3 September 2020
- Average DB pension transfer breaks through half million pound barrier but sharp fall in transfer activity
- Industry responds to the Pensions Regulator’s first consultation on new approach to scheme funding
- Annual allowance pension savings statements deadlines draw near
- Pensions Regulator blogs on targeted auto-enrolment enforcement
Average DB pension transfer breaks through half million pound barrier but sharp fall in transfer activity
We have issued our latest quarterly update on the transfer quotations and payment activity for the DB schemes we administer. The main headlines include:
- Transfer quotation levels in Q2 2020 were down 25% from the previous quarter, with 1.1% of deferred members receiving a quotation in this quarter. This is the lowest level we have seen since Q2 2016
- Take-up rates for the latest quarter are also the lowest we have seen since 2016 with only 83 of 412 quotes taken. However, the average transfer value taken increased from £425,000 for Q3 quotations to £556,000 for Q4 2019 quotations
- An end to contingent charging - in June 2020, the Financial Conduct Authority confirmed the introduction of a ban on “contingent charging” (advising on a transfer where the adviser’s own charges are substantially dependent on the outcome) by financial advisers for DB transfer advice, effective from Q4 2020. This could have a significant effect on transfer quotation and payment activity in future
- The Covid-19 lockdown led to a significant reduction in transfer activity, with the rate of requests initially falling by around two-thirds from pre-lockdown levels before inching back up over June. Our memo includes a summary of our weekly analysis of activity levels over the Covid-19 lockdown
- Transfer value suspensions and monitoring - last quarter’s survey of LCP’s admin clients showed that 28% of schemes had decided to pause or reduce transfer quotations as a result of the Regulator’s Covid-19 guidance. By the end of July, all of these had resumed quoting, although some on a reduced basis. The Regulator’s guidance also calls for enhanced monitoring of transfer activity over the pandemic, and so we have been monitoring transfer requests for all LCP admin clients on a weekly basis
More details, including charts, are available here.
It’s no surprise that this quarter has seen such a dip in pension scheme members asking for quotations or taking up quotations they had already received, given that it coincided with the height of the pandemic. But it seems as though those with the largest pensions have been the least likely to be put off from completing a transfer.
While the Covid-19 impact is ongoing, the transfer market is about to enter into very new territory as the FCA’s ban on ‘contingent charging’ comes into effect in a few weeks. This could have a big impact on the number of quotations requested. It may also make it harder for members to get the right advice as we expect it will lead to many advisers leaving the market.
The Pensions Regulator’s first consultation on the principles of the proposed new scheme funding regime (see Pensions Bulletin 2020/09) closed on 2 September.
The Pensions Regulator will now consider the responses, and use them to inform its second consultation on the draft of the replacement DB Funding Code of Practice, which is now expected in the first half of 2021. It will also carry out an impact assessment on the new Code.
Combined with regulations expected off the back of the Pension Schemes Bill, the new Code is fully expected to be the biggest shake-up in the financial management of DB pensions in over 15 years and will have significant implications for many, perhaps most, DB pension schemes in the UK.
Many in the industry (including LCP) have commented on the loss of flexibility under the proposals and the potential overreach of the Fast Track approach. In addition to being a simple approach for smaller and better funded schemes, Fast Track is also used as the benchmark for Bespoke approaches, and can be imposed by TPR if it is not satisfied with the evidence for why a Bespoke approach is appropriate.
LCP’s own response to the consultation built on our July on point paper which covered the potential negative unintended consequences of the proposals, including the need for flexibility in the Bespoke regime. We also commented on recent hints from the Regulator that it will set the Fast Track parameters as less prudent given the current economic environment, and the potential for this to lead to a weaker negotiating position for trustees.
It will be interesting to see how the Regulator considers the feedback from the industry and to what extent it influences the drafting of the new Code.
HMRC’s latest pension schemes newsletter contains three sets of deadline reminders, the most significant of which relates to 2019/20 annual allowance (AA) pension savings statements. Scheme administrators are reminded that by 6 October 2020 they must issue such statements proactively to scheme members:
- Who made 2019/20 savings to their pension scheme of more than the general (£40,000) annual allowance; or
- Where the scheme has reason to believe that a member has flexibly accessed their pension rights (anywhere) before 6 April 2020 and the member had money purchase savings made to the scheme in 2019/20 of more than £4,000
The newsletter also contains reminders about 2019/20 relief at source annual returns (5 July 2020 deadline, which has passed – so the newsletter has information about what to do for failed returns) and 2019/20 relief at source annual claim returns (5 October 2020 deadline).
The AA statement deadline is now just over a month away, so schemes should have this well in hand. HMRC includes a subtle reminder that of course the group of members to whom a statement must by law be sent proactively does not cover everyone who has an AA charge – because that depends on their personal AA which might be cut back by the taper, and because some members accrue benefits across more than one scheme – perhaps salary-linked old DB and new DC provision?
Conversely, not everyone who falls into the “proactive group” has a tax charge because some may have carry forward to help out, though less and less so as the taper impacts more carry forward years. Trustees/employers may want to send out statements to a wider group than the strict minimum “proactive group”.
In closing off the 2019/20 tax year, it is worth remembering that tapering of the AA could arise for those with total income from £110,00 (it is only from the 2020/21 tax year that this entry point has been lifted up to £200,000). So Voluntary Scheme Pays continues to be important for a material number of senior staff, and providing information to members will be key to avoiding a major part of the problems that arose for senior NHS consultants. VSP gives members an easy way to pay their AA charge, is in many cases extra tax-efficient, and makes it easier for members to assess the net value of accruing benefit in a scheme.
The Pensions Regulator has published a blog on the results of its approach to enforcing employers’ auto-enrolment duties during the Coronavirus pandemic. The blog and linked data in the quarterly compliance and enforcement bulletin indicate that the Regulator’s “pragmatic” approach to enforcement has worked well. Where employers have struggled to comply the Regulator has been prepared to delay escalation while escalating enforcement activity where significant and wilful non-compliance has emerged, often via whistleblowers.
The Regulator states that they have seen no evidence of a significant spike in non-compliance and confirms that, while keeping its approach under review it will take action where necessary to protect savers.
As with so much Covid-related, the real test will be how things continue in the coming months. But it has to be good news that the vast majority of employers seem to have found a way to continue to meet their auto-enrolment duties in these most testing of times.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.