Pensions Past, Present and Yet to Come
Standing at the start of a new decade, we speculate what the next ten years may bring for defined benefit (DB) and defined contribution (DC) pensions. We also look back at the past ten years to see what lessons can be learnt.
Unlike the noughties which saw the introduction of the Pensions Regulator (the Regulator), Pension Protection Fund, new funding and new accounting rules, the last decade had fewer momentous changes. A success story was the introduction of auto-enrolment. Arguably the biggest impact came from the introduction of Freedom and Choice.
So what might the twenty twenties hold for pensions?
If you speculate on the future, you are guaranteed to be wrong. But in the Christmas spirit and to spark debate on what the industry could do, we have made six guesses on the future.
Proposed increases to general levy for pension schemes
The Government has been consulting on significant increases to the general levy from 1 April 2020. This levy is payable by all occupational and personal pension schemes to fund the Pensions Regulator, the Pensions Ombudsman and pensions-related activities of the Money and Pensions Service. The levy rates are calculated by reference to the total number of members (excluding spouses and dependants), as shown on the latest scheme return. They have remained unchanged for most pension schemes since 2012/13, other than the introduction in 2017/18 of a new lower rate for the largest schemes (with 500,000+ members). Four options are proposed, with Option 1 being the Government’s current preference:
- Option 1: A holding increase of 10% of the 2019/20 rates, then a wider review by Government of the levy structure and consultation on further increases from 1 April 2021.
- Option 2: A three-year phased increase, which would mean the 2019/20 levy rates increased by 45%, 125% and 245% on 1 April 2020, 1 April 2021 and 1 April 2022 respectively.
- Option 3: A ten-year phased increase, which would mean a 25% increase of the 2019/20 rates on 1 April 2020, followed by 20% increases in each of the next eight years.
- Option 4: A ten-year phased increase from 1 April 2021, when the levy would increase by 30% followed by 25% increases in each of the next seven years.As well as the above options, a one-off increase is proposed to the annual, flat-rate levy
Simpler annual benefit statements
Following the launch of an industry-backed, simpler annual benefit statement template in October 2018, the Government is consulting on how to make pension benefit statements easier for members to understand so as to help them to plan for retirement.Three different approaches are proposed:
- the industry-backed, simpler statement template (which has seen limited adoption to date);
- set design principles to be applied to statements; or
- a template of descriptors (which would result in statements providing more detail than the above approaches).
The Government is exploring whether a voluntary approach could deliver sufficient simplification and consistency, or whether a regulatory approach may be needed.It is also proposing that annual DC benefit statements should include information on member-level charges and transaction costs, in ‘pounds and pence’. This follows on from the requirement (from April 2018) for occupational pension scheme trustees to publish information on charges and transaction costs on a publicly-available website, and signpost members to this in their annual benefit statement. Other issues explored in the consultation include how to encourage members to open their pension statements, having a ‘pension statement season’ and the relationship between simplifying statements and the development of pension dashboards.The Government intends to consult on draft legislation and guidance ‘in due course’.
Update on HMRC’s GMP Equalisation guidance
According to Pension Schemes Newsletter No. 114, HMRC’s GMP Equalisation Working Group plans to publish high-level guidance in December 2019, which will address certain pension tax issues caused by GMP equalisation. The guidance will be specific to GMP equalisation on the lifetime and annual allowances; it will not cover the use of GMP conversion to equalise. The Working Party is continuing to work on other pension tax issues due to GMP equalisation and aims to provide a further progress update on these in December 2019.
Launch of Retirement Living Standards
The Pensions and Lifetime Savings Association (PLSA) has launched its Retirement Living Standards, which are designed to help individuals envisage the lifestyle they want in retirement, and understand how much they need to save in order to achieve that desired standard of living. The Standards are set at three levels – ‘Minimum’, ‘Moderate’ and ‘Comfortable’ – and are based on a basket of goods and services, including household bills, food and drink, transport, clothing, holidays and leisure. A single individual would need around £10,000 a year to reach the ‘Minimum’ Standard, £20,000 for the ‘Moderate’ and £30,000 for the ‘Comfortable’. For couples, it would be £15,000, £30,000 and £45,000 respectively.The PLSA envisages the Standards becoming a ‘rule of thumb for retirement planning’, with schemes including them in annual benefit statements, or even developing ‘personalised targets for their members’ pension planning’. It is also working with the Money and Pensions Service on the Standards being included in their tools, for example the Money Advice Service pension calculator. A report by the Institute and Faculty of Actuaries sets out the level of pension contributions required to deliver the Standards.
Equitable Life: Proposal approved
Equitable Life policyholders (who include trustees of DB schemes with legacy additional voluntary contributions) and the High Court have voted in favour of a Proposal which will include the transfer of all with-profits policies to Utmost Life. Although policyholders will receive a one-off uplift to their funds, all investment guarantees will be lost. The funds will then be converted to unit-linked policies and transferred to Utmost on 1 January 2020. However, before then, trustees had until 13 December 2019 to decide into which of Utmost Life’s fund choices members’ investments will be placed. If trustees did not make a fund choice by the deadline, Utmost will hold members’ investments in cash for 6 months, before transferring them into the default fund. If you have not yet done so, you should discuss the options with your usual XPS Investment Consultant.
To discuss any of the issues covered in this edition, please get in touch with Caroline Ekins