017.

Briefing paper for second reading of the Pension Schemes Bill published

On 27 January 2017, the House of Commons Library published a briefing paper on the Pension Schemes Bill in preparation for the Bill’s Second Reading on 30 January 2017. The briefing provides an overview of the main provisions and debates so far.

Flexible Payments from Pensions: January 2017

HMRC published updated statistics on 25 January 2017, in relation to the number and value of flexible payments made from pensions since April 2015.

The figures show that 1.5 million payments have been made since the pension freedoms were launched, with 162,000 people accessing £1.56 billion flexibly from their pension pots over the last three months of 2016. This brings the total amount of money withdrawn from pensions to £9.2 billion since April 2015.

TPR figures show significant shift to DC

A report published by TPR on 27 January 2017 reveals that total memberships in DC pension schemes (14.8 million) have for the first time overtaken DB scheme memberships (11.7 million). 95% of DC members are now in schemes being used for automatic enrolment.

Andrew Warwick-Thompson, Executive Director for Regulatory Policy, said “this transformation is the direct result of the success of automatic enrolment which has seen more than 7 million workers join a pension scheme for the first time […] Our concerns are rising about the fragmentation of DC provision and the persistence of a tail of sub-scale schemes. In our opinion, these pose an unacceptable risk to consumer protection […] We strongly believe that it is unacceptable to have two classes of DC pension saver – those that benefit from the premium of scale and good governance and administration, and those that do not”.

TPR’s approach to resolving these issues includes the implementation of its 21st Century Trustee initiative during 2017, its role in the authorisation and supervision regime for master trusts under the Pension Schemes Bill, and supporting the Government’s call for evidence on removing barriers to consolidation in the DC market.

Government response to report on intergenerational fairness published

On 27 January 2017, the Work and Pensions Committee has published a Government response to its report on Intergenerational fairness.

Frank Field MP, Chair of the WPC said: “We will continue to press for cross-party consensus on the replacement of the triple lock after 2020. The Government is right to say pensioner benefit spending has dipped slightly as a share of GDP, as accelerated increases in the state pension age have kicked in; but official projections show that, without reform, it will rise relentlessly from that point. The triple lock has been valuable but it is unsustainable. The Committee has recommended an alternative which would maintain pensioners’ living standards and protect them from the effects of inflation.”

McCloud v Lord Chancellor and Secretary of State for Justice (16 January 2017)

In this case before the Employment Tribunal, 210 judges at various levels within the judiciary complained that the new judicial pension scheme which they had been compelled to join subjected them to direct age discrimination and, in some cases, indirect race and sex discrimination, and that it also contravened the principle of unequal pay.

The Tribunal found that transitional provisions employed were not objectively justified.

For further detail, please see our case report.