Pensions legislation - too much of a good thing?
Hi! Welcome to this first revamped issue of 'Bee Lines'. What I hope to do over the coming months is to provide a plain-English guide to the enormous amount of pensions legislation which is currently being put in place by government.
Believe it or not, there are four separate pieces of major legislation going through the Parliamentary process right now and all of them will have profound effects on the existing pensions environment. Added to this is a plethora of delegated legislation, statutory instruments and consultation documents, all of it significant and all of it happening at once!
Somebody said the other day that there was so much going on that there was probably no one person who understands the totality of it all, and I had to disagree because I think I probably do. He said he thought in that case I should have a go at putting it all down in writing so that other people with more interesting lives than mine could be kept up-to-date with all the various developments too. So that's what the 'Bee Lines' will be - a summary of where I think pensions are at right now and what's affecting them and why. I hope over the coming months to pick out some of the more obscure stuff that's flying around as well as the enormous chunks of legislation whizzing around with them. And I hope to make a bit of sense of it all in terms of what it is all likely to mean in practice to those of us involved in the daily task of explaining an increasingly-complex pensions environment to our increasingly-bemused customers.
I hope you find it all readable and useful and I apologise in advance for any errors of interpretation I may make as I try to translate this stuff into English for you. Nobody's perfect! At Scottish Life we've kept pretty close to the developments as they've been happening in pensions over the last few years and I will use the value of the insights we gain from that process to make you better informed, so as to help your customers. It may be a good idea, I think, to start with an overview of the pensions reforms the Labour government embarked on in their first term of office and the approach we have taken to add our weight to influencing the agenda. In this first issue we will then set out a plain guide, a road map if you like, to the various pieces of legislation currently being enacted and end-up with a number of questions I find I'm frequently being asked at the various IFA seminars I attend throughout the UK in my never-ending peripatetic pensions role.
The Labour Government's First Term: 1997 - Pensions Reform - a brief overview
The government announced its review of pensions on 17 July 1997, very quickly after the General Election. It set out nine fundamental challenges that the review would address:
- To achieve a sustainable consensus on pensions policy;
- To agree where the responsibility for funding pensions should lie and to establish the right balance between public and private sectors;
- To respond to demographic change;
- To respond to social and labour market change;
- To ensure resources devoted to pensions are used to maximum effect;
- To get the regulation of pensions right;
- To raise awareness of pensions and improve the level of financial education so that people understand the importance of saving for retirement and make the right choice about which pension product is best for them;
- To narrow the pensions gap between men and women so as to give women more security in retirement; and
- To strike the right balance between the generations.
Pensions policy has always been an important issue for new Labour, and was explicitly mentioned in the seventh of ten pledges (the ones allegedly drawn up by Tony Blair in his back garden) about their aims in this government: 'We will help build strong families and strong communities, and lay the foundations of a modern welfare state in pensions and community care.'
With the announcement of this far reaching agenda Scottish Life, with its major interest in the various UK pensions markets, set out to influence the agenda by informing key decision makers across as wide a spectrum as possible. Over the last few years we have kept close to all of the various interests and had many meetings with Government Ministers, key officials within the DSS, the Treasury, the Financial Services Authority, The Inland Revenue, members of the Social Security Select Committee and the Key Bills'Standing Committee, key Backbenchers and Peers, Shadow Spokesmen and other opposition Spokespeople - all with the purpose of ensuring that the importance of fundamental issues such as concurrency and suitability were properly understood and that the value of independent financial advice was not underestimated.
The Main Pieces of Legislation Currently Going Through Parliament
There are four major pieces of legislation currently on the go and each will provide a vital piece of the overall jigsaw forming what will be our new pensions environment from next April. These, and their main effects on pensions, are:
The Welfare Reform and Pensions Act 1999
This Act introduced the framework for the government's Stakeholder Pensions to be introduced from April 2001, and was the result of allegedly 'thinking the unthinkable'. It also sparked off a series of DSS consultations on aspects of Stakeholder Pensions. As well as Stakeholder Pensions, the Act also covers a wide range of areas in social security and pensions legislation - for example introducing pension-sharing on divorce and replacing the Widow's Pension with a bereavement allowance.
Over the Summer and Autumn of 1999 the DSS consulted on the following aspects of Stakeholder Pensions:
- Minimum standards
- Employer Access
- Clearing arrangements
- Regulation, advice and information
- The tax regime (DSS with Inland Revenue)
Many of the issues which emerged from these consultations are still rumbling on.
The Financial Services and Markets Act 2000
Put before Parliament in the 1998/99 session, this finally received Royal Assent on 14 June 2000.
This Bill set out the structural reforms to UK financial regulation. The powers of the new Financial Services Authority were set out, the aim being to 'replace the current fragmented and overlapping structure of regulation with a single regulatory body equipped with coherent, statutory powers' - powers that could be exercised over financial advisers, securities firms, insurance companies, fund managers, investment exchanges, friendly societies and building societies. Consumer redress systems were also unified to create a single financial ombudsman scheme.
The Child Support, Pensions and Social Security Act
This had its third reading on 24 July and received Royal Assent on July 28 2000. The key schedules for pensions are 4 and 5.
The Child Support, Pensions and Social Security Bill contained the measures dealing with the introduction of the new State Second Pension. The measures are designed to operate alongside other aspects of the government's pension reforms, such as Stakeholder Pensions. The State Second Pension replaces SERPS and extends second-tier state pension provision to certain categories of carers and disabled people. It is particularly targeted at those low earners who cannot afford private pensions. The State Second Pension will be introduced from April 2002 at the earliest. The Bill also included more of the legislative framework for the introduction of Stakeholder Pensions.
The Finance Act
The Act deals with two major pension issues; firstly, the ‘New DC’ regime (the tax framework for Stakeholder and other personal pensions and, as an option, for occupational group money purchase schemes) and secondly, partial concurrency. Anyone earning less than £30,000 pa will be able to contribute to a Personal Pension as well as a Company Pension. The legislation means that most occupational scheme members will be able to invest up to £3,600 pa into a Stakeholder plan or make potentially higher contributions through a Personal Pension. The government believes that these changes considerably boost tax relief available to employees, and also work as an added guard against pensions mis-selling (by reducing the likelihood of employees leaving company pension schemes for Stakeholder schemes). Partial concurrency will also have an effect on AVCs. If eligible employees opt to open a Personal Pension or Stakeholder Pension, rather than top-up company pensions, they stand to receive 25% tax-free cash at retirement, which may prompt many to abandon AVCs in favour of Stakeholder or Personal Pensions.
As well as these highly important pieces of major legislation there is an enormous number of other bits and pieces going through too. It is these that are the most difficult to keep track of and to understand the implications of.
A few years ago, with the advent of Income Drawdown rules, we experienced a new way of legislation being enacted. Instead of an all-encompassing Bill being presented to Parliament which would then go on to become an Act of Parliament covering all the detail, what we had for Income Drawdown was a sort of 'empty' Bill going through with all the detail following on in the shape of delegated legislation! This delegated legislation, in the main, took the form of 'Statutory Instruments' issued by the Inland Revenue and the DSS. These, by the way, are sometimes referred to as the Inland Revenue and DSS regulations, or even colloquially as the, you know, DSS Regs or to give them their full name - The Stakeholder Pension Regulations 2000 SI 1403.
The good news is, this seems to be the procedure being followed this time around too. The list of delegated legislation going through right now seems endless. As well as the numerous Statutory Instruments, the most relevant of which are detailed below, there are also a number of Consultation Papers flying about. And, believe it or not, we've also just seen a revision of IR76, the bible of regulations and practice for pension buffs. This update is only a couple of hundred pages long and replaces the 1999 update, similarly still missing those crucial sections on pension transfers and SIPPS. Still, more of this in later issues.
The Consultation Documents from the FSA include
- Polarisation and Financial Services Intermediary Regulation
- Financial Services Compensation Scheme Draft Rules
- Regulation of Stakeholder Pensions business (including the dreaded Decision Trees)
And from the Revenue we have
- Personal Pension Schemes Draft Regulations
Not to overlook the DSS Consultation on
- Employer Payments to Personal Pensions
And, last but not least, the recent consultation paper from the Treasury on Individual Pension Accounts (LISAs or PPIs to you).
And just in case you thought that the Revenue's Draft Regulations were simply a single set....we've had :-
- The Personal Pension Schemes (Restriction of Discretion to Approve and Conversion of Retirement Benefits Schemes) Regulations 2000
- The Personal Pension Schemes (Establishment of Schemes Order) 2000
- The Personal Pension Schemes (Information Powers) Regulations 2000
- The Draft Personal Pension Schemes (Transfer Payments) Regulations 2000
- The Draft Personal Pension Schemes (Concurrent Membership) Order 2000
- The Personal Pension Schemes (Relief at Source)(Amendments) Regulations 2000
- as well as a combined OPRA and Revenue draft application pack for approving Stakeholder Schemes.
All this at a time when there are similar numbers of final Statutory Instruments on Pensions Sharing - more of that to come!
Frequently Asked Questions
Q. Just exactly what is this 'New DC' regime I keep hearing about?
- The 'New DC' regime is being introduced from April 2001 to incorporate most forms of Defined Contribution pensions under a single set of tax laws. Approval under this regime will be possible for individual pensions, such as Personal Pensions and Stakeholder Pensions, and group pension arrangements such as Group Money Purchase Schemes, EPPs, Occupational Stakeholder Schemes and also grouped arrangements, in particular Grouped Personal Pension schemes.
Q. Will it still be possible to establish an 'old regime' CIMP after April 2001?
- Yes. When the 'New DC' regime is introduced next year it will not replace the existing framework for occupational schemes, it will sit alongside it as an alternative for employers. What we're seeing is a widening of choice, not a restriction. So, in practice we will have new CIMPS, and EPPs say, being established in the future under either the existing legislative framework or the 'New DC' regime.
Q. Are Group Stakeholder pension schemes nothing more than just GPPs?
- No. They can be, and many will be, but the 'New DC' regime allows for both Personal Pension based Stakeholder GPPs and for occupational Stakeholder schemes. In effect, the main difference between them, apart from the way they will be regulated, is that the occupational version must be established under trust, as all occupational schemes are required to be. This can be quite confusing because of the inconsistent use by government of the term 'stakeholder'. There is, in fact, no Stakeholder Pension as such in the legislation itself. Stakeholder Pensions are Personal Pensions of a particular type. The confusion arises because the new “kitemarked” (i.e 1% charge cap etc) occupational schemes are also referred to as Stakeholder Pensions.
Q. What are the implications of concurrency?
- The principle of concurrency is basically that people should be allowed to hold different forms of pensions at the same time; concurrently! Since 1956, this is something that has not been allowed, but most people involved with pensions agree that this restriction has been at the root of many of the problems that have beset the industry and its customers in recent years. However, the government, on grounds of cost, could not buy-in fully to the concept and have introduced instead a restricted form of concurrency which has been dubbed 'partial concurrency'. They have imposed an earnings ceiling to restrict concurrency to low to modest earners, those earning below £30,000 pa. What it means in practice is that people who are members of occupational pension schemes, such as Final Salary schemes, will now also be able to contribute to Stakeholder or Personal Pensions at the same time, for as long as they are earning less than £30,000 a year.
Q. What about the person in an occupational pension scheme who is earning just under £30,000 and pays into a Personal Pension too under the 'concurrency' rules, but then actually earns slightly more than £30,000 because of, say, an unexpected bonus paid towards the end of the year. Is it then illegal for him or her to keep the Personal Pension?
- Strictly speaking it would be an illegal contract in this context, but surprisingly, the legislation has been drafted in such a way as to allow people to keep the 'illegal' product for the year in question. Also, in addition to this, and again surprisingly, such people will also be allowed to keep these 'illegal' products going for a further four years.
Q. If someone in a company pension scheme has a Personal Pension or Stakeholder Pension as well, does the overall limit on benefits still apply? ie do Headroom Checks have to be applied as they have done in the past for AVCs and FSAVCs?
- It doesn't look like it.The material produced by the Inland Revenue so far on concurrency seems to imply that in such a case the occupational scheme limits can be breached. In plain English this would mean that people in occupational pension schemes earning less than £30,000 can have a full two-thirds pension from an occupational scheme plus a fully-funded Personal Pension as well. I didn't believe it when I first read it, but this is what it now looks like.
Q. What are the exemptions to the Stakeholder access requirements?
- Employers who offer an occupational pension scheme, which is available for all their employees to join, do not have to make a Stakeholder Pension available, even where the employer may only be making modest contributions to the scheme. Employees who have less than one year’s service need not be offered membership.
- Employers offering membership of a suitable Grouped Personal Pension to all of their employees are similarly excluded from the Stakeholder access requirements if they are prepared to contribute 3% of basic salaries to the scheme. Employees with less than three month’s service need not be offered membership.
- However, in any company where existing group pension arrangements are not available to all staff the employer is obliged to make a Stakeholder Pension available, not just to those excluded from the existing arrangements, but to all employees - including those already in the pension scheme.
- The overriding exemption is that where an employer has fewer than five employees there is no requirement to offer a Stakeholder Pension. It is worth noting here, however, that the exemption applies to the total number employed by the company and not the total of the 'relevant' employees of the company. The employer has to make a Stakeholder Pension available to all 'relevant' employees. Broadly speaking employees are not 'relevant' if they are earning less than the Lower Earnings Limit (LEL), but the number of employees to count for the purposes of the exemption includes those who earn less than the LEL. For example, a small employer could have six employees, but two of them may be earning less than the LEL, so there are actually only four 'relevant' employees. But the employer would not qualify for the exemption from the Stakeholder access requirements because they have six employees in total. However, they would only be obliged to make the Stakeholder scheme available to the four 'relevant' employees in this case, not all six.
Q. Could Stakeholder Pensions replace AVCs?
- Had full concurrency been allowed by government this could well have been the case. But for those earning more than £30,000 a year, AVCs will remain the only product available for topping-up occupational pension scheme benefits. So the answer is 'no, not completely'. However, Personal Pensions and Stakeholder Pensions which provide tax-free cash sums on retirement, and which are more portable than AVCs, are highly likely to be more attractive to people earning under £30,000 a year than AVCs which are unlikely to provide additional tax-free cash directly. They do, of course, generate extra tax-free cash from the main pension scheme itself under the provisions of the 1989 legislation (the so-called '2.25 times rule'), but this is not widely appreciated and is unlikely to stop people changing to the simpler product concept with the
more obvious cash advantages.
Q. I’m confused about ”defined benefit” and “defined contribution” legislation. Can you explain?
- You’re not alone in being confused! The terminology is getting horrendously complicated. Broadly speaking, occupational schemes may be ‘final salary’ (‘defined benefits’) or ‘money purchase’ (‘defined contribution’). In either case, the relevant legislation for tax purposes is Chapter I of Part XIV of the Income and Corporation Taxes Act 1988. (ICTA 88). This provides for benefit limits on pension arrangements.
The ‘New DC’ regime is, however, dealt with under the equivalent personal pension legislation (i.e with contribution limits) namely Chapter IV of Part XIV of ICTA 88.
So “Old DC’ schemes have benefit limits as do DB schemes whereas “New DC’ schemes have contribution limits, similar to current personal pensions.
“This leaflet is based on Scottish Life’s understanding of the current and proposed tax laws. These may change in the future.”