Last year was a busy year for pensions. If you were hoping to catch your breath this year, you might want to stop reading. Instead of consolidation, 2017 promises to be another year of challenges and change for the pensions industry.
We've brought together seven key issues and trends that we think will define the year in pensions:
- Will the Green Paper deliver a red card to employers?
- Does LISA mean the end of higher rate tax relief?
- Reviewing the reforms - auto-enrolment to auto-escalation?
- How many master trusts will be left by the end of the year?
- Will this be the busiest year yet for DB risk transfer?
- Courting change - a busy year for pensions in the courts
- Pushing the button - Article 50 and Brexit
1. Will the Green Paper deliver a red card to employers?
As surely as the sun rises, a crisis involving pensions will provoke government intervention. With BHS and British Steel, last year had plenty of headline grabbing pension crises. This year will see the government's policy and, possibly, legislative responses. First up, DWP's Green Paper which is expected this month. Our predictions for what might be in it are below.
2. Does LISA mean the end of higher rate tax relief?
On 6 April 2017, the first Lifetime Individual Savings Accounts (LISAs or Lifetime ISAs) will be opened. The build up to their release has, so far, been muted. But they represent an important shift away from the current system of pensions taxation. Will the government go one or two steps further and reduce or remove higher rate tax relief? There has already been comment, to the effect that higher rate tax relief is poorly targeted expenditure (if the objective is to make fewer people dependent on the state in old age).
3. Reviewing the reforms - auto-enrolment to auto-escalation?
At the beginning of workplace pension reform, when policy became legislation and PADA turned itself into NEST, the DWP promised that the reform would be reviewed in 2017. Back then, this seemed an impossibly long way off. Will the review be a big pat on the back for the DWP? Or will it address some of the big issues surrounding access to and sufficiency of pension savings?
4. How many master trusts will be left by the end of the year?
The Pensions Schemes Bill will be passed into law this year. Will this spark a wave of closures and consolidations amongst the 85 master trusts currently vying for business? And how smooth and efficient will the transfer process be in practice?
5. Will this be the busiest year yet for DB risk transfer?
Will 2017 be the year in which risk transfer becomes mainstream? Over the past ten years, £70 billion of assets have been transferred to insurers. On top of this, £60 billion worth of longevity swaps have been entered into. Many are predicting a busy 2017, with some in the industry predicting that the bulk annuity market could top £15 billion.
6. Courting change - a busy year for pensions in the courts
There are plenty of important cases that will keep the courts and pension lawyers busy in 2017. Unusually, many of these decisions will be delivered by the Supreme Court, providing the final word on issues such as switches from RPI to CPI, the right to same sex survivors' benefits, equalisation and benefit change exercises.
7. Pushing the button - Article 50 and Brexit
This is one of the most obvious issues to affect pensions in 2017. It is also one of the most difficult to predict. Will we have a hard or soft Brexit? What will be the impact on pension scheme investment and risk management? Will pension policy start to diverge from the European system?
What are you most looking forward to in 2017?
In politics, the year will kick off with the inauguration of Donald Trump as the 45th President of the United States. Later on, elections in Germany and France could mark a further rise in the tide of populism.
If 2016 provided a lifetime of political excitement in the real world, how about escaping to Westeros for the finale of Game of Thrones? Or perhaps the release of the highly anticipated new Fleetwood Mac album? Whatever else catches your attention in 2017, there will be plenty of developments in pensions to keep you busy.
Will the Green Paper deliver a red card to employers?
In 2016, the issues facing employers and trustees of defined benefit pension schemes became front page news. BHS and British Steel were debated in Parliament and across the pensions industry and press.
This year will see the policy response to these crises.
The government has promised a Green Paper (i.e. a pre-legislation policy paper). This is expected to be published in the next few weeks. The debate is expected to focus on:
- the need (if any) for additional powers for The Pensions Regulator;
- the role of The Pensions Regulator in corporate transactions;
- recovery plans for schemes in deficit; and
- the role of the Pension Protection Fund.
In addition, The Pensions Regulator will continue to focus on scheme governance in 2017. It has promised a 'targeted education and enforcement drive'. The Pensions Regulator is aiming to clarify what it expects of trustees and also what its enforcement action will be when the expected standards are not met.
At the end of 2016, it issued its response to its discussion paper on 21st century trusteeship and governance. Some common themes amongst the responses included:
- Good governance is essential. There was widespread support for TPR's increased focus on driving-up standards, noting, however, that this should focus on trustees who need support and guidance.
- Employers need to do more to help trustees govern their schemes effectively. This includes providing time-off for meetings and training and also making sufficient resources available.
- Chairs should have leadership skills. Many respondents agreed that the chair of trustees should have demonstrable leadership skills but few thought that minimum qualifications for the chair or membership of a professional body would be helpful.
- There was little support for mandatory qualifications for trustees generally. Most respondents felt that the knowledge and skills of the trustee board should be taken as a whole with support from advisers and providers, rather than focusing on the knowledge or skill of a single individual.
- Diversity on trustee boards is important. Any solutions to governance challenges should not create barriers or discourage or deter good trustees.
- Higher standards and barriers to entry for independent trustees. There should be higher standards for independent trustees and barriers to entry for such trustees.
In relation to professional trustees, TPR is expected not only to set out the higher standards it expects of such trustees but also to define what it means by the term "professional trustee".
Does LISA mean the end of higher rate tax relief?
This year, the government is giving us Lifetime ISAs (LISAs) with one hand. Will it be taking something away with the other hand?
LISAs will be introduced on 6 April 2017. Any savings put into the LISAs before the age of 50 will receive an added 25% bonus from the government at the end of each tax year. There is no minimum amount which can be saved, but the maximum is £4,000 per year.
LISAs can only be used for:
- a deposit on a first home; and
- retirement savings.
If used as a deposit towards a first home, that home can be worth up to £450,000 anywhere in the UK. Accounts are limited to one per person, rather than one per home, meaning that two first time buyers can both receive a bonus when buying together. If used to save for retirement, the savings can be taken out tax-free after the saver's 60th birthday.
So, what does this have to do with higher rate tax relief for pension savings?
Under the current pensions system, the Chancellor only gets tax when pensions are taken as income. Contributions are made tax free (up to the annual and lifetime allowances) and investment returns are also exempt from tax (the so called exempt - exempt - taxed system).
LISAs are different. Your income is taxed as normal, but the investment return and retirement income are tax free (a taxed - exempt - exempt system). For HM Treasury, this has the advantage of providing tax income up front.
In addition, some commentators have suggested that too much tax revenue is lost providing tax relief for higher rate tax payers.
LISAs could be a standalone addition to the savings landscape. But, they could also be the first stage in reducing or abolishing higher rate tax relief.
The pensions industry will be watching Mr Hammond's budget speech this year with keener than usual interest.
Reviewing the reforms - auto-enrolment to auto-escalation?
This year will mark the fifth anniversary of the introduction of employer duties for the largest UK employers. 300,000 employers are now complying with their employer duties. As a result, seven million workers have been enrolled into pension savings.
As promised in the earliest days of the reforms, the government will now take stock. The government has said that its review into automatic enrolment will be aimed at:
- encouraging as many people as possible to save into a workplace pension; and
- securing their financial future.
What will this mean in practice? Will the review of workplace pension reform be a big pat on the back for the DWP? Or will the government surprise the industry by announcing some fundamental changes? Does it, perhaps, think it has largely achieved the first of those two objectives without coming very close to achieving the second?
Two obvious areas for review and possible change are:
- individuals who have more than one job and who do not reach the automatic enrolment earnings threshold in any single job; and
- self-employed people.
Is a more radical approach needed? Plenty of commentators in the pensions industry have pointed out that the minimum contributions levels are not sufficient for many workers to achieve a replacement income in retirement. Will the government consider a one off increase in the contribution levels or introducing auto-escalation?
Regardless of the government's review, 2017 will see important changes for the National Employment Savings Trust (NEST). From April 2017, NEST will have its annual contribution limit removed and the ban on transfers in and out of NEST will be abolished. This will put NEST in a stronger position, especially in an industry facing a wave of consolidations.
How many master trusts will be left by the end of the year?
The explanatory notes to the Pension Schemes Bill 2016/17 state that there are 84 master trusts. It suggests that there are roughly four million savers across these 84 master trusts and they hold £8.5 billion in assets.
So far, so good. If the members and their savings were spread evenly, each scheme would have just under 50,000 members and over £100 million in assets.
But, perhaps unfortunately for the pensions industry, members and their assets are not spread evenly. Together, the 'Big Three' of NEST, The People's Pension and NOW: Pensions have over £2.25 billion in assets.
NEST has over three million members. The People's Pension and NOW: Pensions have roughly one million each. Individuals who change jobs may have pension savings with a number of providers. But, even if we take this into account, it is clear that the Big Three account for the lion's share of the four million savers identified in the explanatory notes to the Pension Schemes Bill 2016/17.
So where does that leave the other 81 master trusts?
But both the membership numbers and asset levels strongly suggest that there will have to be consolidation in the market. For some master trusts, there is a lack of clarity about where the costs of merging or winding them up will come from - it is an area fraught with difficult issues.
And this is where the Pension Schemes Bill and The Pensions Regulator come in. Expect to see consolidation, closure and managed transfers in 2017.
Will this be the busiest year yet for pension scheme risk transfer?
In 2007, Hunting PLC and the Hunting Pension Scheme completed the UK's first risk transfer deal of over £100 million. By 2014, the market for buy-ins and buy-outs had risen to £13.2 billion before falling back.
Could we mark the tenth anniversary of the landmark Hunting transaction by seeing the market surge past its 2014 peak to reach £15 billion?
Reports from insurers and advisers suggest that this could be the case. There are a number of reasons for this:
- increasing levels of insurer capacity and demand - insurers are raising additional capital and Scottish Widows and Canada Life have joined as active new entrants to the market;
- high levels of market volatility could open windows of favourable pricing;
- scheme demand - there are plenty of pension schemes that are on the path to risk transfer but are waiting for the right conditions. Insurers are reporting a record level of enquiries from pension schemes.
Expect to see some headline grabbing buy-ins, buy-outs and longevity swaps over the course of 2017. In addition, there promises to be a steady but sizeable flow of work which takes the overall market to new heights. All of this is, however, dependent on market conditions. With high levels of volatility, today's favourable conditions could easily sour.
Courting change - a busy year for pensions in the courts
The courts will be busy on pension matters throughout 2017. These are some of the highlights:
- Barnardo's and others v Buckinghamshire and others - in 2016, the Court of Appeal approved the QinetiQ and Arcadia decisions on switching between RPI and CPI for the purposes of revaluating pensions in deferment and increasing pensions in payments. The Supreme Court has given leave for the appeal which is expected to be heard in 2017.
- O'Brien v Ministry of Justice; Walker v Innospec and others - after the ECJ's decision in Parris v Trinity College Dublin (2016) it looks more likely that the Supreme Court will follow the Court of Appeal's decision on entitlement to pension benefits following changes to discrimination law affecting part-time workers and civil partners.
- Bradbury v British Broadcasting Corporation - Warren J's High Court ruling found that the overall conduct of the BBC when it imposed a cap on increases to pensionable salary did not give rise to a breach of its implied duties. Will the Court of Appeal reach a different conclusion? The case will be heard 28 February - 1 March 2017.
- IBM United Kingdom Holdings Ltd and another v Dalgleish and others - the Court of Appeal has granted leave to appeal the High Court's 'breach' and 'remedies' judgments. This will open several new chapters in a legal saga that has already exceeded Crime and Punishment in words used in the decisions.
- Safeway Ltd v Newton and another - at the beginning of last year, the High Court refused to grant a declaration to Safeway Ltd confirming that normal pension age had been equalised at 65 with effect from December 1991. An appeal is listed to be heard by the Court of Appeal on 4 July 2017.
Pushing the button - Article 50 and Brexit
We couldn't provide a forecast for 2017 without mentioning Brexit.
On 3 November 2016, the Divisional Court handed down the judgment in Miller and Dos Santos v Secretary of State for Exiting the European Union. A month ago, the Supreme Court heard the appeal.
The beginning of 2017 will be dominated, politically at least, by questions of how and when the UK triggers Article 50 of the Treaty of European Union.
Regardless of the Supreme Court's decision, the government remains committed to plans to trigger Article 50 by the end of March 2017.
For the pensions industry, the key issues will be market stability, investment risk, inflation and interest rates risks, and the impact on the strength of employer covenants. With the inauguration of Donald Trump as the President of the United States and elections in France and Germany, it seems likely that we will have to get used to living through economically challenging and uncertain times.
It is, however, very unlikely that Brexit will result in any material changes to the regulatory or legislative framework for pensions in the UK in the short or even medium term.
What else is coming up in 2017?
If all this wasn't enough, there are plenty more developments to look forward in 2017:
- Pensions advice - the government will introduce a single body to replace Pensions Wise, the Money Advice Service and The Pensions Advisory Service.
- GMP equalisation - the government's consultation is still open. Over the course of the year, we can expect the consultation response and a final position to be reached. It is, however, one of those issues that has a habit of taking longer than expected, so it could easily be 2018 before we get the full picture.
- VAT and investment advice - will HMRC stick to its current deadline of the end of 2017 to issue definitive guidance on reclaiming VAT on pension scheme investment advice? Or will we have another extension of the transition period?
- WPR - final staging dates for employers that were in existence as at 1 April 2012 - by the end of 2017, almost all employers will have staged. The only employers who will stage in 2018 are those who first paid PAYE income on and after 1 October 2016.