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Inside Pensions – Regulatory Update Prepared by Inside Pensions Date: December 2014 to February 2015

integrity • clarity • simplicity

December 2014 to February 2015

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Table of Contents

New Issues Final rules for independent governance committees (IGCs) ................. 3

New Issues HMRC’s January Countdown Bulletin ..................................................... 3

HMRC’s December Countdown Bulletin..................................................................... 4

FCA policy statement – retirement reforms-guidance guarantee ............................ 4

HMRC –VAT on pension fund management costs and services .............................. 5

New Issues Further two year exemption from central clearing requirements .......... 5

New Issues PensionsEurope publishes Position Paper on EIOPA plans ................. 6

New Issues Government proposal for Automatic Transfers System ........................ 6

New Issues ”Second line of defence” for trust based pensions ............................... 6

New Issues Advice on DB transfers to become a FSMA regulated activity .............. 7

New Issues PPF Administration levy ........................................................................... 7

New Issues FCA proposed additional consumer protection rules ............................ 8

Trivial / small commutation exercises – Code of Good Practice .............................. 8

HMT update on pensions guidance service ............................................................... 9

IORP Directive – negotiating stance agreed .............................................................. 9

New longevity risk methodology developed ............................................................ 10

DWP – changes to automatic enrolment – draft regulations .................................. 10

New Issues TPR issues trustee guidance on pension reforms ............................... 11

New Issues Pension tracing service expanded ........................................................ 11

NAPF life expectancy study – DB pension scheme members ................................ 11

The Purple Book ........................................................................................................ 12

Pension Ombudsman revamp ................................................................................... 12

December 2014 to February 2015

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New Issues Final rules for independent governance committees (IGCs) On 4 February 2015, the FCA confirmed the final rules requiring firms to set up and maintain independent governance committees (IGCs). The rules outline the minimum standard for the terms of reference for IGCs, the scope of the IGC and which type of firms will need to set one up.

The role of IGCs will be to represent the interests of scheme members in assessing the value for money of pension schemes, challenging providers to make changes where necessary. These rules, initially announced by the FCA in August, confirm for providers of workplace personal pensions the necessary detail to ensure IGCs are set up by April 2015.

The establishment of IGCs was recommended after an OFT market study found problems with the workplace pension market including potential conflicts of interest between employers and schemes.

The FCA has been working closely with the DWP to ensure that all members benefit from the same good quality standards regardless of type of workplace scheme.

The FCA has confirmed that a review of the overall effectiveness of the new governance bodies will be conducted in 2017.

For more information: http://www.fca.org.uk/news/final-rules-for-independent-governance-committees

New Issues HMRC’s January Countdown Bulletin HMRC is issuing a series of bulletins in the run-up to the abolition of DB contracting-out on 6 April 2016. On 28 January 2015, it published the fifth edition.

On 8 May 2014, the DWP issued a consultation asking for views on proposed legislative changes which follow on from the abolition of DB contracting-out, together with draft regulations.

One of the most significant implications of abolishing DB contracting-out is that both employers and employees will need to start paying the standard rate of NICs.

The Government recognises that this additional cost could be problematic for the sponsoring employers of the remaining open DB schemes. It therefore decided to provide employers with a unilateral power to amend their schemes in relation to some or all of the members to take account of the increase in the employer’s NICs. The power is set out in the Pensions Act 2014, with the detail of how it may be applied in the draft underlying regulations.

Among other matters, in this latest edition of its countdown bulletin HMRC announces that it will be publishing the statutory override regulations in “early Spring”, as employers that might want to use the override will need to prepare their changes. However, the Contracting-out Regulations (which will set out the rules which schemes that were contracted-out on a DB basis immediately before 6 April 2016 will need to comply with immediately afterwards) will not be published until after the General Election.

For more information: https://www.gov.uk/government/publications/nispi-countdown-bulletins

December 2014 to February 2015

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HMRC’s December Countdown Bulletin HMRC has published the fourth edition of its Countdown Bulletin, which aims to help scheme administrators and trustees deal with technical queries in the run-up to the abolition of DB contracting-out in April 2016.

This edition focusses on encouraging use of HMRC’s Scheme Reconciliation Service. This is a service which is designed to help pension scheme administrators and trustees reconcile their records against those of HMRC. It also highlights the potential consequences for schemes of not doing so. HMRC explains that using the service will help schemes to ensure that their records are accurate and the correct level of pension is paid.

The Scheme Reconciliation Service will identify non-active members only and does not contain details of current members. Queries relating to current members should be directed through the business as usual process. The deadline for assistance from the Scheme Reconciliation Service is April 2016, although queries will continue to be dealt with until December 2018.

HMRC will identify and close all active member entries held on their records in December 2016 and will notify schemes when their records have been closed. As for scheme reconciliation, schemes will have until December 2018 to agree / query their active membership records.

The Bulletin also notes that when the new State pension is introduced in April 2016, HMRC will not need to track GMPs. As a result, it will no longer issue GMP statements to individuals and schemes.

For more information: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/388029/4498_Countdown_Bulletin_Issue_04_accessible.pdf

FCA policy statement – retirement reforms-guidance guarantee In March 2014, the Chancellor announced changes to the choices that people in DC schemes will have at retirement. To support this people will be entitled to free, impartial, guidance on the choices they face when deciding how to use their retirement savings (known as the “Guidance Guarantee”).

On 27 November 2014, the FCA published standards for the bodies responsible for delivering the Guidance Guarantee, together with rules requiring pension provider firms to direct their customers to the guidance service at retirement. Following consultation, the FCA has strengthened the standards to ensure that they fully meet the aims and objectives of the policy – ensuring consumer confidence and the delivery of helpful guidance for consumers.

The FCA has outlined changes to the standards including: how complaints should be dealt with; how the outcome of the guidance guarantee session should be recorded; and how those delivering the guidance should work together to ensure that all those accessing the service get a consistent outcome.

In addition, it has outlined some detail on plans for monitoring and enforcing the standards, with further guidance to be issued early next year. There will be a thorough review of the rules in the pension and retirement area in 2015. This is intended to ensure that consumers have the adequate level of protection following the range of reforms being introduced in the market.

The FCA has also published its annual fees consultation paper. The paper outlines how the FCA plans to levy fees for the Guidance Guarantee. Following initial consultation, the paper includes a proposal that financial advisers will receive a 50% reduction on the new levy.

For more information (standards): http://www.fca.org.uk/news/fca-publishes-guidance-guarantee-policy-statement For more information (annual fees consultation): http://www.fca.org.uk/news/cp14-26-regulatory-fees-and-levies-policy-proposals-for-2015-16

December 2014 to February 2015

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HMRC –VAT on pension fund management costs and services Following two CJEU cases, HMRC issued two Briefs revising its original position on VAT and pension schemes.

On 25 November 2014, HMRC published:

Brief 43 (2014): VAT on pension fund management costs which confirms when an employer may deduct the VAT that is charged on services provided in relation to pension schemes

Brief 44 (2014): VAT treatment of pension fund management services which explains the circumstances where VAT is not chargeable on such services.

For more information (Brief 43): https://www.gov.uk/government/publications/revenue-and-customs-brief-43-2014-vat-on-pension-fund-management-costs/revenue-and-customs-brief-43-2014-vat-on-pension-fund-management-costs For more information (Brief 44: https://www.gov.uk/government/publications/revenue-and-customs-brief-44-2014-vat-treatment-of-pension-fund-management-services/revenue-and-customs-brief-44-2014-vat-treatment-of-pension-fund-management-services

New Issues Further two year exemption from central clearing requirements The EMIR Regulation, which entered into force on 16 August 2012, is designed to improve the stability of the over-the-counter (OTC) derivative markets throughout the EU. The Regulation requires standard derivative contracts to be cleared through central counterparties (CCPs) and establishes stringent organisational, business conduct and prudential requirements for these CCPs. It has also introduced an obligation to report derivative contracts to trade repositories. The Regulation, directly applicable and enforceable throughout the EU, will considerably increase financial stability and safety by preventing the situation where a collapse of one financial firm can cause the collapse of other financial firms.

A specific exemption in the Regulation states that “pension scheme arrangements” (PSAs) are exempt from the clearing obligation of certain derivatives until August 2015.

On 3 February 2015, the European Commission published a report that recommends granting pension funds a further two-year exemption from central clearing requirements for their over-the-counter (OTC) derivative transactions. The report, which is based on an extensive study requested by the European Commission, concludes that CCPs need this time to find solutions for pension funds. At the same time, the report encourages CCPs to continue working on finding technical solutions in this important matter. Ultimately, the objective is that PSAs should use central clearing for their derivatives transactions, as is the case for other financial institutions. This is also seen as imperative for financial stability.

Under current arrangements, PSAs – which encompass all categories of pension funds – would have to source cash for central clearing. Given that PSAs hold neither significant amounts of cash nor highly liquid assets, imposing such a requirement on them would require very far-reaching and costly changes to their business model which could ultimately affect pensioners’ income.

For more information: http://ec.europa.eu/finance/financial-markets/derivatives/index_en.htm#150203

December 2014 to February 2015

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New Issues PensionsEurope publishes Position Paper on EIOPA plans On 17 February 2015, PensionsEurope reaffirmed its opposition to EIOPA’s Holistic Balance Sheet (HBS) project and called on EIOPA to divert its energies to tackling more pressing pension challenges.

PensionsEurope’s statement came in a position paper summarising its response to EIOPA’s 111-question consultation paper on the HBS. The consultation was published on 13 October 2014 at EIOPA’s own initiative.

Although PensionsEurope recognises that EIOPA has addressed some of the issues raised during previous rounds of consultations, the HBS still contains many shortcomings and is not suitable as a regulatory instrument at EU level. PensionsEurope warns that the HBS would place unacceptable burdens on IORPs and their sponsoring undertakings and would have detrimental effects for millions of EU citizens.

For more information: http://www.pensionseurope.eu/pensionseurope-publishes-position-paper-eiopa-plans-further-work-solvency-iorps

New Issues Government proposal for Automatic Transfers System Following the introduction of automatic enrolment in 2012, it is expected that there will be a proliferation of dormant, often small, DC pension pots. The Government intends to address this with a new system of automatic transfers (commonly known as “pot follows member”).

Back in 2013, the Government issued a Command Paper which provided details of its proposals and a legislative framework for its introduction was set out in the Pensions Act 2014.

On 11 February 2015, the Government published its proposals for a framework for the automatic transfer of people’s pension pots when they change jobs. The DWP’s update sets out how workers will be able to consolidate small pension pots within their current employer’s pension scheme.

It is intended that automatic transfers will initially apply to a limited number of larger schemes. The first stage will be to introduce automatic matching of an individual’s “mini” pots. A person will be contacted to confirm if they want these pots to be moved to their new scheme. To begin with, an opt-in system will be used, ahead of the introduction of a full opt-out model.

The Government’s aim is to have an automatic pot-matching system in place by autumn 2016.

For more information: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/402860/automatic-transfers.pdf

New Issues ”Second line of defence” for trust based pensions On 27 January 2015, during the report stage of the Pension Schemes Bill in the House of Lords, it was announced that the DWP is working with TPR to consider how best to introduce a “second line of defence” for trust-based schemes (to give added protection to people making decisions about their pension pots and retirement income), on the same basis and timetable as that announced by the FCA.

In addition, the government confirmed that it intends to exempt those with DB or “safeguarded” pensions wealth below £30,000 (the maximum amount that can be paid as a trivial commutation lump sum) from having to obtain advice on a transfer to a DC arrangement.

For more information: http://www.publications.parliament.uk/pa/ld201415/ldhansrd/text/150127-0001.htm

December 2014 to February 2015

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New Issues Advice on DB transfers to become a FSMA regulated activity On 29 January 2015, a draft of the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No 2) Order 2015 was published. The draft order will deliver the Government’s commitment to provide for advice on the conversion and transfer of “safeguarded” benefits (broadly DB benefits) into flexible benefits to be regulated by the FCA in accordance with the regulatory framework established by FSMA.

The commitment was made by the Government in its response to the consultation on “Freedom and Choice in pensions”. The government expects that the new DC flexibilities which will be available from April 2015 will lead to a greater demand for DB to DC transfers. It therefore promised to introduce a requirement for all potential DB transferees to obtain professional advice before doing so.

The FCA will provide guidance to advisers about their obligations under this order as it relates to the provision of advice under the advice safeguard and will subsequently update their rules accordingly.

For more information: http://www.legislation.gov.uk/ukdsi/2015/9780111128237/pdfs/ukdsi_9780111128237_en.pdf

New Issues PPF Administration levy The PPF administration levy meets some of the running costs of the PPF. The rates used to calculate the amount payable by eligible pension schemes have remained unchanged since 2012/13 (when they were reduced by approximately 26%).

On the basis of the PPF’s current and planned administration costs recoverable under the levy, it is estimated that a levy deficit of £5.1 million will exist at the end of 2014/15, and that this deficit would increase by approximately £5 million in each subsequent year if remedial action is not taken.

Between 14 November 2014 and 9 January 2015, the Government consulted on proposals for addressing the deficit.

On 4 February 2015, the DWP published the response to the consultation, together with final regulations which implement the changes. The Government has decided to increase levy rates each year in 2015/16, 2016/17 and 2017/18 with the aim of eliminating the deficit in 2021/22 (movements in the PPF’s administration costs over the next seven years may alter this estimate). This approach is intended to limit the immediate impact of the increase in the rates for 2015/16 and provide eligible schemes with time to plan for further increases in 2016/17 and 2017/18.

For more information: https://www.gov.uk/government/consultations/the-occupational-pension-schemes-levies-amendment-regulations-2015

December 2014 to February 2015

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New Issues FCA proposed additional consumer protection rules On 26 January 2015, the FCA wrote to the Chief Executive Officers (CEOs) of pension providers to outline plans to introduce additional protection for those accessing their DC pension pot from April.

Under the new additional protection rules firms will be required to ask consumers about key aspects of the circumstances that relate to the decision they are making about their pension pot. These include issues such as health and lifestyle choices or marital status. This will come into force from April.

Providers will be required to give relevant risk warnings, such as warning of the tax implications of their decisions, in response to answers from consumers. Firms must also further highlight the availability of the Government’s new Pension Wise scheme or regulated advice.

Firms will be required to deliver these messages in a direct and simple language which will be set out when the new rules are published.

For more information: http://www.fca.org.uk/news/fca-introduces-additional-protection-for-consumers-ahead-of-pension-freedoms

Trivial / small commutation exercises – Code of Good Practice The Incentive Exercises Monitoring Board (the Board) has published a note in its “Q&A” section, in which it clarifies the application of the Incentive Exercises Code to one-off trivial / small pension commutation exercises.

Broadly the Code covers two types of incentive exercise:

“Transfer Exercises” – for example, involving a transfer out of a DB scheme on an enhanced basis or in return for some other inducement (as distinct from a normal individual transfer request); and

“Modification Exercises” – for example, a pension increase exchange exercise (involving an enhancement to pension income in return for surrendering all or part of future pension increases).

The Board’s view is that it is reasonable to treat a one-off trivial / small pension exercise as a “Modification Exercise”. It is not expected that the Code will apply where members are not given a choice.

The consequences of applying the Code and treating an exercise as a Modification Exercise include:

offering “Guidance” (as defined in the Code) to members if the deal is a 100% Balanced Deal (ie one in which members benefits are valued and compared before and after the Modification Exercise using the framework set out in section 67 of the Pensions Act 1995)

complying with the Code’s requirements on “Vulnerable Customers” (those who may be particularly vulnerable by virtue of age, health, understanding etc. and who may require special treatment).

The Board intends to conduct a major review of the Code in 2015 once government policy, legislation and market developments have become clearer.

For more information: http://incentiveexercises.org.uk/qa

December 2014 to February 2015

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HMT update on pensions guidance service The new retirement options for DC members, which were announced in the Budget 2014, will be introduced on and from 6 April 2015. The government is setting up a free and impartial guidance service (to be known as Pension Wise) to help individuals understand their options.

On 12 January 2015, HMT published an update to explain the progress that has been made in setting up the service.

HMT hopes that aspects of the service will be tested, piloted and rolled out ahead of April. A simple landing page for the website has already gone live, and website users can now register their interest in the Pension Wise service, say what aspects of the service they are most interested in, and provide their input on the ongoing service design. Some of those registered will also be invited to participate in the ongoing programme of user testing, pilots and trials as the service is refined and developed, providing valuable feedback and insight.

A public pilot of the online guidance service is planned to start in February; this may be of particular interest to those who have deferred their pension choices since the Budget announcement, and who may welcome some initial information on their options.

The contact centre, through which telephone and face to face appointments can be booked, will be available from March.

HMT will bear the 2014 / 2015 set-up costs of the Pension Wise service. The ongoing cost will be funded by an FCA administered levy on regulated financial services firms.

For more information: https://www.gov.uk/government/publications/delivering-pensions-guidance-january-2015-update

IORP Directive – negotiating stance agreed On 10 December 2014, the Council of the European Union agreed its negotiating stance on a draft directive aimed at both facilitating the development of occupational retirement savings and improved protection for pension scheme members and beneficiaries.

The draft directive revises the existing directive on the activities and supervision of Institutions for Occupational Retirement Provision (IORPs). It is intended to improve the governance and transparency of these institutions and facilitate their cross border activity, thereby strengthening the internal market.

This agreement enables negotiations with the European Parliament, with the aim of adopting the directive at first reading.

The latest draft of the compromise text:

re-inserts the requirement for cross-border IORPs to be fully funded at all times (the September 2014 draft had relaxed this requirement by requiring that an IORP’s technical provisions to be fully funded at the start of cross-border activities);

revises the “fit and proper person” test for those running an IORP. The latest wording requires the “qualifications, knowledge and experience” of those effectively running an IORP to be “collectively adequate in relation to the activities performed for the institution”.

For more information: http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/146148.pdf

December 2014 to February 2015

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New longevity risk methodology developed On 8 December 2014, the Institute and Faculty of Actuaries and Life and Longevity Markets Association jointly published a new methodology which will allow insurers and pension schemes to assess Longevity Basis Risk. It is intended to enable the use of simpler, more standardised and easier to execute index-based longevity solutions. There are also broader applications for insurers and pension funds in managing their capital requirements relating to longevity risk.

Index-based longevity swaps allow pension schemes and insurers to offset the risk of increased liabilities resulting from members living longer than expected. Until now, it has been difficult to assess how well the index-based longevity swap can reduce the longevity risk for the particular pension scheme or insurance book. The methodology developed in this research advances the thinking on how this is assessed. The framework has been designed to be applicable to both large schemes (which can use their own data in their models) and smaller schemes (by capturing demographic differences such as socio-economic class and deprivation).

While the cost and complexity of longevity swaps means they have often been the preserve of large schemes, this research could make longevity swaps more accessible to smaller schemes and insurers in managing longevity risk.

For more information: http://www.actuaries.org.uk/news/press-releases/articles/new-longevity-risk-methodology-developed-insurers-and-pension-schemes

DWP – changes to automatic enrolment – draft regulations The DWP have published, for consultation, draft regulations to implement technical changes to automatic enrolment aimed at simplifying the process for automatic enrolment into workplace pensions and reduce burdens on employers.

The measures will:

introduce an alternative quality requirement for DB pension schemes;

simplify the requirements on employers regarding the provision of information about automatic enrolment to their employees;

create exceptions to the employer duties so that an employer is not required to enrol an employee into a workplace pension in certain situations, for example for individuals with tax protected status.

For more information: https://www.gov.uk/government/consultations/workplace-pensions-automatic-enrolment-simplifying-the-process-and-reducing-burdens-on-employers

December 2014 to February 2015

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New Issues TPR issues trustee guidance on pension reforms On 12 February 2015, TPR published the first part of a communications package designed to help trustees prepare for the significant changes in the pensions landscape that come into force on 6 April this year. The package will include:

An “essential guide” for trustees of schemes providing money purchase benefits on new rules about governance and charge controls.

Guidance for trustees of DB schemes on member requests for transfers from DB to DC schemes in order to access the new pension flexibilities.

Guidance for trustees to address the new pension flexibilities, including how trustees should direct their members to the new Pension Wise service. This guidance is due out in March, following the publication of further DWP regulations.

Updated “scorpion” communications materials (also due out in March) to help members understand the risks of pensions and investment scams, which are expected to evolve as a result of the new pension freedoms.

For more information: http://www.thepensionsregulator.gov.uk/press/pn15-09.aspx

New Issues Pension tracing service expanded On 1 February 2015, the DWP announced that the free government service that helps people find lost pension cash is undergoing a major expansion, ahead of April’s ground-breaking pension freedoms.

The Newcastle-based Pension Tracing Service (PTS) will triple its number of staff – taking the total headcount to 49 – ahead of an expected increase in the number of calls from people seeking help to find lost pension pots.

Independent research suggests that the most common reason for losing track of a pension is when an individual leaves an employer and does not keep them informed of any future changes of address.

Estimates suggest that there could be as many as 50 million dormant and lost pension pots by 2050.

For more information: https://www.gov.uk/government/news/bigger-and-better-pension-tracing-service-ready-to-help

NAPF life expectancy study – DB pension scheme members The NAPF has published research analysing 2.5 million living pensioners and 1 million deaths in an attempt to change the way DB pension schemes forecast longevity, resulting in more informed liability calculations.

The research highlights that typical assumptions (based on changes in England & Wales population longevity) do not reflect the longevity trends experienced by DB pension scheme members and also shows the pace of longevity change varies between DB schemes and between different groups of DB pensioners.

For more information: http://www.napf.co.uk/PolicyandResearch/DocumentLibrary/~/media/Policy/Documents/0414_Longevity_model_Nov14.pdf

December 2014 to February 2015

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The Purple Book The ninth edition of the ‘Purple Book’, published by TPR and the PPF monitors the risks faced by over 6,000, mostly private DB pension schemes. The data tracked by the Purple Book shows that pension schemes continue to reduce their risk as asset allocation trends continue, but the decrease in equity shares has levelled off as the UK economy continues to recover.

For more information: http://www.pensionprotectionfund.org.uk/news/pages/details.aspx?itemID=383

Pension Ombudsman revamp The Pension Ombudsman has launched its new website and unveiled a new name – Pension Ombudsman Service. The aim of the rebrand is to provide simpler and clearer information online. Of particular use is the new determination search feature and updates on group cases, current issues, and latest news.

For more information: https://www.pensions-ombudsman.org.uk/