Pensions Bulletin 2021/11
Our viewpoint
11 March 2021
- DWP hikes up the General levy
- State pension corrections under way following LCP report
- Actuaries publish 2020 mortality projection model
- ONS announces minor errors in published RPI figures
- HMRC further extends temporary changes to registered pension scheme processes because of Covid-19
- Actuaries examine covenant leakage
DWP hikes up the General levy
The DWP has decided to go ahead with its favoured Option 1 for increasing the general levy in order to tackle the substantial and growing deficit in respect of the financing of certain activities of the Pensions Regulator, the Pensions Ombudsman and the Money and Pensions Service. This follows a consultation launched last December (see Pensions Bulletin 2020/51) which itself followed on from proposals first set out in October 2019.
Under Option 1 the current occupational pension scheme levy scale is split into two – one for DB schemes and another for DC schemes – and a new levy scale for DC Master Trusts is introduced. Then over a three year period DB schemes see their levy increase by 120%, and DC schemes experience a 50% increase. Much more modest increases are applied to DC Master Trusts and Group Personal Pensions over this period.
The DWP says that, in response to concerns expressed about the rising costs of the three bodies compared to the difficult operating environment currently faced by pension schemes and their sponsors, the Government has decided to freeze the 2021/22 operating budget of both the Pensions Regulator and the Pensions Ombudsman at their 2020/21 levels. It has also decided to reduce by 25% the core element of MaPS funding for 2021/22 that will be chargeable to the levy.
The Occupational and Personal Pension Schemes (General Levy) (Amendment) Regulations 2021 (SI 2021/214) come into force on 1 April 2021.
Comment
The DWP has not played this issue particularly well. First the deficit should not have been allowed to grow to the levels that it has and secondly there should have been more transparency as to how each body’s current and likely future costs relate to the now four types of pension scheme.
State pension corrections under way following LCP report
The DWP is undertaking an exercise to identify and make good (to the extent required by the law) underpayments in state pensions to certain individuals, following a report published last May by LCP partner Steve Webb which suggested that many older women were receiving lower state pensions than those to which they were entitled (see Pensions Bulletin 2020/22). All underpayments relate to the “old” state pension system for those reaching state pension age before 6 April 2016.
Guy Opperman said in a statement made to Parliament on 4 March that those affected comprise the following:
- Those married or in a civil partnership who may be entitled to a Category BL uplift based on their partner’s national insurance contributions (which would have increased their basic state pension to up to 60% of the basic state pension of their husband or civil partner)
- Those who fell into the above category and whose husband or civil partner reached state pension age after 17 March 2008 should have received this uplift automatically when they met the eligibility criteria
- Those who have been widowed where their state pension was not uplifted to include amounts they are entitled to inherit from their late husband, wife or civil partner
- Those who have not been paid the Category D state pension uplift as they should have been from age 80
As well as increases to their state pensions going forward, those in the last three categories above are also eligible to receive backdated payments to when the uplift should have happened.
The Office for Budget Responsibility’s March 2021 Economic and Fiscal Outlook report, suggested that £3bn was the initial estimated cost to 2025/26 of providing for back payments and uplifts to future pension payments for those affected.
The exercise will not cover two groups who still need to claim for an increased pension. These are those married women whose husbands turned 65 before 17 March 2008, and women who divorced after reaching state pension age.
Comment
It had been known for a while that there was an issue, but the actual scale of the problem has turned out to be far greater than expected. Whilst it is heartening to see that the DWP is tackling the issue, anyone who thinks they may be affected should not wait to be contacted.
Actuaries publish 2020 mortality projection model
The Institute and Faculty of Actuaries’ Continuous Mortality Investigation has published its latest mortality projection model (called CMI_2020) and in keeping with its decision announced in December (see Pensions Bulletin 2020/51), the “core” model places no weight on mortality data for 2020 when projecting mortality rates into the future.
However, the new core projections produce cohort life expectancies at age 65 that are about four weeks lower for males and one week lower for females than in the 2019 core version of the CMI model. This is mostly as a result of the projected mortality improvements reaching the long-term rate a year later. This is not directly related to Covid-19, but a consequence of the model’s construction of having a rolling fixed term to reach the user specified long-term rate of improvement.
The CMI reports that mortality rates in England and Wales in 2020 were on average 12% higher than in 2019 because of the pandemic – the largest year-on-year increase in mortality rates since 1929, with 2020 mortality rates the highest seen since 2008.
Accompanying the release is a set of FAQs which describes the CMI model and contains background information on recent mortality experience.
Comment
These latest mortality projections, used by most trustees in the UK to measure the liabilities in their defined benefit pension schemes, produce slightly lower life expectancies than in 2019, but not due to Covid-19. Whether, and if so how, account should be taken of Covid-19 when assessing the likely path of future mortality, is a topic that may command some discussion by trustee boards over the coming period.
ONS announces minor errors in published RPI figures
The Office for National Statistics has announced that there was an error in the published Retail Prices Index in 2020. The published RPI annual growth rate was up to 0.1 percentage points lower than the true figure. However, as is the practice with the RPI, the resulting faulty indices will not be republished. Instead, the correction will feed through into future RPI’s starting with the February 2021 RPI due to be published on 24 March 2021.
Comment
Some trustees may be concerned that the basis on which they may have awarded pension increases in 2020 is now faulty so they will need to revisit. This should not be the case. The faulty RPI figures remain the official ones and so affected pensioners should have received the increase to which they were entitled under the scheme’s rules.
The effect will also be short-lived and relatively small. For example, a pensioner with an annual pension of £10,000 might miss out on £10 of pension in 2021, compared to if the error had not occurred. Although the £10 will not be recovered, the error will not continue into 2022, thanks to the corrective action the ONS is taking.
HMRC further extends temporary changes to registered pension scheme processes because of Covid-19
HMRC’s latest pension schemes newsletter reports on a number of matters, starting with recapping the pension tax measures announced in the Budget (see our Budget Bulletin).
The newsletter goes on to announce a further extension (to 30 June 2021) to the temporary changes to some pension processes that HMRC first announced last March (see Pensions Bulletin 2020/14) and which were subsequently added to and further extended, first to the end of October 2020 and then to the end of March 2021.
Amongst the other topics covered are Scottish income tax rates for 2021/22 (no change to those for 2020/21), Welsh income tax rates for 2021/22 (no difference to England and Northern Ireland) and other matters relating to obtaining relief at source on member contributions.
Comment
The continuation of these temporary changes until we come out of lockdown makes sense, but some could be made permanent as they are simply different ways of working rather than easements on penalties and guidance.
Actuaries examine covenant leakage
A timely report by a working party at the Institute and Faculty of Actuaries provides some insight into the impact of dividends and other forms of covenant leakage on DB scheme funding.
The report sets out some useful background before addressing implications for actuaries and practical considerations within five example scenarios. It also includes case studies from recent high profile corporate failures.
Comment
This is a useful resource for actuaries, especially given the Pensions Regulator’s increasing focus on dividends and covenant leakage when assessing trustees’ funding plans.