Capita Hartshead’s 15th Annual Pension Scheme Administration Survey reveals further evidence of the closure of defined benefit schemes to new entrants. The Survey found that 78 per cent of organisations in this sample have established defined contribution arrangements, with the median employer and employee contribution to these schemes being seven per cent and four per cent respectively.
Worryingly, nearly three-quarters of respondents (71%) say that the cost of managing their pension scheme has grown at a faster rate than any other business overhead. The principal reasons given are increases in professional fees, costs of compliance and changes in long-term assumptions, such as mortality rates and investment growth.
The Survey did, however, find that third-party administration continues to deliver cost savings. For schemes with more than 2,000 members, third-party administration is generally substantially cheaper, being on average £8 to £10 cheaper per member per annum than in-house arrangements. The Survey also showed that increases in scheme administration costs were typically lower than in previous years.
Like last year, however, cost savings are not the number one reason for choosing a third-party administrator. Instead experience, specialist technical support and reputation top the list of reasons for choosing a third-party administrator. And nearly all (96 per cent) of third-party administered schemes are delivered to set turnaround times, a figure which has more than doubled since 1995 (when only 46 per cent did so).
Key trends for defined benefit schemes over the last year have included the decision by sponsoring employers to make special one-off employer contributions (38 per cent of schemes); to increase regular employer contributions (16 per cent); and to close schemes to new entrants (nine per cent). Amongst defined contribution schemes, the main action reported was the introduction of new investment fund options for scheme members (reported by 15 per cent of schemes). The Survey also highlighted the growing trend towards introducing flexible retirement.
In response to the Survey’s findings, Mike Addenbrooke, managing director of Capita Hartshead, commented: “The Survey shows that a lot of the trends identified last year have continued, with further closures of defined benefit schemes, and a corresponding increase in the number of defined contribution schemes. One factor highlighted by this year’s Survey is that increases in administration costs were typically lower than in previous years, though they still increased by between two and nine per cent and grew faster than other business overheads for seven out of ten schemes in the Survey. In contrast, for all but the smallest schemes, third-party administration continues to provide substantial cost savings.”
Results taken from Capita Hartshead’s 15th Annual Pension Scheme Administration Survey, published on 3 June, have revealed that although most schemes continue to use paper-based documents, there is an increasing trend towards using web-based communication tools.
The Survey, which looks at trends from both in-house administered and third-party administered schemes, shows that 58 per cent of schemes now have a dedicated pensions website; 63 per cent of these via the employing company and 37 per cent via a third-party administrator. However, just one in four schemes provides web-enabled access to members’ individual records. More than a third say they are unsure whether such access will ever be provided, and nearly one in five have no intention of providing this facility.
The results also highlight the effects of such sites on member query traffic: where access is provided to individual member records, 58 per cent of schemes commented that member queries have reduced.
Mike Addenbrooke, Capita Hartshead’s Managing Director, summarised: “Communications is an area that has seen significant improvement in this year’s Survey – almost half of schemes now rate their communication with members as good or excellent. This is great news, as it is indicative of a better level of service being provided to members. The results indicate that pension schemes in the UK may have turned a significant corner in the last 12 months – particularly in terms of the increased use of web-based communication, a shift which the industry has been expecting for some time.”
Mike added: “Having said that, there is still work to be done - 17 per cent of schemes were honest enough to admit that their communication with members is not as good as it should be, and a third describe it as merely adequate. It is hoped that this will improve in the year to come – as 78 per cent of schemes plan to review the quality of their communications in the year ahead.”
Almost half of employers responding to the latest Capita Hartshead Pensions Administration Survey are likely to auto-enrol all employees into their company pension schemes ahead of 2012, the likely date for the implementation of personal accounts and auto-enrolment.
And, though Survey respondents are concentrated among larger employers, a surprising 26 per cent of employees are not members of any pension scheme offered by their employer. This means that the decisions these employers make in relation to auto-enrolment will have a nationally significant impact on the success of personal accounts as a measure to increase the numbers of people saving for retirement.
The 15th Annual Pensions Administration Survey, published on 3 June, surveys schemes with a total membership of more than six million people. This year’s Survey reveals that, as a result of the introduction of personal accounts, 53 per cent of employers said that they would review their schemes and 31 per cent of schemes were likely to revise the benefits offered to members.
As a means to contain these likely increases in cost, a quarter of employers said that they may auto-enrol some employees into personal accounts rather that auto-enrolling all employees into the company scheme. Although it is expected that this will soften the cost implications, it may cause challenges for the recruitment and retention of staff.
Commenting on the results, Mike Addenbrooke, managing director of Capita Hartshead, said: “It would seem that a significant number of schemes are thinking of moving to auto-enrol employees into personal accounts. This will of course greatly reduce the number of employees who are currently making no pension provision, which is in line with the Government’s desire to increase the number of people saving for retirement. It is particularly reassuring that the Survey goes on to show that the vast majority of schemes (95 per cent) expect this shift not to have any adverse effects on their current schemes, and only five per cent said that it will lead them to close their scheme in favour of personal accounts for all employees.”
He concluded: “But while schemes may not be expecting any adverse effects, half of those surveyed do expect that the introduction of personal accounts will cause a review of existing company pension arrangements.”
Almost ninety per cent of ten pension schemes welcomed the Pensions Regulator’s Codes of Practice and guidance, according to results gleaned from Capita Hartshead’s latest Pensions Administration Survey, published on 3 June.
The 15th Annual Pension Scheme Administration Survey revealed that 84 per cent of schemes felt that the Regulator has used its statutory powers correctly since its inception in 2005; an impressive result given the Regulator’s wide remit.
The Survey also shows the principal means by which trustees comply with the Regulator’s ‘trustee knowledge and understanding’ requirements; these include training by third-party advisers (97 per cent), training via the Regulator’s online trustee toolkit (77 per cent), and regular attendance at seminars (69 per cent).
Commenting on the results, Mike Addenbrooke, managing director of Capita Hartshead, said: “It would seem that most schemes give the Pensions Regulator their vote of confidence, and this year’s results show a proactive approach to training and adviser reviews.”
He added: “The Survey showed that regular trustee training is almost universally in place, meaning that members can rest assured that their schemes are being run more conscientiously than ever.”
On 25 April, the Government issued a consultation paper on ‘Amendments to the anti-avoidance measures in the Pensions Act 2004’ which proposes an extension to the Pensions Regulator’s ‘moral hazard powers’.
The Pensions Regulator was granted ‘moral hazard’ powers in the Pensions Act 2004 which meant that an order could be placed on certain categories of person to make additional contributions (Contribution Notices) to, or provide financial support (Financial Support Directions) for, defined benefit pension schemes.
Currently, a Contribution Notice may be issued if there is a behaviour which is intended to prevent the recovery of a debt from an employer under section 75 of the Pensions Act 1995, or to prevent (or reduce) a debt becoming due. A Financial Support Direction requires a parent or other associated company to support a scheme where the sponsoring employer is a service company or is insufficiently resourced.
A corporate transaction that has the effect of reducing the security of a pension scheme’s benefits (e.g. by reducing an employer’s assets or by weakening the strength of an employer’s covenant) may result in the Regulator using these ‘moral hazard’ powers. Their introduction has resulted in parties to a corporate transaction seeking clearance from the Regulator to ensure that these powers are not used against them in the future. To date, the Regulator has used these powers only once.
The main proposed changes to the current requirements are summarised below:
• Clarification on the conditions for issue of a Contribution Notice
A Contribution Notice can be issued following a series of events, rather than in response to a single act or omission. As this is a clarification of current legislation, it is considered to have been in force since 27 April 2004.
• Removal of ‘good faith’ requirement for issuing a Contribution Notice
The current requirement that a Contribution Notice can only be issued against a party for acts or omissions which have had the effect of preventing a debt becoming due where made ‘other than in good faith’, is to be removed.
• Change to the test applied when issuing a Contribution Notice
The test to be applied before issuing a Contribution Notice is to be amended. It will include additional circumstances where an act, or a failure to act, was materially detrimental to the likelihood of a member receiving current and future benefits from the scheme. The focus of any transaction would therefore be on its effect rather than on the motivation of the parties involved in the deal.
• Financial Support Direction to be issued among a number of parties
Currently, a Financial Support Direction can only be issued against a single person associated with or connected to the employer, where the employer is insufficiently resourced and may therefore be unable to meet the scheme provisions.
An amendment has been proposed so that the resources of the whole group of companies can be taken into consideration when judging whether to issue a Financial Support Direction where there is an under-resourced employer, rather than requiring the Regulator to identify one single person who is sufficiently resourced to enable the issue of a Direction.
The group of persons should be associated with or connected with each other and not simply connected to the under-resourced employer sponsoring the pension scheme.
• Bulk transfers
Amendments have been proposed to ensure that the Regulator’s powers are not frustrated where there has been a bulk transfer of members from one scheme to another. There are two changes to note:
i) if the Regulator would have issued a Contribution Notice but for a bulk transfer, the proposed changes will now permit this even after the event; and
ii) if the bulk transfer is regarded as being detrimental to the member’s benefits (e.g. where the new employer is less able to fund the scheme) then a Contribution Notice may also be issued.
• Statutory defence
A statutory defence is proposed in relation to Contribution Notices if a party can demonstrate that they could not reasonably have foreseen the negative effect of a corporate transaction.
The Regulator will not use its extended powers during the period prior to the enactment of any legislation, unless the use of its power relates to one of a number of actions or situations listed in the consultation.
The proposed changes are in response to the launch of new business models in the pensions market with the Government intent on ensuring that the Regulator’s ‘anti-avoidance’ powers are appropriate in addressing any materially detrimental risk (without imposing undue burdens on pension schemes or employers). In particular, the Government is focusing on businesses which look to sever the link between the employer and the scheme in order to operate a well funded scheme for profit. The retrospective nature of these dates is intended as a means of preventing ‘undesirable market behaviour’ prior to the implementation of the new regulations.
The changes discussed in this article are only at the consultation stage and are therefore subject to change. However, any change is likely to be retrospective, and parties to an ongoing corporate transaction should take appropriate advice to ensure they are not subject to any future action by the Regulator.
The consultation closes on 20 June 2008.
On 9 May 2008 the Pensions Regulator issued guidance entitled ‘Occupational DC schemes – Good practice in member retirement options and the open market option’, which sets out trustees' responsibilities in providing retirement options and good practice guidance.
The aim of the guidance is to encourage trustees and employers to:
• think carefully about the retirement options offered by their scheme and to follow good practice that is likely to lead to informed decisions being made; and
• recognise and emphasise to members (and dependants) the advantages of obtaining financial advice from an appropriately authorised adviser.
The guidance applies to all registered occupational schemes that provide benefits on a defined contribution (DC) basis or provide pensions based on a cash sum at retirement. This includes AVC arrangements in an occupational scheme, regardless of whether other DC benefits are provided, but it does not include Group Personal Pensions.
It is accepted that processes for providing retirement benefits vary between DC schemes and that what works for one scheme may not work for another. However, the guidance recommends that trustees should, as good practice, ensure that the retirement process meets the needs of the scheme and its members and that it is clearly set out and understood by the parties involved.
Trustees have a duty to ensure good governance of the scheme and in doing so must comply with legal requirements. This guidance emphasises the legal requirement that before payment of a pension from a money purchase arrangement commences, the scheme must have provided the member or dependant with the opportunity to select a lifetime annuity from a provider of their own choice, known as the Open Market Option.
In addition, trustees should have an appreciation of the retirement process and the issues that may arise so that when they undertake any review, relevant questions can be raised with their advisers. The trustees should then be in a position to make informed decisions on the best approach for their scheme.
New developments in the area of DC retirement provision may mean that trustees need to amend their processes or scheme rules to take advantage of these as and when they arise.
Support for the member
The Financial Services Authority has suggested that some people may be able to improve their annuity by up to 30% simply by shopping around, and there is scope for even greater improvements if the member qualifies for an impaired life annuity. With this in mind, the Pensions Regulator recommends that trustees emphasise the benefits of obtaining independent financial advice to their members when considering their retirement options.
The guidance recommends that as good practice, a scheme should provide support to its members (or dependants) to enable them to make informed decisions specific to their own situation at retirement.
There are three broad strategies identified that the trustees may wish to adopt:
Assisted Choice - The scheme facilitates independent financial advice
Limited Choice - Trustees appoint an annuity broker to search the market and find a competitive quote on a basis chosen by the member.
Default - Trustees appoint an annuity broker to search the market and find a competitive quote on a basis determined by the trustees.
Monitoring the outcome
In order to determine the effectiveness of their retirement processes, trustees are encouraged to monitor the process for their scheme and make improvements where necessary.
Other influencing factors
Other factors that may influence trustees’ decisions when agreeing a process for setting up a pension include:
• the steps that should be taken if members (or dependants) do not respond to communications;
• how to deal with small funds;
• when to disinvest the fund; and
• special considerations that may apply to pension credit members (with benefits arising from a pension sharing order).
In most cases the scheme’s advisers will be able to discuss the options for dealing with these situations.
Although there are no new requirements noted in the guidance, there is a clear message that trustees should have efficient processes in place for converting DC funds into retirement income, whether this takes the form of a scheme pension or following the exercise of the Open Market Option.
The provision of information to members or dependants on their retirement options is high on the Regulator’s agenda. Emphasis is placed on the trustees communicating the availability of independent financial advice and other information such as the Regulator’s online guide ‘Your Retirement Choices’.
As part of the Regulator’s continued focus on DC schemes, it is anticipated that further guidance on related subjects will be issued in due course. These will be published on the Regulator's website as they become available.
The Pension Protection Fund (PPF) has issued a consultation on a Good Practice Guide for trustees of schemes to follow during the assessment period. The guidance is aimed at all occupational pension schemes that are eligible for the PPF and whose employer has become insolvent. It is suitable for both lay and professional trustees of such schemes.
The Guide sets out the principles that the PPF expects the trustees to adhere to during the assessment process, and provides practical guidance on the assessment process. These principles are:
• Competence and proficiency;
• Proportionality; and
• Working in partnership and with transparency.
The Guide provides examples of good and bad practice in each of these principles.
The guidance has been developed taking into account the views of pensions experts with experience of the assessment process, as well as the PPF’s own experience of the common issues experienced by trustees during the assessment period. It sets out the role of the trustee and the role of the caseworker in guiding a scheme through the assessment period, including reporting requirements and performance monitoring. It also provides a high-level overview of the assessment process.
The guidance will be updated regularly to include feedback received from industry. The PPF intends to release the guidance as an interactive web-based document, together with a PDF document that can be downloaded.
The closing date for the consultation is 25 July 2008.
The Good Practice Guide is available on the PPF’s website:
The Secretary of State for Work and Pensions, James Purnell, has announced that the Pensions Bill 2007 will be amended to allow automatic enrolment into Workplace Personal Pensions (WPPs) from 2012. WPPs are offered by employers but operated by a personal pension provider.
The announcement follows confirmation from the European Commission that automatic enrolment into WPPs is consistent with EU law. The Bill already provides for automatic enrolment into trust-based pension schemes, but the Government wanted to confirm that automatic enrolment into contract-based schemes would be allowed under the Distance Marketing Directive and the Unfair Commercial Practices Directive.
In practice, this will mean that group personal pensions, group stakeholder schemes and group self-invested personal pensions will be able to operate automatic enrolment once the legislation is brought into force. James Purnell estimated that this amendment will mean that an additional 4.7m people will benefit from automatic enrolment.
Pension Reform Minister Mike O’Brien welcomed the news:
“Automatic enrolment is key to combating the inertia that prevents people from saving and I am pleased that millions of people who work for an employer who offers a Workplace Personal Pension will be able to benefit from this important social reform.”
The Pension Protection Fund (PPF) has issued a consultation on the proposed method of paying equal compensation to men and women which would otherwise be unequal due to differences in Guaranteed Minimum Pensions (GMPs). The consultation was triggered by legal advice received by the Board of the PPF, which confirmed that the PPF must take into account any differences in scheme benefits that have arisen due to differences in the calculation of GMPs on account of gender.
This is because section 171 of the Pensions Act 2004 imposes on the Board of the PPF a duty to pay compensation on a basis that is no less favourable for a woman than it would be to a comparable man (or vice versa) for all pensionable service after 17 May 1990, the date of the Barber ruling. The comparator must be a person of the opposite sex who is employed by the same employer on like work, or work rated as equivalent, or work of equal value, and whose employment was pensionable under the scheme rules.
Following the Barber ruling, which established that occupational pension schemes must provide equal benefits for men and women, the Department of Work and Pensions’ legal advisers claimed that there was no need to equalise GMPs on the grounds that it was the overall benefits that had to be equalised (not the components making up the benefits). The issue of GMP equalisation was never addressed in the courts. This has meant that GMPs have not been equalised between 17 May 1990 and 6 April 1997.
The proposals in the consultation document only apply to schemes that enter a PPF assessment period and are, or have been, contracted out of the State Earnings-Related Pension Scheme (SERPS) with members with GMP entitlements accrued on or after 17 May 1990.
This legal advice affects section 143 valuations. A section 143 valuation must be completed during the assessment period to determine whether the scheme will enter the PPF. To complete a section 143 valuation, trustees will have to consider the issue of any inequalities in the GMP calculation when determining the compensation members would be entitled to if the scheme entered the PPF.
The Board of the PPF believe that trustees will have to choose between two general approaches:
• They must either determine whether a comparator exists for each member and, where one does, calculate an equalised amount of PPF compensation (allowing for differences in the GMP formula between men and women), or
• They must amend the scheme rules to achieve benefit equalisation for GMPs, without determining whether a comparator exists.
The minimum action that trustees will be required to take for a section 143 valuation would be to adjust compensation only where a comparator exists. However, the Board of the PPF anticipates that it is likely to be difficult and expensive for trustees to establish whether there is a comparator for every member. This method is also likely to result in delays in completing the assessment period, which is unlikely to be in the best interests of members.
The options for benefit equalisation for GMP are:
1. On retirement, the pension benefit should be projected forward for both the pensioner and for a comparator of the opposite sex in order to calculate which gender has the largest net benefit over their expected lifetime. The pension payable should be that of the gender that receives the higher amount over that period.
2. The comparison of the total male and female pension should be made when the pension comes into payment and at least annually once the pension is in payment. The pensioner should be paid the higher of the male or female estimate that applies in their particular case at each annual pension payment date.
3. The comparison of the male and female GMP and then the male and female pension in excess of GMP should be made when the pension comes into payment, and at least annually once the pension is in payment. The pensioner should be paid the higher of the male or female GMP and the higher of the male or female excess over GMP that applies in their particular case at each annual pension payment date.
4. The comparison of the GMP should include the additional pension paid by the State. This is because where an individual’s GMP is less than the SERPS benefit foregone, then the State can pay an additional amount to bring it up to the SERPS amount.
The Board of the PPF favours the partial application of method two for schemes that have entered an assessment period. This method will result in members receiving the higher of the (overall) pensions payable to two individuals who are equal in every respect except gender.
The PPF has confirmed that it will review the compensation it pays for schemes that have already entered the PPF to ensure that compensation is equal between men and women wherever possible.
The closing date for responses to the consultation is 28 July 2008. A summary of the responses to the consultation and the approach chosen to adopt to benefit equalisation for GMPs will be announced during the autumn of 2008. This will be covered in a future edition of Pensions Express.
To view the consultation document, please visit:
Pensions Tax Simplification Newsletter 33
HM Revenue & Customs (HMRC) has published its latest Pensions Tax Simplification Newsletter - the main points are summarised below.
• Registered Pension Schemes and the disclosure regime
A reminder has been issued regarding the tax avoidance scheme disclosure regime. Registered pension schemes (unlike employer-financed retirement benefit schemes) are specifically excluded from disclosure requirements for standardised tax products. However, there are exceptions where employer funding and / or scheme investments seek to obtain a tax advantage.
Click here for further information on the disclosure regime and Registered Pension Schemes.
• Regulation making powers in the Finance Bill 2008
Guidance has been published regarding the regulation-making powers in the Finance Bill 2008, and HMRC has confirmed that these will not become law until the Finance Bill receives Royal Assent. This is expected to happen in July.
• Online system error messages
During January 2008, some customers reported receiving a 'system error' message when completing their Pension Scheme Return on Pension Schemes Online.
HMRC has identified that this was a result of multiple clicking on the 'next' button on the page 'Land or interest in land, acquired at arms length'. A fix for this will be implemented in October 2008.
• New Helpline Number
The Pension Schemes Services helpline has recently changed to a ‘lo-call’ rate number:
0845 600 2622
Newsletter 33 can be accessed in full at:
Money Laundering Registration - Further extension
HMRC has announced that the deadline for registering a business regarded as a Trust or Company Service Provider (TCSP) will be extended from 31 May 2008 to a future date yet to be announced.
The reason for this extension is a delay in the publication of revised guidance from HMRC, which will set out clearly the businesses that HMRC expects to register. HMRC has stated that the extension will continue until at least four weeks after publication of this guidance.
HMRC advises that any parties that have not yet registered may wish to delay registering until the updated guidance is available. Those that have registered do not need to do anything further at this time.
The PPF 7800 Index
The latest PPF 7800 Index revealed an overall improvement in the aggregate funding position over April 2008.
As at the end of April 2008:
• The aggregate funding position of the schemes improved to a surplus of £30.3bn from a deficit of £23.6bn at the end of March 2008. The April outturn is the first surplus in 4 months, although the aggregate funding position of the schemes is worse than it was a year ago (there was a surplus of £88.3bn in April 2007).
• For those schemes in deficit, the overall deficit improved to £55.5bn from £81.3bn at the end of March 2008.
• For those schemes in surplus, the overall surplus improved to £85.9bn from £57.7bn at the end of March 2008.
For further information on the PPF 7800 Index, please follow the link to the PPF website:
The latest PPF 7800 Index revealed an overall improvement in the aggregate funding position over March 2008.
The figures allow for two factors in addition to the impact of financial market movements, which are: