Andrea Bull: Hello and welcome to this webinar on the end of defined benefit contracting out. Today's presentation will last for approximately 35 to 40 minutes and we'll have time for your questions at the end.
Just a couple of housekeeping points first. The webinar player has a few simple controls. The most important are the volume adjustments and the full screen option which are in the bottom right hand corner of the player.
There are also some tabs along the top which you can click on to access details of today's presenter, Jason, the slides, our recent alert on the end of defined benefit contracting out and HMRC's latest countdown bulletin.
You can ask us questions at any time, just click on the 'ask a question tab', type in your question and click submit. We'll try to answer as many as we can in the time available. There's also a poll tab. Don't worry too much about that, we are going to be a bit interactive today and so some polls will flash up on your screen and we'd invite you to participate in those. If for any reason you can't see the current slide, just click on the slide tab to get back to it.
So over to today's presenter, who is Jason Coates, a partner in the pensions team at Wragge Lawrence Graham & Co.
Jason Coates: Thanks Andrea and good morning everybody in the audience. Welcome to the webinar on the end of DB contracting out.
So DB contracting out, it's all about the 6th of April 2016.
It's about preparation, preparation, preparation and now is the time to start preparing.
So we're going to go through a number of issues which you need to start thinking about if you haven't already in relation to preparation for the 6th of April 2016. So, from an employer's perspective in particular the cessation of DB contracting out does have some potential issues.
- First of all, what will this change cost?
- What does it mean to our benefit design?
- Are there ways in which we can mitigate the cost?
- And could this be a trigger for bigger change to our scheme?
- Finally, whether the scheme's open or already closed, I'm afraid we all need to think about GMPs.
So just a quick recap on the basics. Why are we facing these changes? The state pension system will change from next April. Currently we have a basic state pension and on top of that a second pension formerly called SERPS [State Earnings Related Pensions Scheme] and then S2P [State Second Pension].
On top of that bedrock, companies have set up occupational pension schemes and for some time now schemes were able to contract out of the state's second pension so that members got benefits under the occupational scheme rather than the State Second Pension and the consequence of that were lower National Insurance contributions.
But from next April the state pension system will change. There'll be a new single tier flat rate pension and no longer any DB contracting out.
For schemes which are contracted out and are open to accrual that means that there will be higher National Insurance contributions for both employers and active members. So what is the financial impact of that?
Well, this slide shows a summary of the financial impact. For the employer there's an increase of 3.4 percent of band earnings. Band earnings, just a reminder, is the earnings between the lower earnings limit and the upper accrual point; broadly £6,000 and £40,000.
The impact for members is an increase of 1.4 percent on their band earnings. The overall net impact for any particular employer and member will depend but I have seen some figures suggesting that the outcome for typical scheme might be a two and a half percent increase in contributions for the employer and a percent for the member.
For schemes which are predominantly those which are still open to accrual there are benefit design impacts too and the reason for this is that we're no longer comparing apples with oranges. The way in which occupational schemes have been established in the past to interact with the state pension system will obviously change or face change because of the change to the state pension system.
The next slide shows you a few examples of where this is coming through and a bit later I'll take you through some specific examples of some rules we've been looking at with our clients. But the benefit design impact potentially impacts for all types of scheme:
- defined benefit predominantly; but potentially also
- defined contribution;
- for schemes which are predominantly open; but also
- those which are closed already to accrual; and potentially
- for schemes which are contracted in as well as contracted out and that's because many schemes will have benefit design rules which interact and have reference to the existing state pension system which will no longer be there post next April.
It is a bigger impact though for schemes which are open to accrual and contracted out on a defined benefit basis, but for those schemes deferred benefits, on the whole, will have crystallised under existing definitions, so the impact is likely to be felt mostly in relation to the active members. Just as a quick aside, we do have a checklist of all the issues that you need to think about in relation to the end of DB contracting out. Please feel free to email me. My email contact details are available on the webinar and we can send that through to you. Over to Andrea on the first poll.
Andrea Bull: Ok. Hi everyone. Here, it's coming up for you now. So, how would you describe schemes' readiness for the April 2016 contracting out changes?
Very prepared, quite prepared or not prepared?
I'm going to give you all a few moments now just to get your answers in there. So how are you feeling? Very prepared, quite prepared or not prepared? Ok, just give you another few seconds to get your answers in. They're coming in thick and fast now. We're going to show the results now. So, we've got 53 percent of you saying quite prepared. We've got 35 percent not prepared and 11.8 percent of you are very confident, very prepared. Good news for you guys.
Jason Coates: Ok. Thanks Andrea. So moving on then, I mentioned just now that we're going to look at some specific rules that we've been looking at for some of our clients already and there'd be no pensions law webinar that would be complete without a look at such rules, so here the first one is looking at a pensions underpin.
This is a slightly unusual scheme. It's actually a defined contribution scheme with a contracted out defined benefit underpin that used to be based on the GMP and then a reference scheme test.
We've been looking at what this rule might mean post April and if you take a look at the wording in red, you'll see that this particular scheme has actually written into its rules a reference scheme style underpin that means that the defined contribution benefit can't be less than this particular reference scheme underpin.
And the question that we're looking at is whether or not that underpin will have meaning past 6th April [2016], and whether or not it could be removed in the future. You'll see that this particular rule makes references to phrases such as the lower earnings limit, the upper earnings limit and the upper accrual point.
And the legislation which contains those references (which is in the Pension Schemes Act section 181 and the Social Security Contributions and Benefits Act 1992) will continue to have those definitions post April for various different reasons.
In conclusion, this rule will actually have meaning post 6th of April [2016], those phrases will still exist and it will be capable of understanding what the rule is.
There is, though, still an issue of course for this scheme to decide whether that underpin should remain post 6th April given that its purpose was to have a contracted out reference scheme underpin.
It's very common, as we move onto the next slide, for schemes to have offsets in the definitions of pensionable salary which feed into final pensionable salary and the calculation of the pension accrual. And there are generally two types. This first slide is the first type. So here we can see that pensionable salary is the greater of two things, the first being the salary of the member, so their earnings, but less an amount equal to the annual rate of the basic flat rate state pension for a single person.
So there's a specific offset relating to the state pension as it currently exists. And again the question here is whether or not that will have meaning so that this rule will be effective post 6th April when the state pension system changes. In short, this rule will still have meaning post 6th April because the basic state pension on the current or old style will still exist and will continue to be published in the Social Security Contributions and Benefits Act [1992]. And that is section 44(4) [of the Social Security Contributions and Benefits Act 1992] for those of you would like to have a look at it.
But it will be referenced because those people currently enjoying the existing state pension will continue to receive it post 6th April and therefore the government will continue, as far as we're aware, to publish in that statute the new state pension.
There is of course the question again - even though it will have meaning, whether or not it remains sensible for future service going forward for that to be the precise definition or not.
Ok. Here's another one. So this one is probably a bit more common than the one we've just looked at. This one also has an offset, but it's an offset based on the lower earnings limit.
And as we discussed in relation to the first example on the underpin, the lower earnings limit definition will continue to be relevant. It will continue to be able to be found and therefore again this definition will also have meaning and be capable of application going forward.
The employer will want to consider with the trustees, in the same way as the others, as to whether that's appropriate, but it certainly will have meaning and not just fall away.
And of course that is important because if any of these underpins or offsets were to be removed automatically because they have no meaning, there could be an unwanted and unexpected increase in pension liabilities for the scheme.
Moving on to the last example - this is an example of a level pension for the bridging pension, so this is where scheme rules provide that as a member passes through their state pension age, their scheme pension is adjusted so that overall as and when they start to receive their state pension they get a pension which is more equal over that period, rather than having a particular uplift when they reach state pension age.
Now this is one in a rule where it may be relevant to your deferred and, indeed, even pensioner members, where those pensioner members are below state pension age as well as active.
So looking at the words here in red, basically what this talks about is that when you're looking to provide the level pension through state pension age, there's an adjustment and you'll see that there is a reference here to the basic state pension.
So again we have to consider whether or not that will have relevance going forward, and I think in this type of example, given the clear wording in the brackets which shows that the intention of this is to be able to provide something more equal through state pension age based on the state pension, my view is that you can interpret this in a purposive way to reflect the new state pension as well as the old for those for whom it's relevant.
It's worth just mentioning before we change off this slide that when doing this exercise it's probably also worth having a look at definitions of state pension age and GMP age to make sure that your rules are in line.
You'll see here in this particular rule right at the beginning that state pension age is defined as 65 if male but by reference to a statute if female and actually that's not quite right and doesn't quite reflect the current legal position, so those rules will also need to be considered and updated.
The other thing you'll need to think about in terms of your rules is what I'd describe here as cleaning out all the contracted out things so schemes which have been contracted out or which currently are contracted out will typically have an appendix which has GMP model rules in.
You may also have some standard clauses which deal with contracting out which will refer to how the scheme is currently contracted out. Unlike for DC contracting out (and when that went basically protected rights were abolished and disappeared into thin air), it won't be the case, unfortunately for everybody, that their GMPs will go up in smoke.
GMPs will still be around and indeed we're waiting for final regulations which we've seen in draft to know exactly what the new regulations will be in terms of what schemes need to continue complying with in relation to GMPs. But it will be necessary just to have a look at how those things are reflected in the scheme to tidy them up.
Andrea Bull: Ok. We have another poll for you now. Just going to put it on the screen right now. So, have you reviewed your scheme rules to see how they are affected by the April 2016 contracting out changes?
So, it's a simple yes or no here.
So have you reviewed your scheme rules?
Again I'll just give you a few moments to get your answers in here.
Ok, a few more seconds for people to give their answers and then we'll show the results. Ok, I'm going to show them now.
So we have got nearly 70 percent of you saying no you haven't yet and 31 percent said yes.
Jason Coates Ok, well thanks for that. So, hopefully the previous slides we've just been through will give everyone a bit of an indication for those who haven't yet reviewed their rules as to the areas in which you need to take a look.
Ok, we're going to go back now to thinking about the employer's position and we're just going to focus for a moment on schemes which are currently contracted out on an active basis.
So for the employer there is in fact a way out, a way of mitigating the increased National Insurance contributions that we discussed earlier. In effect, to the degree to which the employer wishes to do so, there is an ability to pass over the costs to the employer to the member.
This is known as the statutory override and it's found in section 24 of the Pensions Act 2014 and schedule 14 of that Act. It's apparently very straightforward in that it gives employers a statutory power that's outside of the scheme rules and outside of the scheme's amendment power to amend the scheme to mitigate these increased National Insurance costs.
So it doesn't require the employer to get trustee consent and it doesn't require member consent. And it gives the employer the option to seek to offset these increased costs either by increasing the member's own contributions or by reducing future service benefits or indeed some combination of the two.
It is worth just noting because it may be relevant to some of the audience that this statutory override does not apply to public sector schemes and it does not apply to those members who are protected persons who have specific statutory protections which came about from former privatised industries.
Now, the statutory override is, as ever, apparently straightforward but actually once you get into it there is a bit more to think about. And you'll need an actuary to help you and the actuary will need to effectively make sure that what the employer is proposing to do in terms of increasing the member contributions or reducing future service benefits, hasn't got an impact which is greater than the actual NI costs that you're seeking to offset.
So in other words there's a cap on what the employer is able to do and that's limited to the particular increase in its National Insurance contributions. I should also mention that although this statutory power is outside section 67 [of the Pensions Act 1995] there still is something built into it which means that you can't affect subsisting or accrued rights. This is only about affecting future service rights or contributions.
So the employers' options really are fourfold as this slide shows. Across the middle are the two options which the employer has got which we've just described through the statutory override, so that's increasing member contributions or reducing future service benefits.
But there are two other options, so, at the top, the employer could decide to simply absorb the extra cost or, at the bottom, the employer may decide that actually this change prompts it to want to have a more radical review of its pension provision for future service.
So on that topic, a few more points to make. So, if you are an employer who's thinking about a more radical response, for example closing the scheme to future accrual, then it is important to note that just because there's these statutory override provisions it's not actually possible to get over all the usual stuff that applies in relation to a closure.
It seems to me that contracting out on these changes that we're talking about is not likely to be enough simply on its own to constitute the business case for change. We say here don't forget IBM and all the usual stuff.
Viewers will no doubt be familiar with the IBM cases [for more on this, see our alert http://www.wragge-law.com/insights/ibm-remedies-judgment-what-does-it-all-mean/], the importance of their being a business case for change and, in that context, as I say, it seems to me that the business case to change from an employer needs to be a bit more than just the contracting out changes we're discussing.
You need to be looking at the overall costs, the volatility, the equalisation of pension benefits across the workforce and all the usual kinds of issues that the employer would look for.
The last bullet point is important; consultation requirements. When we think back to the slide we were looking at in relation to the four options, of those four it's only if the employer decides to absorb the cost where there'll be no obligation to consult with the membership.
On that basis, although things will change (the member's NI costs will go up and it's important obviously to tell the members about that), the view is that the governance request is not required because there's no actual change being put forward by the employer.
However for all the other three, it will be necessary to put forward the case for change and to consult using the 60 day consultation for pensions. So even if you're going to use the statutory override, you'll need to consult.
Ok, a slightly different topic for you; auto enrolment. So it's the case that some schemes that are contracted out defined benefit schemes are used as qualifying schemes for auto enrolment.
Now, at the moment it's the case that if you are a DB contracted out scheme you effectively automatically qualify, you'll meet the standards required for a qualifying scheme by virtue of being contracted out on that basis.
Now clearly from next April when that contracting out disappears there won't be that automatic qualifying basis. Looking forward any scheme that's going to stay open and be used as a qualifying scheme will need to consider on what basis that the tests can be met.
The existing test schemes standard will still continue to be available but the government have introduced a new test which is called the cost of accruals test. So you'll have another option in relation to how you satisfy being a qualifying scheme for auto enrolment, so some consideration will be needed to be given to that for those schemes that will stay open and be used in that way.
So, there was always a time when I was going to have to get to GMPs, and if you're like me this is kind of how I feel when I have to deal with GMPs let alone anti-franking. But it is important and GMPs and the reconciliation of GMPs and a number of topics in respect of GMPs will need to be considered as part of the cessation of contracting out. One point to make in passing relates to GMP revaluation.
It used to be the case that GMP revaluation will kick in for GMPs once contracted out employment ended. And that will change, of course, in the sense that everybody's contracting out employment will end next 6th April and so the government had made a change in the draft regulations which means that the requirement for GMPs to revalue if you're using the fixed basis will kick in, not on cessation of contracting out employment next April, but on the cessation of pensionable service at some future date where the scheme's open to accrual.
And as I said earlier we're still awaiting the final regulations from the government in relation to that but we hope to get those confirmed in government terms over the summer, apparently.
Ok, so next we're going to move on to the GMP reconciliation. Now GMP reconciliation service is available to enable schemes to reconcile their membership lists against the GMP data which HMRC has on its records.
So there's two different ways in which you can approach this; there's two different things. So there's the scheme reconciliation service and that's for schemes which are still open to accrual currently and there's the shared workspace for schemes that have previously surrendered their contracting out certificates.
HMRC will have data for all types of members, so early leavers, pensioners, widows, widowers and so on and it will be important for all schemes to start to look at checking their GMP data with that which HMRC hold on their records.
So the next slide just sets out the importance of the deadlines in connection with this. It's really important that your scheme has requested these services and registered online by next April. We'd really encourage you to be checking with your administrators that this has already been done to make sure that you are on the system for the services.
HMRC are not packing up their bags, however, on the 6th of April next year. They've said that they will have teams available to help with queries up until December 2018 and they will deal with queries submitted to them by October 2018. So clearly the first and important thing to do is to get registered for the service. That then gives you some time and we'll come back in a moment to think about how the best way is of using the service. Andrea.
Andrea Bull: Ok. Another poll for you now. So, I think, from what Jason's been saying, you'll realise that there is quite a bit of work to be done here, in relation to HMRC's scheme reconciliation service and so here's a question in relation to that.
Have you agreed with your administrators the scope of work that's needed in relation to a scheme reconciliation?
So is it yes or no? I'll just give you a few moments here to answer this one. Ok, here are the results. So, we've got 64 percent of you saying yes, you're already on the ball you've been talking to your administrators about what work is needed and 36 percent of you haven't yet.
Jason Coates: Ok. So moving on then, looking at how you can request the service as we already said, you can make separate requests for each scheme. It is important just to note that - where you've got many schemes within the group it's important that you make a separate request for the service for each scheme.
We've got the deadline, as I say, for registering for the 6th of April [2016] but once you've done that you can then plan your timing. We've basically then got a window between 6th of April [2016] and December 2018 in which you can plan for your particular scheme's reconciliation work to be done.
So HMRC will be contacting the scheme administrator to make sure you have completed the process, so, if you haven't already, it's worth just double checking and making sure the administrator has got the relevant print outs and confirmation that you're signed up from the service.
This is a bit more detail about how the actual process will work. It's important, I think, to have a look at it and also to understand that this is a different process to when schemes previously ended their contracting out.
So this time it works the sort of opposite way round to the previous scheme cessation service, so it won't be the case that schemes, your schemes, will be sending in your member data to HMRC for it to do the work, this is going to work the other way round.
You can request data that is held by HMRC from HMRC, they'll send it to you and it will be for the scheme itself then to do the work of comparing what the HMRC have sent you, with the data that you've got.
Your scheme will then raise discrepancies with HMRC and HMRC say that they'll attempt to deal with all discrepancies within three months.
Where they are convinced that evidence has been provided that their own records are incorrect they will, of course, update their records and vice versa, so where the scheme is convinced that HMRC's data is correct obviously the scheme will update its data.
And what we'll expect to happen is a number of versions of the data being run by the scheme and called down from HMRC as this process is undertaken and HMRC have made it clear that you can pull down your data as many times as you wish, so ultimately you'll end up with a call down of your data from HMRC's service that matches up with your data and where you're comfortable that you've got to. I would note and recommend the Pensions Administrations Standards Association (PASA)'s guidance on this.
They've issued their first briefing just recently when they confirmed who was part of their working group on GMPs. It's called a Call to action for trustees and scheme administrators and I think it's definitely worth getting in touch with and getting that brochure and also keeping in touch with PASA's guidance cause they're going to be issuing a number of things over time. A PDF copy of the Call to action is included in the resources with this webinar under the Downloads tab at the top of the window.
I would recommend for those of you who are involved in this reconciliation process that you look at that because they'll be developing some best practice that I think will be very helpful to schemes if they go through the process.
One of the things that I think schemes do need to bear in mind here is thinking about, ok so the reconciliation process is really for us to do and therefore to some extent it's up to us what we do and how we do it and how far we go, but it's important I think for you all to remember what members will see themselves on the other side of the fence here.
So members are going to get information over the coming years from two places. You'll be giving them information from the scheme, so in their benefit statements when they have their retirement pack if they request a transfer which will of course detail their contracted out rights that the scheme holds.
Then in addition to that the members are also going to get information from HMRC itself. And this is going to be in two forms, so HMRC effectively at the end of the reconciliation period are going to be sending a pension statement to members. Now it's unsure at the moment exactly what that pension statement will include and what level of detail there will be.
We know that at the very minimum members will be told what HMRC's records hold in terms of where they're contracted out benefits were in what schemes and for what periods.
We don't know whether there'll be more information for example exact details of the value of the contracted out rights. But certainly members will get something from HMRC which will give them certain details which they'll be able to compare with what the scheme has told them.
The other important thing will be the state pension statement. So anybody who's over 55 can request their state pension statement. The state pension scheme as we've said will change from next April and for those people who have a period of contracted out service there will be in effect in calculating the new state pension for those people when they reach state pension age, a calculation done which will test what they're entitled to on the new style state pension but also compare it to what they would have got under the old style taking into account a deduction for their contracted out benefits.
And it seems to us that must mean that there's a calculation done by the government which will involve a member's contracted out rights, which again will mean that there is some explanation to members and to able them to understand how their state pension is being calculated.
So again another case where it's probably going to be likely that members will be able to compare what the state is telling them their contracted out rights were with what the scheme will tell them. So what should trustees be doing?
Now I was asked this question the other day, can I do nothing? Now in one sense you can do nothing on the basis that there isn't going to be something sent by HMRC to the scheme at the end of this reconciliation to say these are the reconciled benefits.
As we've said the way this will work is that the scheme will draw down data and then do the reconciliation itself. But I think there are a number of important reasons why doing nothing is not a good idea for any scheme.
Not only do trustees of course have a duty to pay the right benefits and the Pensions Regulator expects good record keeping as a fundamental part of scheme benefits and trusteeship but also there'll be an important question of coming to buyout one day and tidying up GMPs and potentially this whole reconciliation piece is an important precursor to schemes either looking to tidy up GMPs, perhaps converting them into other benefits one day or for GMP equalisation, and just on that as an aside the DWP were expecting to come back with further guidance and consultation on equalisation which of course is all a bit difficult and has been pushed to the side for a little bit longer yet.
But certainly this GMP reconciliation I think is important for people as that base line before they do other things with GMPs.
It seems to me it must be likely that when schemes come to do buyouts in the future those schemes that have and are able to show buyout providers evidence of their reconciled GMP data, showing a list of members benefits against that and matching that of HMRC, are likely to be seen as schemes which have good healthy clean data and will be more attractive to the buyout providers when they're faced with a list of schemes with whom they might contract.
I think there's a whole host of reasons why it's important for schemes to do this and that doing nothing isn't an option. It's vital that schemes liaise with their administrators at an early stage.
It sounds like from the answer to our earlier poll that in fact many of you are already having that conversation which is really good to hear.
So not only is it about registering for this service, but I think there's an important piece of work for schemes to do now in terms of agreeing the scope of work for the reconciliation, the price and priorities.
So clearly there's potentially a very big piece of work and I think trustees will want to make sure that they get their arms around that work with the administrators to ensure that there's a sensible efficient process and approach which manages costs and risk in relation to the GMP reconciliation.
In terms of priorities it seems to us most sensible to be focusing initially at least on those individuals who you know will reach their state pension age before December 2018 and to be working on that kind of timescale. There's a GMP micro service which is planning to go live in April 2016.
This is really a self-service GMP calculation feature that schemes will be able to use. This is still a work in progress and HMRC have said that they may be contacting schemes in relation to helping to design this to make sure it works well; it will help with things like revaluation and increase calculations and they really urge anybody who does get asked to give feedback or to help them with developing this please not to ignore their emails about it but to get involved to make sure that a really well workable site is developed. And then just finally GMP discrepancies.
This process will undoubtedly for every scheme reveal discrepancies. Most problematic may often be that there's an overpayment of benefits. Schemes do have these issues from time to time in any event but by doing this reconciliation one might expect to pull out of the woodwork a number of things. It may be that schemes have been overpaying benefits or underpaying benefits and the usual rules which we discuss with trustees in these cases will apply in terms of the trustee duties to apply the scheme rules properly and to seek recovery where there have been overpayments, but of course always mindful of the impact on individual members and the potential for members to have defences.
And in relation to this I'd always point people to TPAS or the Pensions Ombudsman websites where there's some really useful guidance as to the way in which schemes should deal with overpayments and underpayments. And finally proportionality. I think it will be the case that schemes will have to decide where their sort of threshold of proportionality is. This is going to be potentially a big exercise for people and there will be some discrepancies which are of a non-material nature.
I would just add though of course, it's important to consider materiality to the scheme on the one hand but also materiality to the individual member on the other which can be really quite different. Andrea, our final poll.
Andrea Bull: Yeah, just before I do this, just a reminder that we will have, a few minutes for questions at the end, so if you've got any questions please send them in. We've had a few so far so we'll deal with them in a moment but please don't be shy, send in your questions. Ok. So now onto the final poll for today.
Having heard this webinar, what do you think your main priority is now? Is it registering for HMRC's scheme reconciliation service? Reviewing your scheme rules? Liaising with the employer? Or planning GMP reconciliation? Which of those four options do you think is your main priority?
We'd just be interested to know what you think there. So again, I'll just give you a few moments to get your answers in then we'll see what people are saying. Ok. A few more seconds then I'll show you the results. Showing you the results now. Wow quite a split there. So we have got the highest percentage is 35 percent for planning GMP reconciliation. We've got 30 percent liaising with the employer. 26 percent reviewing your scheme rules and the smallest percentage, nine percent registering for HMRC's scheme reconciliation service.
Jason Coates I think that probably reflects what we're seeing in practice from our clients too in the sense that actually especially with all the budget flexibilities that people have been dealing with since last April that this topic is now starting to come up the agenda, that people have registered with HMRC service and are now increasingly getting into the further more detailed aspects such as the scheme rules, employers planning ahead to make sure that if they're going to make changes given the 60 day consultation that that's dealt with in advance, so that looks a pretty fair proportion or reflection I think of where we've seen our clients.
Andrea Bull: Ok. Great. So now it's time for questions. I've got one here which has come in for you Jason. So, you mentioned earlier this cost of accruals test to be a qualifying scheme for auto-enrolment. Could you give us some more details about that Jason?
Jason Coates: Yeah sure so the statute and as always there's a very useful guidance booklet from the Pensions Regulator on this that's worth people looking at, but in essence what they've come up with is five cost of accrual qualifications which vary for schemes between nine percent and 13 percent of pensionable earnings and that then is different so there's five different tests between nine and 13 percent depending on precisely how your scheme defines pensionable earnings and so you'll need to just find which of those five your particular scheme fits and it may be of course that you meet all of them or it may be you meet some of them, but there's quite a variation indeed to make sure that the different definitions of pensionable earnings can be dealt with.
Andrea Bull: Ok great. And another one here, so what is your experience so far in terms of employers' positions in relation to the April 2016 changes. So you mentioned before those four options…
Jason Coates: Yes.
Andrea Bull: And I know we've got a question here also asking how widespread closure to further accrual will be as a result of this change, so just wondered what your thoughts are on that Jason?
Jason Coates: Yes, it's interesting. So we had the slide that showed the four options and I would say actually although we've got the statutory override which we talked about for employers which were the two options sort of across the middle of the slide, actually I would say that so far more employers have been looking at either, I think it was option one or option four, so either absorbing the cost themselves or indeed doing something more radical.
So you know to the question that was just asked in relation to 'do we expect to see more closures?' I think the evidence so far is that we will. I would just sort of take a step back though and go back to the slide I mentioned earlier where I explained that I don't think contracting out changes and state pensions changes of themselves are likely to be sufficient as a business case alone and I say that because there's a statutory override which precisely allows people to offset the increased cost.
So I think there will be more needed to that but I certainly think a large number of clients are looking at that radical change and saying well this might be the time. The types of schemes where we're seeing people absorbing the cost will be where there a very few active members typically, so we have a number of clients who'll say well actually if I weigh up the cost of consultation the sort of upheaval of going through all of that in relation to potentially the work that we need to do either to close the scheme or to use the statutory override, the actuarial advice, the legal advice, when I weigh all of that up, actually I've taken the view that there are relatively few employees still in active service and therefore I'll run this off over time rather than actually closing to accrual or using these more radical changes.
Andrea Bull: Ok, thanks Jason. Ok another one. Do you think I should be registering for HMRC's scheme reconciliation service now?
Jason Coates Well yes and it sounds like most people have done that, so without a doubt you should be registering. I think the important thing now though is that sort of second stage of planning what exactly you're going to do.
As with many of these things, my instinct would be not to rush and be the first mover necessarily but clearly you want to make sure there's plenty of time to deal with the discrepancies going forward so, I'd slightly err on the side of waiting a little while to let HMRC get their systems up and running and not necessarily being the person who's going to be testing their systems out but just leaving that for a little while but yes definitely don't leave it too late and come up with a clear work plan.
Andrea Bull: Ok. Another one here in relation to the statutory override that you mentioned earlier Jason, what does the actuary actually have to do here?
Jason Coates: Ok yeah so the work that the actuary has to do as I said the statutory override is available to enable the employer to offset the cost but the changes that it makes either the increase in member contributions or the reduction in future service benefit can't really have a value impact that's any greater than the value impact of the increase in the National Insurance contributions. So the actuary has to effectively work that out using a technical provisions basis without needing to include margins for prudence. There is also a fair degree of leeway in terms of the data that can be used to try and make this a bit easier so the actuary can actually use any data that's available after the end of December 2011, and then adjust that to the effective date, sort of rolls it forward to the effective date, but it does mean that that makes the work a little less simple and they can use data which they've pulled together for other purposes such as valuations, they don't need to do something specifically for this.
Andrea Bull: Ok thanks Jason. I'm sorry that's all we've got time for today. We've reached our 45 minutes.
Thanks to everyone for participating in this webinar and giving us those answers to the polls. Just a reminder we do have a downloads tab for you, so you can get the slides from today and also our recent alert on the end of defined benefit contracting out.
You can also get Jason's details if you want to ask him about that checklist that he mentioned earlier and we will be putting a recording on our website so if you or any of your colleagues want to watch a recording of it you can do so. We'll let you know when that's available. And then just the last thing is we would welcome your feedback on today's webinar so I am going to put the feedback questionnaire on the screen now and if you could fill that in for us we'd be really grateful.
So thanks everyone, thanks in particular to Jason. Bye.
Jason Coates: Thanks goodbye.