Pensions News Bulletin February 2016
1. Pension Freedoms: 1 Pension Restrictions: 0
The pension freedoms, which came into effect in April 2015, gave those aged 55 and over the ability to access their retirement savings flexibly. The government’s response to the Freedom and Choice in Pensions consultation, published in July 2014, made it clear that the government wanted to ensure that everyone in a defined contribution scheme could access their pension savings flexibly even if their pension scheme did not offer flexible access under its own rules.
To ensure flexibility was accessible to all, in 2015, the government strengthened the right to transfer to allow people to switch pension provider if their existing one did not offer the flexible access options they wanted.
However, after the reforms took effect it became apparent that some pension members were facing several barriers when seeking to transfer their pension or access their pension savings flexibly. These barriers include:
- excessive early exit charges,
- complexity in the transfer process,
- lack of understanding,
- a need for financial advice.
During February the government published its response to the early exit charges and pension transfers consultation and set out the steps it will take to address the issues. During the course of the government’s consultation on this issue they estimate that people have accessed their pension pots flexibly around 400,000 times, withdrawing over £3.5 billion from their pension arrangements.
Early exit charges
Data collected by the FCA found that 84% of those eligible to access the freedoms, (individuals aged 55 or older) did not face an early exit charge. However 358,000 (9%) face early charges of between 0 and 2% of their fund, 165,000 (4%) face a charge of 2% to 5% of their fund and 147,000 (3%) face a charge of 5% or more. This is in addition to annual charges and sometimes heavy commission related charges they would have paid during the course of their pension investment.
It is important to note that the government accepted that pension schemes and pension providers were acting lawfully in levying early exit charges as these were a standard feature of many older pension contracts. However times have changed. Some of these contracts would now be unlawful if entered into today and others would be inconsistent with current practices and expectations, such as thwarting the flexibility aim.
So the government will introduce legislation in the ‘Bank of England and Financial Services Bill’ to amend the ‘Financial Services and Markets Act 2000 (FSMA)’. This amendment will give the FCA a duty to make rules requiring relevant firms to limit early exit charges to a rate, or rates, set by the FCA following their further consultation.
Pension transfers, advice and guidance
Evidence gathered revealed that for the majority of individuals transferring between contract-based pension schemes experienced transfer times of 16 days on average but the average transfer time for trust-based pensions was much longer at 39 days.
Consumer bodies and advisory firms, raised concerns that reducing the statutory timeframe might weaken due diligence allowing more pension scams to succeed. The government has therefore decided to concentrate on improving current processes in three key areas:
- improved scheme administration, especially for trust based pension schemes, through greater use of standardisation and electronic transfer processes,
- streamlining the due diligence process, including establishing a quality assured ‘whitelist’ of trusted pension providers,
- improvements in member guidance and communication for individuals that may find the transfer process confusing (all of us!?)
The Pensions Regulator will introduce new guidance for scheme trustees to help ensure transfers are processed promptly and accurately. The government will make trust-based pension schemes more transparent and accountable for their performance in processing transfers through a new reporting regime; and Pension Wise will develop additional guidance on pension transfers in order to support individuals through the transfer process.
The government’s paper can be found here: https://www.gov.uk/government/consultations/pension-transfers-and-early-exit-charges-consultation
2. New DC Code of Practice.
The pensions regulator first published its DC Code of Practice in 2013 but, due to the many pensions changes and regulations since then, they have published a new code that has recently completed its initial consultation process with the industry and consumer bodies.
The new code is shorter than the current version as a good understanding of the relevant legal obligations is assumed. The legal requirement for an annual governance statement, signed on trustees’ behalf by the chairman of trustees has replaced the voluntary governance statement. The online scheme-assessment tool will be adapted to the new Code and the thirty-one ‘quality features’ that were the focus of past guidance are no longer mentioned as they underpin the common sense and regulatory obligations expressed.
The draft Code is divided into six sections:
- the trustee board (covering the appointment of a chair of trustees and the new rules for master-trust arrangements),
- scheme management skills (managing risk, trustee knowledge and understanding, managing relationships with advisers, service providers and sponsoring employers, and conflicts of interest),
- administration (the need for promptness and accuracy in core financial transactions),
- investment governance (documentation, setting objectives and strategies, monitoring and review, asset security and liquidity, and default arrangements),
- value for members (assessment, restrictions on costs and charges, and the charge-cap adjustment measure),
- communication (at retirement and on transfer, annual governance statements, initial registration and annual scheme returns, and whistleblowing).
A distinction is made between legal requirements and good practice. For example, the Regulator wants trustees’ to communicate the importance of contribution levels as a crucial determinant of their future fund size and for the scheme’s investment strategy to be informed by regular engagement with members about how and when they intend to access their pensions. Trustees are expected to consider additional information when communicating with members that might help them make decisions, for instance by making them aware of flexible benefit options when providing benefit illustrations.
The Regulator intends to produce practical guidance following a further consultation exercise in the spring and it’s expected that the revised Code will be laid before Parliament in May 2016 and come into force in July 2016.
You can download the new draft Code from here: http://www.thepensionsregulator.gov.uk/doc-library/dc-code-consultation-2015.aspx
3. Beneficial Ownership Transparency
At present it is possible to structure a trading company within a hierarchy of companies. One nested within another, within another and so on. At the end you do not know who is controlling the company and with whom you are really doing business. That is about to end or at least be improved on the way to an end.
The UK is committed to implementing an international (G20) agreement driven by the Financial Action Task Force (FATF) which aims to combat financial crime and terrorism through improving transparency of beneficial ownership information. It is expected that most of these commitments, apart from the public register (see below) will be implemented in 2017 through new UK Money Laundering Regulations.
The UK has already published a national risk assessment of money laundering and terrorist financing in consultation with the private sector and public including law enforcement agencies, regulators and policy makers. The outcome is that new regulations will ensure Company Law and Money Laundering Regulations define ownership and control criteria that identifies a natural person as the ‘beneficial owner’ of a company.
This legislation will oblige companies to know who owns and controls them, by requiring companies to obtain and hold adequate, accurate and current information on their beneficial ownership. Companies will also be required to make this information accessible to relevant authorities such as law enforcement, tax authorities, regulators and the financial intelligence unit.
Companies will also have to report beneficial ownership information to a central register and following a consultation, the UK has committed to make this register publicly accessible. This public register is expected to become operational in June 2016.
The same requirements will apply to trustees who must hold adequate, accurate and current beneficial ownership information for their trusts, including the settlors, trustees and beneficiaries. Mechanisms will be put in place to ensure that the relevant authorities as mentioned above have access to this information.
Financial institutions and other designated businesses and professions who undertake customer due diligence will be able to access this information whether on corporations or trusts.
Worthy of note is that information will be shared in line with bilateral and multilateral agreements, with foreign authorities such as law enforcement, tax and regulatory authorities.
Part of this work is a commitment to consult on extending beneficial ownership transparency to foreign companies investing in high value property or bidding on UK public contracts. Most people think this is long overdue so it is an area that will be watched with interest.
Thank you for reading.