Pension reforms came in to force on 6 April 2015. They represent the biggest change to the industry since A Day. Are you prepared for life under the new regulatory landscape?
The changes are the culmination of sweeping reforms to defined contribution (DC) pensions aimed at providing savers with flexible access to their pension savings and changes to the DC governance and charges regime. Key developments include:
- new options to provide pension flexibility for defined contribution (DC) pension savings and related tax changes; and
- the introduction of a new DC governance and charges regime.
The reforms also impact on certain aspects of defined benefit (DB) pension provision. In addition, technical amendments to the workplace pension reform regime will apply in April.
To help trustees and employers get ready for the post-6 April landscape, our pensions experts have prepared a series of alerts with four podcasts on the reforms. These cover:
A high-level summary of the key changes is below.
Flexible access - DCschemes
Last year's Budget Statement promised sweeping changes to workplace pension savings.
Flexible access to DC savings reaches a key milestone on 6 April 2015, the effective date for many of the changes. These include:
- reforms to the tax regime to permit flexible access to DC savings (subject to scheme rules or trustee use of overriding powers of payment);
- changes to the taxation of pension savings at death;
- introduction of a new 'Money Purchase Annual Allowance', triggered if an individual accesses their pension savings flexibly;
- amendments to the regime for existing and new drawdown funds;
- abolition of trivial commutation lump sums for DC schemes;
- the minimum age for most individuals taking small pots will change from age 60 to age 55. The limit for small pot payments was increased on 27 March 2014 from £2,000 to £10,000; and
- extension of the statutory right to DC transfers, removing the bar on transfers that applied if the member's pensionable service terminated within one year of their NPA.
Flexible access - DB schemes
Although the reforms focus on DC pension savings, they will have an impact on DB schemes.
The biggest impact for DB scheme trustees will be the requirement to ensure members receive appropriate independent advice for certain DB to DC transfer requests.
DB scheme trustees should also be aware of:
- the impact for DB schemes with money purchase AVCs;
- change to the regime covering trivial commutation and small pots; and
- issues surrounding partial transfer requests.
Governance - DC schemes
From 6 April 2015, new quality standards will, subject to certain exemptions, apply to defined contribution occupational and workplace personal pension schemes. The key governance aspects of these standards for trustees include:
- the requirement to appoint a chair of trustees;
- the production of an annual statement covering governance;
- the requirement for the chair to sign-off a statement confirming compliance with the new regime;
- focus on trustee knowledge and understanding;
- preparation and review of the scheme's statement of investment principles; and
- reviewing the scheme's core scheme financial transactions.
Charges - DC schemes
A charges cap of 0.75% will apply to qualifying pension schemes' 'default arrangements'.
From 6 April 2015, trustees will have to work out which of their funds are 'default arrangements' and test each default arrangement's level of costs and charges against the charges cap.
Trustees will also be required to:
- calculate the scheme's level of charges and transaction costs that are borne by the member;
- consider whether these represent good value for money; and
- include the level of charges and costs in the annual statement along with an assessment of whether this is good value for money.
Pension reforms - Key dates
27 March 2014 - Budget Statement and changes to drawdown and triviality thresholds.
17 July 2014 - Date of HMRC guidance for transitional provisions on pension commencement lump sums.
6 April 2015 - Start of new DC governance and charges regime.
6 April 2015 - Effective date for DC pension flexibility and related tax changes.
Pension reforms - Key documents
Trustees should be aware of some key guidance that has been issued by The Pensions Regulator and the Department for Work and Pensions (DWP). This includes:
- The Pensions Regulator's 'Draft essential guide to communicating with members about pensions flexibilities' (March 2015).
- The Pensions Regulator's 'Essential guide to governance standards and charge controls' (April 2015).
- DWP's 'Charge cap: guidance for trustees and managers of occupational schemes' (March 2015 ).
The Pensions team has also created a four-part series of alerts which will explore the impact on DC and DB schemes in more detail and cover the changes for the workplace pension reform regime. The first of these will be issued next week, focussing on flexible access to DC pension savings, with three others to follow in the build up to 6 April.