Vision | February 2022
Welcome to the February 2022 edition of Vision, our quarterly round up of the latest developments affecting workplace pensions and savings.
Vision
Your regular insight into<br> workplace pensions and savings
**February 2022**
Introduction and contents
Welcome
Welcome to the February 2022 edition of Vision, our quarterly round up of the latest developments affecting workplace pensions and savings and summary of key dates in the coming months.
We hope you find the content of Vision informative. If you have any questions on any of the items covered, please get in touch with your usual Punter Southall Aspire (PS Aspire) contact.
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Key dates in the next 12 months
Key dates in the next 12 months
Temporary increase in National Insurance
From 6 April 2022 there will be a temporary 1.25% increase in the rate of employee and employer National Insurance (NI) as a transitional arrangement before a new Health and Social Care Levy becomes a separate tax from April 2023. This increase could see salary sacrifice becoming an even more tax efficient way of making pension savings.
Removal of flat fees in small DC pension pots
Regulations come into force that prohibit flat fee charges for defined contribution (DC) pension pots with a value of less than £100.
Stronger nudge to pensions guidance requirements take effect
Subject to certain exceptions, trustees / managers of occupational pension schemes will be required to deliver a ‘stronger nudge’ to guidance in relation to applications to transfer or start receiving flexible benefits which are received on or after 1 June 2022.
Regulations for simpler annual benefit statements to come into force
Automatic enrolment schemes that provide money purchase benefits only will be required to issue new simpler annual benefit statements to their members.
Climate Change Governance and Reporting Regulations
The climate-related governance and disclosure requirements which have applied to trust-based schemes with assets of £5 billion or more, master trusts and authorised collective money purchase schemes from October 2021, will be extended to schemes with £1 billion or more of assets from October 2022.
Auto-enrolment thresholds for 2022/2023 announced
Auto-enrolment thresholds for 2022/2023 announced
The Department for Work and Pensions (DWP) has confirmed that the auto-enrolment thresholds remain unchanged for the 2022/2023 tax year:
- The earnings trigger remains at £10,000 a year, or £833 a month, or £192 a week
• For those employers paying contributions based on banded qualifying earnings, those thresholds are also unchanged:
- The lower earnings limit is £6,240 a year, £520 a month and £120 a week
- The upper earnings limit is £50,270 a year, £4,189 a month and £967 a week
The lower earnings limit is also the earnings threshold above which employer pension contributions are mandatory for all members of a qualifying scheme, regardless of how they were enrolled.
Despite freezing the thresholds, the DWP expects pension savings will be slightly increased, when compared to the 2021/2022 tax year, due to wage inflation. One industry commentator estimates that it will bring an extra 17,000 people into auto-enrolment, of which around 70% are likely to be women, and an extra £26 million in additional pension contributions.
It is worth noting that this decision means the auto-enrolment and NI lower earnings limits are no longer aligned, the NI figure increasing to £6,396 for the 2022/2023 tax year. Some payroll/auto-enrolment software may need updated to allow for the now different lower earnings limit to be recorded.
This freeze, arguably a missed opportunity to address recognised issues, leaves some anomalies that employers may want to consider addressing to ensure their employees are treated more equally.
Lost tax relief
As the earnings trigger is lower than the personal allowance for income tax (in most cases £12,570 a year for both the 2021/2022 and 2022/2023 tax years), where an employer deducts pension contributions before tax under the ‘net pay arrangement’ (a method which is common in trust-based schemes), non-taxpayers will miss out on any form of pensions tax relief on their employee contributions. We outline in a later article how the Government plans to address this in the next few years.
No retirement savings
The Government has stated its intention to reduce the auto-enrolment minimum age to 18 and remove the lower earnings threshold by the mid-2020s. In the meantime, younger employees (under the age of 22) and lower paid/part time employees, a higher proportion of which are women, are more at risk of missing out on retirement savings where their employer operates their pension scheme under ‘compliance minimum’ auto-enrolment rules. These employees do, of course, have the option to opt-in or join, but typically they don’t, which is one of the main reasons why the Government has proposed the above changes.
If you would like to discuss any of the above and/or your particular circumstances, please contact your usual PS Aspire consultant.
Pensions tax allowances for 2022/23
Pensions tax allowances for 2022/23
As announced in the Spring Budget 2021, the pension tax allowances will remain unchanged for the 2022/23 tax year:
- The lifetime allowance will remain frozen at £1,073,100 until April 2026, with no inflationary increases applied. This means more and more individuals may face lifetime allowance charges.
- The standard annual allowance remains at £40,000 and the money purchase annual allowance, which impacts anyone who has accessed their pension flexibly, is also unchanged at £4,000.
- The tapered annual allowance will continue to apply to individuals with ‘adjusted income’ over £240,000 and ‘threshold income’ over £200,000. For those affected, the annual allowance will be reduced by £1 for every £2 of adjusted income over £240,000, to a minimum of £4,000.
Minimum Pension Age is changing
Minimum Pension Age is changing
Currently, most pension scheme members can access their pension savings from age 55, their normal minimum pension age (NMPA). However, in the Finance Bill 2021/22, the Government has confirmed its intention to increase the NMPA to 57 from 6 April 2028.
Whilst we have known for some time that this change was in the pipeline the Finance Bill, released in November 2021, included two notable changes in the form of retrospective cut off dates, that have effectively closed the door on schemes and/or individuals being able to take action to protect their current NMPA:
- Only schemes that gave members an ‘unqualified right’ to take benefits at 55 in their rules as at 11 February 2021 will be able to protect that age for existing members, a protected pension age.
- New members post 11 February 2021 who had joined such a scheme by 3 November 2021, i.e. had already joined before this rule change was announced, can also have a protected pension age of 55.
The original draft rules gave individuals the opportunity to transfer to a scheme which had a protected pension age of 55, provided this was done before 5 April 2023. This window was closed following industry concerns that it could have opened the door to scammers.
Bearing in mind that there could be amendments before the Finance Bill becomes the Finance Act and passes into law, the following reflects our current expectations around how this will work in practice.
Schemes with protected pension ages
Protection is only given if the scheme rules as at 11 February 2021 specifically gave members an unqualified right to take benefits at 55. This means the rules expressly state that benefits can be drawn from age 55 and the member mustn't need the consent of anyone else such as the trustees, scheme administrator or employer to take benefits at this age.
Requiring consent is most common under trust-based pension schemes where the rules often state that trustee consent is required for a member to take their benefits before the scheme’s normal retirement age. Contract-based arrangements such as personal pensions (including group personal pensions) and stakeholder plans will potentially have adopted model scheme rules which link the age at which benefits can be accessed to the 'normal minimum pension age' or its underlying legislation, rather than an actual age such as 55. If they are set up in this way, none of these schemes or their membership will benefit from protected pension ages.
Members in schemes with existing protected pension ages, such as occupation related early retirement ages that were in place before 6 April 2007, and those who retained an early pension age when the NMPA changed from 50 to 55 with effect from 6 April 2010, will not be affected by this latest increase.
Transfers from schemes with a protected pension age
Individuals with a protected pension age associated with scheme rules will be able to maintain protection on transfer, though what is protected depends on the type of transfer:
- A bulk (also known as a ‘buddy’) transfer, where more than one member of a scheme transfers at the same time to the same receiving scheme, will maintain the protected pension age on both the funds transferred and any new monies that are paid into their new plan in the new scheme.
- An individual transfer will also maintain the protection on the funds transferred, but not on any new contributions. This is dependent on ring-fencing the funds with the protected pension age separate from new monies, otherwise protected pension age status would be lost on transfer.
The ability of pension providers and schemes to support protected pension ages and bulk transfers varies and should be checked on a case-by-case basis when members are transferring funds and/or if an employer is considering changing their pension scheme.
Who this will affect
The increase in the NMPA on 6 April 2028 takes place around the same time as State Pension age reaches age 67, and the intention is that the ages will remain aligned with the NMPA increasing to 58 when State pension age increases to 68. However, unlike the State Pension age timetable which phases in changes over c.12 months, NMPA changes will not be phased. For members without a protected pension age, the increase to age 57 means:
- Those born before 6 April 1971 will have reached age 57 before 6 April 2028 and are therefore unaffected.
- Those born between 6 April 1971 and 5 April 1973 (inclusive) will have a window from their 55th birthday to 6 April 2028 to start taking benefits before the NMPA increases to 57. If they don't access their pension during this time, they will need to wait until their 57th birthday.
- Those born on or after 6 April 1973 will have a minimum pension age of 57.
Protected pension ages are likely to be the exception rather than the norm, so the majority of pension scheme members will simply see the earliest age at which they can take benefits increase to age 57 on 6 April 2028. This may not be an issue for most people; although the ‘pension freedoms’ introduced in 2015 allow more ways in which to access pension savings from NMPA, research suggests that people still retire much later and there is evidence that, as a result of the pandemic, many workers are delaying their retirement (source: When will you retire? The average age is 59 but many will work longer | This is Money).
Trustees and employers will have to decide when and how to inform affected members to ensure they have sufficient notice of the increase in the NMPA so they can adjust any plans they may have to retire or access their benefits.
To find out more about how this impacts your pension scheme and employees, contact your usual PS Aspire consultant.
New pension transfer regulations come into force
News for trust-based schemes
New pension transfer regulations come into force
From 30 November 2021, new regulations came into force to give trustees and scheme managers greater power (and greater responsibility) when processing transfers. The new regulations apply to all pension transfers, including those from personal pension plans.
As a result, trustees, providers and administrators are required to carry out new checks before a transfer takes place to determine whether the request meets the conditions to enable a statutory right to transfer, or whether any amber or red flags are identified. Failure to carry out the required due diligence could expose trustees or managers to potential liability should a transfer be allowed to take place to what turns out to be a scam arrangement.
These additional requirements give trustees and managers the power to pause or prevent a transfer request where any concerns are present:
- If there are any amber flags, the member must seek guidance from MoneyHelper before the transfer can be completed.
- If there are any red flags, the trustees or scheme manager have the power to refuse the transfer.
So, what checks must be carried out?
Step 1: Check if the receiving scheme is a public service pension scheme, authorised master trust or an authorised collective money purchase scheme. If it is then the transfer can proceed without further checks.
Step 2: If the transfer is to an occupational pension scheme, the member must be asked to provide evidence that there is an employment link or, if to a qualifying overseas pension scheme (QROPS), an employment or residency link. Where the receiving scheme is not occupational or a QROPS e.g. a low-risk personal pension scheme, the trustees or manager should assess whether the transfer can proceed without additional checks.
Step 3: Assess if any amber or red flags exist. Examples of these are set out in the table to the right.
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Amber flag examples
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Red flag examples
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The member hasn’t or can’t provide an employment or residency link.
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The member requested a transfer after unsolicited contact.
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Overseas investments are included in the scheme (this does not refer to, for example, a global equity fund, but where assets are invested in unregulated funds).
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The member has not provided evidence of receiving guidance from MoneyHelper.
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High-risk or unregulated investments are included in the scheme.
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Someone carried out a regulated activity without the right regulatory status.
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Scheme charges are unclear or high.
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The member has been offered an incentive or has been pressured to make the transfer.
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Further examples and guidance can be found from The Pensions Regulator (TPR).
Trustees should ensure that they have reviewed, in conjunction with the scheme administrator, how transfer processes may need to be updated and what additional due diligence processes are required.
Government to rectify tax-relief anomaly for low earners
Government to rectify tax-relief anomaly for low earners
Tax relief on employee contributions is granted by HM Revenue and Customs (HMRC) in part by way of an incentive for saving into a pension plan, with the employer’s contribution not being assessed for tax on the employee. As such, they are an extremely attractive way for employees to save for their retirement as part of their overall planning.
However, an anomaly between the two methods of tax relief that pension schemes can operate – the relief at source (RAS) basis and the net pay arrangement (NPA) - has resulted in low earners missing out on tax relief under the latter.
Net pay arrangement
Under this method, typically used by trust-based schemes, the employer deducts gross contributions from an employee’s gross pay before calculating income tax using Pay As You Earn (PAYE). In this way the employee should get tax relief immediately at their highest marginal rate. However, if an employee doesn’t earn enough to pay income tax, they won’t get any tax relief. When submitted to the scheme provider, there is no tax relief claimed from HMRC.
Relief at source
Through RAS, which is the method used by contract-based arrangements such as personal pensions, an individual’s contributions are paid net of basic rate tax. The pension provider sends a claim to HMRC for the basic rate tax relief due and applies it to the member’s pension plan. This happens whether the member earns enough to pay income tax or not. Anyone paying tax at higher than basic rate can claim further tax relief due directly from HMRC.
Having pledged in its 2019 election manifesto to fix this issue and following a ‘call for evidence’ in 2020, the Government finally published the outcome of this consultation in October 2021. This confirms that the Government will introduce a system to make top-up payments directly to low-earning individuals saving in NPA schemes in respect of pension contributions made from the 2024/25 tax year onwards.
The Government has stated this change will mean that all lower-earning pension savers should receive similar outcomes, regardless of how their pension scheme is being administered for tax purposes. According to the consultation response, up to 1.2m individuals, broadly 75% of whom are women, could benefit by an average of £53 a year.
To be able to administer the new system, the Government has announced a £71m investment in the modernisation of pensions tax relief administration, including RAS claims.
Importantly, the top-ups will be paid after the end of the relevant tax year, with the first payments being made in 2025/26 and continuing thereafter. The Treasury has said that the time lag between the announcement and implementation of this system is due to the complex nature of the changes required to IT systems. It also believes this basis is preferable, as the whole of a member’s taxable income for the 2024/25 tax year will be known and so the top up can be calculated accurately.
The Government’s response also suggests that HMRC will notify individuals that they are eligible for a top-up, and they will be invited to provide the necessary details for HMRC to be able to make the payment to them. In effect, the onus will be on those disadvantaged individuals to claim the top up by providing payment details, which could mean there is a real risk of non-take up.
To find out more about how this might impact your pension scheme and employees, contact your usual PS Aspire consultant.
Regulations banning flat fees on small pots laid before Parliament
Regulations banning flat fees on small pots laid before Parliament
In January 2022, new measures to protect small pension pots from being eroded by charges were laid before Parliament. The regulations, which will come into force from April 2022, ban the charging of flat fees on pension pots held within the default investment strategy of a qualifying workplace pension scheme, where that fee would reduce the value of the pot to less than £100. A proportion of a flat fee can be deducted as long as this does not result in the pot falling below £100 in value.
Pensions Minister, Guy Opperman, explained that the £100 threshold (known as the ‘de minimis’) has been implemented to protect savers, particularly those who change jobs regularly or take on short-term work and, as a result of auto-enrolment, have accumulated numerous small pots. The regulations are expected to benefit hundreds of thousands of savers across the UK.
The regulations come following the DWP’s May 2021 consultation: Permitted Charges within Defined Contribution Pension Schemes (covered in our August edition of Vision), which aimed to gather views on the implementation of the de minimis and the proposed legislation. In addition, the consultation sought views on a proposal to move to a universal charging structure which would only allow charging of a single percentage charge based on the value of the member’s pot within the default strategy. However, the Government’s response to the consultation, which was published in November 2021, confirmed that the DWP would not be implementing a universal charging structure for DC pension schemes following industry feedback.
As well as the de minimis pot size limit, the Government has confirmed that it continues to engage with the pensions industry on wider consolidation initiatives to tackle the growth of small pots, including through the industry-led Small Pots Co-ordination Group.
‘Stronger nudge’ to pensions guidance regulations published
News for trust-based schemes
‘Stronger nudge’ to pensions guidance regulations published
From 1 June 2022, new rules come into force which are designed to increase the take-up of Pension Wise guidance at the point individuals access their DC savings, with the latest retirement income data showing that only 14% of consumers who are accessing their DC pension pot for the first time currently make use of this service (source: WPC report on protecting pension savers).
Currently, trustees are required to make such members aware that free and impartial pensions guidance is available, to provide details of the Pension Wise service, and to tell members that they should consider taking regulated advice. However, there is currently no obligation for them to ensure that members do in fact access the guidance.
In January 2022, the DWP published its response to the July 2021 consultation on proposed regulations introducing requirements for individuals to be given a stronger nudge to pensions guidance. The new regulations state that, from 1 June 2022, when a member makes an application to access or transfer their flexible benefits, or a communication in relation to such an application, trustees must:
- refer the member to appropriate pensions guidance and explain its nature and purpose;
- facilitate the booking of a Pension Wise appointment as part of the application process;
- explain to the member that their application cannot proceed unless they have received appropriate pensions guidance and notified the trustees of its receipt, or opted out of doing so by giving the trustees an opt-out notification.
Trustees are expected to continue to deliver the stronger nudge in all subsequent interactions with the member in relation to the same application, unless the member confirms that they have received appropriate pensions guidance or provides the trustees with an opt-out notification. In addition, trustees must keep a record of the member’s receipt of pensions guidance, their receipt of an opt-out communication from the member, or the applicable exemption.
There are some exemptions to the above requirements; the stronger nudge will not be required in the following circumstances:
- the member is under the age of 50
- receiving flexible benefits is not the purpose, or one of the purposes, of the member’s application (for example, if it is a transfer to consolidate benefits)
- the trustees have received from the member (or a person authorised to act on their behalf) verbal or written confirmation that the member has opted out of, or received, appropriate guidance following a referral by the trustees or managers of a different scheme
- the member is transferring into a pension scheme that is regulated by the Financial Conduct Authority (FCA)
In relation to the opt-out notification, the DWP has stated that it must be contained in a separate communication to other application documents, for example as a separate opt-out form. The exception here is where the trustees receive verbal or written confirmation from the member (or a person authorised to act on their behalf) that the member has received guidance/regulated financial advice in connection with the application in the previous 12 months, the member qualifies for a serious ill-health lump sum, or their application is solely to transfer their flexible benefits.
Discussing the purpose of the new regulations, Guy Opperman stated ‘The Stronger Nudge provisions are an important measure designed to help people make informed decisions about accessing their pension savings. These measures will help protect consumers and encourage use of the free, impartial guidance that is available to help them make informed decisions about the options available to them.’
TPR has stated that it aims to produce its own guidance ahead of the new duties coming into force to help trustees and administrators prepare for the changes.
At the same time, similar FCA rules will come into effect for providers of personal pensions and stakeholder schemes.
Simpler annual benefit statements
Simpler annual benefit statements
With effect from 1 October 2022, auto-enrolment schemes that provide DC benefits only will be required to issue new simpler annual benefit statements to their members (excluding pensioners). The statements will need to be in a format that does not exceed one double sided sheet of A4 paper when issuing a paper statement and the equivalent length when printing a digital statement accessed on-line or via e-mail.
The content and layout of the statement should enable the member to easily understand:
- how much money they have in their pension plan and what has been saved in the statement year;
- how much money they could have when they retire;
- what they could do to give themselves more money in retirement.
Pension schemes are able to use their own branding and colour schemes, but this should not obscure the flow of information, nor should it increase the length of the annual statement beyond the permitted length. The language used should be simple, accessible, and avoid use of jargon or complex terminology. When designing their statements, trustees and providers should refer to the DWP's statutory guidance, which is designed to help them understand how to present the information and meet the new requirements.
A review of their effectiveness will be carried out before 1 October 2027, and within every five years after that, with the DWP considering the lessons learnt when deciding whether to extend the approach to other schemes.
Trustees and providers of in scope schemes will need to ensure that they are ready to produce the new simpler statements in time for their first annual benefit statements that need to be issued on or after 1 October 2022.
PLSA publishes ESG Made Simple guide
News for trust-based schemes
PLSA publishes ESG Made Simple guide
Trustees are subject to legal requirements when setting their investment policy and choosing investments, and this includes a requirement to take account of Environmental, Social and Governance (ESG) factors, including climate change.
Since 1 October 2021, trustees of schemes with assets of more than £5 billion and all authorised master trusts, have been required to produce and publish a Task Force on Climate-related Financial Disclosures (TCFD) report online in a publicly available format. It is likely that this requirement will extend to most schemes by 2025. This is in addition to the previous requirements for schemes to clarify and explain their policies regarding ESG, including climate change, that became law in October 2019. As a result of these new regulations, it is essential that trustees have a clear strategy on ESG.
The Pensions and Lifetime Savings Association (PLSA) has produced a Guide to help trustees understand ESG as an investment concept and show how it can be integrated into the investment strategy and oversight of pension schemes.
The Guide, produced in partnership with Aegon:
- includes a glossary of relevant terms and clearly defines their meanings;
- considers emerging key ESG themes of climate change and carbon pricing, ESG ratings, ESG and government bonds;
- looks at how trustees should consider ESG when choosing an investment manager;
- highlights some of the leading organisations that promote ESG such as the TCFD, the Financial Reporting Council (FRC) and the Principles for Responsible Investment (PRI);
- provides a template ESG policy for pension schemes providing a suggested checklist of steps to take to become ESG compliant.
WPC publishes report on accessing pension savings
WPC publishes report on accessing pension savings
In January 2022, the Work and Pensions Committee (WPC) published its second report in its series on the impact of pensions freedoms, concentrating on the issues people face when accessing their benefits.
The report calls on the Government and regulators to play a more active role in supporting savers to help them make better decisions about their money and makes the following recommendations:
More guidance
The committee wants more people to get help when deciding how to take their pension savings. It suggests the Government sets a goal of at least 60% of people to be using Pension Wise or receiving paid-for advice when accessing their pension pots for the first time.
It wants the Government to run two trials for automatic Pension Wise appointments: one at age 50 before an individual can access their pension savings and one when they access their pension for the first time.
Change the Pensions Advice Allowance
The Pensions Advice Allowance, which allows £500 to be withdrawn from a pension up to three times in different tax years to pay for advice, should be overhauled with the annual limit removed. To increase take-up, advisers should be encouraged to signpost its use.
De-coupling tax-free cash
The committee considered a proposal to allow de-coupling of tax-free cash, where someone could take their 25% cash without designating what to do with the rest of their pension pot. It recommended that regulators scope the research and testing needed to investigate this proposal further.
Less pension complexity
The committee warned the Government not to add to pension complexity. However, with three annual allowances and seven sets of transitional protections, not to mention the complicated protection regime that will be introduced to accompany the increase in the NMPA (see our NMPA article for more information), it does not seem feasible that this will change any time soon.
Investment market snapshot
Investment market snapshot
The below graphic shows how different asset classes available to investors have moved over the year to 31 December 2021. The market movement can give you an idea of how the investments in your pension arrangement may have moved over the same period, and the potential impact on employee savings.
If you would like more information on how to monitor the investments used by your pension arrangement, please contact your PS Aspire consultant.
Source: Thompson Reuters, based on information available as at 21 February 2022.
Please note that the value of investments may fall as well as rise, and individuals may get back less than they invested. Past performance is not a guide to future performance.
The market snapshot is provided for information purposes only. PS Aspire accepts no liability for any costs, liabilities or losses arising as a result of the use of, or reliance upon this information by any party.
