17th December 2015 Anne-Marie Winton and Rosalind Connor comment in Lexis Nexis PSL Pensions re Pensions end of year review—life in 2015

Pensions analysis: Our panel of experts looks back at the most important developments and challenges for pensions lawyers in 2015.

The experts

Ann Flynn, senior consultant and business development lead, Towers Watson

Rosalind Connor, partner, ARC Pensions Law

Anne-Marie Winton, partner, ARC Pensions Law

A view from the Market

What is your take on the pensions industry in 2015?

Ann Flynn: I have been involved in the pensions industry for 30 years and 2015 has been the biggest year I have seen, especially on the defined contribution (DC) side, outside of landmark changes such as pension simplification in 2006. The headline event this year has been the pensions freedoms changes, which has had a demonstrable impact on people’s decisions and behaviours before and at retirement stage. I think this trend will continue to evolve across the pensions industry. We have seen a massive spike in the number of people who deferred buying annuities and instead withdrew cash from their pension pots in May/June of this year, and a large increase in the number of people using the income drawdown option. So far, it is the smaller pots that are being taken in cash, suggesting that many DC retirees may have more than one source of retirement income, perhaps in defined benefits (DB) benefits. This market is definitely going to grow.

The other key shake-up this year was the Chancellor’s move, announced in the Summer Budget, to reduce pension tax relief for high earners. From April 2016, the government will introduce a taper to the annual allowance for those with adjusted annual incomes of over £150,000. This allowance cut comes in addition to a cut of the lifetime allowance from £1.25m to £1m, as announced in the March Budget. The latter change affects all pension savers and as DC pots mature, more people are likely to breach the lifetime allowance so registering for protection has become more critical.

These developments have given employees, trustees and members alike quite a lot to think about this year in terms of how to take advantage of the new opportunities on offer, and make sure they plan carefully to avoid tax penalties.

We are seeing pensions benefit design changes, and cash being offered to people in lieu of pension contributions. The reduction in the annual allowance is having an impact on pension plan design as employers are concerned that more of their staff may be impacted by the tapered allowance. As a result, some employers are reducing pension contributions to 10% of eligible earnings to avoid members breaching the tax allowance. At the same time, these members are being offered cash payments in lieu of pension contributions. In a recent survey of employers, 75% confirmed that they would be taking this approach. As there are now more members affected, employers are applying a reduction to the cash payment for employer NICs. We will definitely start to see more of this next year.

In his Budget speech, the Chancellor announced the start of a consultation process which will examine the case for reforming pension tax relief. One proposal on the table is a fundamental reform of the system, moving from an exempt-exempt-taxed (EET) system to a system which is taxed-exempt-exempt (TEE) and providing a government top-up on pension contributions. Should the government put their proposals into action, it would definitely have a profound impact on our pensions industry. I believe we will hear more on the outcome of the consultation in the 2016 Spring Budget.

Regulation and compliance have played a massive part in 2015. Towers Watson did some employer research this year, and we found that the thing that occupied their minds the most with their pension schemes was meeting their compliance obligations and being confident that they were doing everything they should be. Ultimately, most employers want to focus on the bigger picture and ensure they can deliver competitive benefits packages, but find that a lot of their time is spent adhering to all the rules and requirements that surround DC pensions today.

How has the market changed over the past 12 months?

The main thing is that people now have good flexibility with their pension pots and can take more cash at retirement but need to be aware of the tax implications of doing so. Pension administration has continued to improve and streamline since April 2015, making the process much smoother. Technology will continue to play a big part in our market helping people to make the right decisions at the right time and be clear on what it is they want to do with their pension pot.

The Pensions Regulator and the Department for Work and Pension (DWP) have turned the spotlight on the governance of DC schemes this year. In April 2015, the minimum quality standards for DC schemes were published. Albeit, there are still differences for trust-based and contract-based DC schemes the standards do provide greater clarity on how they should be governed and managed.

The biggest challenge for pension providers throughout the year has been the impact of the new pension freedoms and coping with the demand. There was a clear pent-up demand in terms of people wanting to take cash out of their pensions rather than choosing annuities. We have seen an eightfold increase in retirees taking cash–205,000 retirees since April 2015 have made DC withdrawals. This is a significant spike from an operational perspective across the pensions market. For many providers and administrators, there is also the operational challenge of ensuring they can handle the process and have the ability to pay people their cash if they want to take it, and also set up drawdown payments too.

Legal developments and practical impact

What legal developments have had the biggest impact on your practice in 2015?

Anne-Marie Winton: For my practice, because I have been doing quite a bit of employer-related work, I have seen the impact of pensions liabilities potentially tipping employers into insolvency. Pensions is a real commercial threat to the viability of otherwise robust businesses. It’s a shame–why should firms be penalised for what were good decisions taken years ago that now look like bad ones because of legislative change?

Rosalind Connor: The 2014 Budget changes that introduced pensions freedoms have brought a lot more complexity to pensions because of the need for earners to obtain financial advice before exercising their options. DC pension schemes have had to weigh up whether they want to offer these freedoms, which bring their own range of issues, from costs to HR planning. It has been a massive consideration for clients this year, because there was a general assumption that all types of scheme would offer the freedoms, but in the end many schemes haven’t, for a whole range of reasons.

The other main DC issue in 2015 was the introduction of 30-day vesting. From 1 October 2015, members whose only benefits under a scheme are DC benefits have vested rights and are entitled to deferred benefits after 30 days’ pensionable service (up from the current two years). This was a headache, as the legislation didn’t automatically write this change to vesting into DC pension schemes, so a lot of people were preparing the deeds at short notice to meet the deadline.

There have been a number of Pensions Ombudsman comments on pension schemes. The present Ombudsman is looking at things from a more legalistic perspective in terms of giving people a clear steer as to whether something is right or wrong, and whether it’s within the rules or not, which obviously has been very helpful. The Ombudsman has also made it clear that it is perfectly legitimate for people not to be sure whether it’s necessary to do guaranteed minimum pension (GMP) equalisation. This was very helpful for a lot of schemes that are grappling with this issue, particularly as contracting out is coming to an end next year.

One of 2015’s key cases was Re Merchant Navy Ratings Pension Fund [2015] EWHC 448 (Ch), [2015] All ER (D) 298 (Feb). While it probably doesn’t relate to many other schemes as the one in this case was very unusual (it was an industry-wide scheme with lots of competitors as employers), it raises the very pertinent question of whether a member, who is no longer in a scheme but is in employment and so enjoys better benefits, is an active member or a deferred member. This is almost on point with the really big question of whether salary linkage makes you an active member, because a lot of schemes have closed and yet retained salary linkage, and there are a lot of unanswered questions about how that works. Merchant Navy Ratings is clear that salary linkage does not make you an active member, and that makes a lot of difference to the way that schemes are managed. It was a big decision that really affected how we did the job on a day-to-day basis.

How have these affected your ongoing cases and working life? How have you dealt with these on a practical level?

Anne-Marie Winton: I aim to facilitate co-operative and collaborative negotiations between trustees and companies, but in a distressed situation, the parties can potentially pull in different directions, which can be stressful and demanding for everyone involved. The company directors are juggling their directors’ duties the trustee’s priority is to protect their members. The one thing that is absolutely certain is that the scheme is trundling inevitably into the Pension Protection Fund (PPF). In these circumstances, real tension can arise between what should otherwise be amicable relationships. In these situations, everyone needs to keep calm and share objectives. It’s helpful knowing in advance what the bottom line is for both sides before you get around the negotiating table. There may be tension and incompatibility, but you at least know where both sides are coming from.

Rosalind Connor: Pension freedoms have been a big HR issue, and have raised multiple questions. Occupational schemes are connected to an employer–does the employer want members drawing down and remaining in employment? Does that fit with its general HR policy? Is it looking towards flexible retirement, or actually just encouraging people to leave money in the scheme and then retire, all at once? There is a statutory override allowing trustees to put this in without employers’ consent, but trustees have generally been uncomfortable about doing that. They are conscious that it will involve more cost, leaving the employer out of pocket as a result. The end result has been that many schemes have not been too keen to offer pensions freedoms, as they perceive potential problems. This has been a big part of my workload for this year. In practice, many schemes have offered only one-off lump sums that extinguish the pension, often up to a limit, which then operate rather like a trivial commutation lump sum, rather than providing a new benefit.

30-day vesting has also kept myself and many others busy getting the deeds done by the 30 October deadline. If you haven’t done this work by now, you’re effectively too late.

The salary link point that came out of the Merchant Navy Ratings case has affected the way a number of schemes have done things. The judgment has been helpful in terms of giving us a lead and has allowed us to go back to clients with added certainty or a different position on a matter.

Have all of the expected developments of 2015 come to pass?

Anne-Marie Winton: The real nuisance is when we get very unexpected legislation that affects our clients with very little notice. There are scheduled timeframes for the issue of new pensions regulations but they sometimes can be rushed through and not always worded as best they might. Fortunately, this hasn’t happened this year.

One thing I would say is that the post-Budget freedoms for the pensions legal industry have been underwhelming so far, for the reason that a lot of DC schemes decided not to offer them. There has been a lot of publicity and interesting statistics surrounding the freedoms, but that has been in relation to insurer-based schemes (group personal pension plans, personal pension plans etc) and not so much to occupational schemes run by trustees. I’m not sure what would trigger the motivation for occupational schemes to take advantage of the freedoms next year, unless we have further legislation, or further freedoms are unlocked.

Rosalind Connor: A solid HMRC position on VAT on pension schemes is still awaited. There seems to be a lot of ongoing pushback, which has been surprising, and I think the industry has been slightly disappointed that there hasn’t been the necessary levels of engagement from HMRC. The VAT position on pension schemes has been significantly affected by a series of European cases–effectively, the position is generally better than we had previously thought it was. HMRC has discussed some proposals with industry bodies, but its final position is still awaited. Until then, the transitional provisions HMRC put in place at the last year are the only things people can work with. They have just been extended.

The pot-follows-member option seems to have been kicked into the long grass. Former pensions minister Steve Webb was keen on it, but I don’t think Ros Altmann is focused on it in the same way. There would need to be proper commitment at government level to lift it off the ground. Also, Webb’s pet project was defined ambition schemes. We have legislation on this, but it hasn’t yet been brought into force. We would need a politician with Webb’s level of enthusiasm for the project to drive it further. I think it’s gone away for now, at least for the medium term.

Clients and business developments

How has your business developed in 2015? Has this been a good year for work in your area?

Anne-Marie Winton: Personally, it’s been a unique year, because I have joined what is probably the first specialist pensions law firm in memory. We only started trading on 1 June 2015, but we have had a very favourable response so far, and have had both clients and lawyers wanting to join us. I believe we are filling a gap that hasn’t been filled by anyone else. And it does suggest that clients are clearly comfortable instructing specialist firms, as they have done for years with boutique litigation firms and employment law specialists.

Rosalind Connor: There has been a lot more law, which tends to mean there’s more work for lawyers. The shift towards more DC schemes and DC in general becoming more complicated has become quite a big issue for the pensions industry. Certainly, I have found myself giving more advice on the DC side of things than I used to. I have more DC clients too.

There has been continued and focused attention around liberation of pension schemes, and it shows no sign of abating. There may be fewer DB pension schemes than there were, but there is a lot more scrutiny of them and more work is needed to be done there.

There’s been more complex work around public sector schemes. More people have had to look at the serious issue of joining a public sector scheme rather than working with their own scheme or setting up their own. The new Fair Deal pensions policy has been a big challenge for a lot of public sector providers, as it is a new situation for many of them.

Read the full article on Lexis Nexis PSL Pensions here

The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. ARC Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.