UK Pensions Review 2018
As 2018 draws to a close we take a look back at the changes to UK Pensions this year. From a proposed increase to the Lifetime Allowance, to the Pensions Cold Calling Ban, read below to find out more.
Employers who are paying the minimum statutory contributions under the auto-enrolment legislation should have increased employer contributions into their workplace pension scheme or other qualifying scheme. From 6th April 2018 from 1% to 2%, and employee contributions from 1% to 3%, with a further increase due on 6thApril 2019 to an employer contribution of 3% and employee contribution of 5%.
Employers should also remember the need to re-enrol employees who have opted out every three years, subject to some exceptions.
The Qualifying Earnings Band (being the band of earnings used to calculate contributions for auto-enrolment) increased from 6th April 2018 to £6,032 from £5,876 at the lower end and to £46,350 from £45,000 at the upper end. The Government reviews these figures every year.
2. Pension Lifetime Allowance
In the Autumn Budget 2018 it is proposed that the Lifetime Allowance be increased to £1,055,000 from £1,030,000 but there were no such increases for those on HMRC Fixed or Enhanced Protection. No changes were made to the annual pension allowance of £40,000 reducing to £10,000 for those earning between £150,000 and £210,000.
3. Pension Protection Fund Compensation Cap
The PPF pays compensation to members of eligible defined benefit schemes when there is a qualifying insolvency event in relation to a sponsoring employer, and where the defined benefit scheme has inadequate assets to cover the PPF level of compensation. The cap of £38,505.61 increased to £39,006.18 with effect from 1st April 2018. The 90% level of compensation that applies for scheme members entering the PPF before normal pension age will therefore equal £35,105.56p.
4. New Powers for the Pensions Regulator
Following a White Paper, a DWP consultation took place until 21st August 2018 to increase the Regulator’s powers to enable the Regulator to:
- Have more transparency of corporate transactions more quickly
- Take action against directors for wilful or grossly reckless behaviour
- Have new powers to impose civil and criminal penalties, and
- Have enhanced and consolidated information gathering powers
5. Collective Defined Contribution Schemes
The Royal Mail and others have lobbied for new legislation to be passed providing for a new UK type of defined contribution scheme (known as collective defined contribution schemes, defined ambition or target benefit schemes which would pool risk between very large numbers of beneficiaries and seek to smooth out payments of pension benefits when stock markets fall. One can look at such a scheme as being somewhere between a defined benefit scheme and a defined contribution scheme. The Government are consulting until 16 January 2019 on how a collective defined contribution scheme might work and on the changes to legislation.
From the employer’s perspective there is no risk and the employer pays out the same monthly payments, but from the employee’s perspective there is a target to receive on retirement. As a collective scheme, tens of thousands of employees get together in a single plan. Industry-wide schemes require co-operation between employers. Better returns may be provided by investing in longer term assets such as mortgages and transport projects. Costs are lower as there is no accounting for each employee’s pension pot.. But returns are not guaranteed. The Netherlands have been running these CDC schemes for years. In 2012, 25% of the Netherlands CDC schemes had to cut pensions by around 1.9%.
Whilst this is being talked about in the UK pensions industry of late, the Government is otherwise pre-occupied with Brexit so there is no sign at the moment of such schemes coming into existence through the passage of legislation.
6. Pensions Cold Calling Ban
Whilst HM Treasury has stated its intention of banning pensions cold calling as soon as possible, following a consultation on draft regulations, the ban has been delayed as it seems the Government is pre-occupied with Brexit.
7. Master Trusts Legislation
Master trusts have become increasingly popular. The Occupational Pension Schemes (Master Trusts) Regulations 2018 are due to come into operation in the Winter 2018/19. The Regulations will provide for the Pensions Regulator to supervise master trusts.
The number of master trusts operating is expected to reduce to avoid compliance with the tougher requirements. Under the new rules master trusts will need adequate capital which is a problem for the smaller players.
8. Lloyds Banking Group Pensions Trustees Limited v Lloyds Bank PLC High Court Decision
On 26 October 2018 Mr Justice Morgan held that the trustees must adjust the Non-Guaranteed Minimum Pension Benefits in order that the total benefits received by men and women members with the same age, service and earnings are equal, i.e that the contracted out element of the pension must be equalised. Guaranteed Minimum Pensions are the minimum pensions that must be paid to pension scheme members who were contracted out of state pension before 1997. Under the ruling, the schemes trustees must look at the pension benefit which would have been paid to a male and female, and pay the higher of the two.
9. Barnados Decision
The Scheme Rules provided for pension payments to be increased in line with the Retail Prices Index (RPI). The Employer wanted to change the index from RPI to the Consumer Price Index to reduce cost. The Supreme Court unanimously rejected this approval on the basis that the Scheme rules did not allow such a change.
10. Budget – Autumn 2018 – Insolvency Priority Order
In the Budget the Chancellor proposed to make HMRC a preferential creditor in the event of insolvency. So HMRC will rank ahead of the pension scheme rather than pari passu with the pension scheme.