Pension Schemes Bill

Written evidence submitted by the Society of Pension Professionals (PS 03)

INTRODUCTION TO THE SOCIETY OF PENSION PROFESSIONALS

 

SPP is the representative body for a wide range of providers of advice and services to work-based pension schemes and to their sponsors. SPP’s Members’ profile is a key strength and includes accounting firms, solicitors, insurance companies, investment houses, investment performance measurers, consultants and actuaries, independent trustees and external pension administrators. SPP is the only body to focus on the whole range of pension related services across the private pensions sector, and through such a wide spread of providers of advice and services. We do not represent any particular type of provision or any one interest - body or group.

Many thousands of individuals and pension funds use the services of one or more of SPP’s Members, including the overwhelming majority of the 500 largest UK pension funds. SPP’s growing membership collectively employs some 15,000 people providing pension-related advice and services.

The Society of Pension Professionals was previously known as the Society of Pension Consultants (SPC).

SUMMARY

 

1) These comments do not cover the collective benefits provisions in the Bill, as those simply delegate powers to the Secretary of State to make regulations – without those regulations, there is not much of substance on which to comment.

2) The Bill appears to be relatively modest in its intentions and we do not have any material concerns.

3) Our concerns at this stage are as follows:

a) some imprecision in the new classification, particularly regarding the definition of "defined benefits scheme";

b) lack of clarity over DC schemes with internal annuitisation;

c) lack of clarity over cash balance schemes;

d) the Bill is drafted in terms of "schemes", therefore apparently not recognising that there could be a number of different arrangements within a scheme. We wonder whether it might, indeed, have been better to borrow the concept of "arrangement" found in the tax legislation;

e) the definition of "retirement income" (page 4 of the Bill as published) does not seem to recognise income drawdown.

CLASSIFICATION OF PENSION SCHEMES

 

4) The new definitions of "defined benefits scheme", "defined contributions scheme" and "shared risk scheme" appear at first glance to be a significant reclassification of pension schemes for statutory purposes.

5) However, on closer inspection, the changes appear to be rather more modest. The intention seems to be simply to create space in legislation for "shared risk" (or "defined ambition") schemes in certain parts of the legislation where those schemes need special treatment, namely short service benefit, revaluation, transfer values, section 67, indexation, and quality requirements for automatic enrolment. The new classification is only used in certain quite specific areas.

Defined benefits scheme

6) The only significant positive use of the definition of "defined benefits scheme" is for the purposes of the automatic enrolment legislation. It is also used negatively, in that such schemes are carved out of the definition of "shared risk scheme". We do have some concerns about the precision of this definition, including the following:

a) the concept of a "promise" is vague and not defined. It could be read as meaning that no private sector scheme could be a "defined benefits scheme". This is because, in the event of employer insolvency, a scheme might not have sufficient assets to fully secure all benefits – and so be unable to provide "a promise, at all times before the benefit comes into payment, about the level of the benefit", thus failing the necessary "full pensions promise" requirement for a "defined benefits scheme".

On this reading, all private sector schemes which are currently thought of as defined benefits would become "shared risk schemes" under the new definitions.

We assume that this is not intended, but the question should be put beyond doubt.

b) the requirement for normal pension age to be "fixed" excludes schemes under which normal pension age changes by reference to state pension age, or is determined by a notice given by the employer to the employee;

c) uncertainty over the reference to factors "other than longevity"; and

d) the carve-out for discretionary benefits in clause 5(6) does not cover scheme-wide discretions (e.g. discretionary increases for groups of pensioners).

7) Despite the fact that the definition is somewhat imprecise, we do not consider that its use is likely to cause many problems in practice, because of the limited circumstances in which the definition is (currently) intended to be used. Nevertheless, if its use is extended in future there is potential for confusion.

Shared risk scheme

8) This definition appears intended to cover: defined benefit schemes with a defined contribution underpin, defined contribution schemes with a defined benefit underpin, cash balance schemes, defined contribution schemes with guaranteed investment returns, etc.

9) We have a query relating to defined contribution schemes, which offer internal annuitisation. If a promise has been made about conversion factors, is that sufficient to classify the scheme as a "shared risk scheme" rather than as a "defined contributions scheme"?

Defined contributions scheme

10) The definition of "defined contributions scheme" is not widely used either. For the most part, the Bill amends existing legislation to replace references to "money purchase scheme" with "a scheme under which all the benefits that may be provided are money purchase benefits". So the new definition of "money purchase benefits" (resulting from the Bridge case) is still used for these purposes.

11) The limited circumstances where "defined contributions scheme" is different to the existing concept of a "money purchase scheme" is only likely to be relevant where a scheme offers internal annuitisation. This would be caught by "defined contributions scheme" but would not be a scheme under which all the benefits are "money purchase benefits" on the new definition.

12) The removal of the statutory concept of a "money purchase scheme" may have been intended to avoid confusion from having references in statute to both "defined contributions scheme" and "money purchase scheme" with the terms being defined differently. However, there is still potential for confusion over this.

CASH BALANCE SCHEMES

 

13) We have a concern about where cash balance schemes fall in the new classification. For the purposes of Part I of the Bill, they would appear to be shared risk schemes.

14) The position is less clear in the following areas.

a) The Pensions Act 2014 will insert a reference to "money purchase benefit" for the purposes of the new 30-day period for an entitlement to short service benefit in section 71 of the Pension Schemes Act 1993. Clause 11 of the Bill will replace this with a new concept of "non-salary related benefit". It is not clear whether this captures cash balance schemes and whether the period for short service benefit to apply is two years or 30 days.

b) The new revaluation provisions inserted by Schedule 2 of the Bill use the distinction between "money purchase benefit, "salary related benefit" and "flat rate benefit". The explanatory note states that, for the purposes of the new revaluation provisions, the benefits from a "final salary cash balance scheme" are "salary-related benefits", but this does not appear to reflect the legislation itself.

October 2014

Prepared 22nd October 2014