Last year was relatively uneventful for pension developments after the previous years of constant change, but there are a number of areas where the system is still letting savers down, and some major consultations are in progress that will lead to important new initiatives.
For members of final salary schemes, the Department of Work and Pensions (DWP)’s consultation on the security and sustainability of defined benefit (DB) schemes could have a major impact. The findings were published in a delayed White Paper shortly before we went to press.
The challenge here is the very fine line between protecting deferred members who have built up benefits under a DB pension scheme, and yet ensuring the company can stay in business and continue to provide employment for the current generation of workers, as well as supporting the pension scheme in future. The White Paper announced that workers in DB schemes will be given greater protection when things go wrong, under a package of measures giving The Pension Regulator (TPS) more powers.
Attempts to weaken indexation in final salary schemes
A Green Paper published last year suggested that employers with ‘stressed’ schemes should be allowed to change the basis of their members’ annual inflation increases from the retail prices index to the typically slower-rising consumer prices index (CPI). By the government’s own admission, such a move would cost pensioners around £20,000 of income over their lifetime. Unite, Britain’s largest union, opposes any such measure, saying it equates to ‘legalised theft’. The paper even proposed that schemes in dire straits might put their members’ annual increases on hold altogether.
Industry experts have called for the government to introduce a statutory override to scheme rules, so that trustees can implement this switch to the lower CPI to reduce the burden on employers.
New rules to punish directors
The new White Paper outlined plans to make TPS’s powers ‘clearer, quicker and tougher’, including legislation for a new criminal offence to counteract reckless behaviour, and substantial fines for company directors who deliberately underfund their DB scheme. These proposals follow recent high-profile corporate collapses such as those of construction group Carillion and British Homes Stores.
Ahead of the White Paper’s release, prime minister Theresa May also proposed new powers to block a company takeover that might put a pension scheme at risk. To set that move in context, about 28,000 Carillion members face cuts to their retirement benefits, yet the company boosted shareholder dividends and former chief executive Richard Howson received a £1.5 million pay package, including £245,000 in bonuses, just a year before the company’s collapse (read more about Carillion and the pension danger to shareholders on page 30). The industry slammed May’s suggestion, however, and this plan was dropped from the White Paper amid concerns that such a move ‘could inhibit legitimate business activity’.
Pooling: The long-term solution?
Another proposal is to pool schemes in order to harness economies of scale via fewer, larger schemes, which could greatly reduce costs and deliver better investment returns through better governance and advice. Such a major project is likely to be many years in the development, however, judging by the current initiative to pool the UK’s 80 plus local authority pension schemes, which after four years has only completed the first stage of the process in legally consolidating the funds.
Equal spousal pensions for same-sex partners
Of the many recent court rulings with implications for workplace pensions, the case that stands out as a game-changer is Walker v Innospec Limited, which relates to same-sex spouses’ pensions.
Walker worked for chemical firm Innospec between 1980 and 2003, and sought clarification of the pension his same-sex partner would receive should he die. Innospec argued that it had no obligation to pay a spousal pension to Walker’s husband because the Civil Partnership Act 2004 came into force on 5 December 2005, which pre-dated Walker’s service.
The Supreme Court unanimously allowed Walker’s appeal, however, and ruled that the spouse’s pension should be calculated on his full years of service, and that the Equality Act 2010, which provides an exception to non-discrimination rules where the right to a benefit is accrued before 5 December 2005, should be disapplied.
All pension schemes should now be looking over their membership base to rectify cases where a same-sex spousal pension should have been paid and establish whether there are arrears to pay, with interest for late payment. It does not apply, however, to member deaths prior to 2 December 2003, the deadline for transposing the Equal Treatment Framework Directive into domestic law.
Over-taxation on flexible pension withdrawals
One problem with the new flexible pension regime that has understandably niggled investors is the over-taxation of pension withdrawals. Currently, HMRC taxes withdrawals from pension pots on a ‘Month One’ basis, which assumes the same withdrawal will continue to be made in every month for the rest of the tax year, so if you take a very large lump sum from your pension – say to pay off your mortgage – the taxman assumes this amount will be taken each month.
For example, assuming no other income, a £10,000 withdrawal should be tax-free because it falls under the personal allowance – the amount you can earn each year without paying income tax (£11,850 in 2018/19). But if HMRC applied emergency tax on a Month One basis, the bill would be over £3,000, because you would only receive a twelfth of your personal allowance – £987.50 (£11,850/12) – free of tax, and you would be paying tax of 20 per cent on the next £2,762.50 (one twelfth of the 20 per cent band) and 40 per cent on the remaining £6,250, as if you were going to take the same income in each of the next 12 months.
The position is often exacerbated because providers typically charge a fee for each withdrawal, so often people are keen to make as few withdrawals as possible. One way around this is to take a very small sum at the start of the tax year, say £100, to avoid emergency tax being levied by HMRC.
If you overpay, then you can either wait for HMRC to put you on the correct tax code or fill out a repayment claim form. There are three versions for different circumstances: the P55 form for partial cash withdrawals, the P50Z if you are taking the lot in cash and you have no other income in the tax year, and the P53Z if you’re still receiving other income. You can fill out the relevant form online via your Gateway account (www.gateway.gov.uk) or by post. You will generally only escape this problem if the provider has an up-to-date tax code from HMRC, or your P45 from the current tax year.
Readers with multiple pension pots from various sources may also be interested in the latest developments on the Pension Dashboard. The target launch date for the dashboard isn’t until 2019, but the DWP plans to produce a feasibility report this spring. Ultimately, schemes are likely to be obliged by law to supply data to the dashboard.
Pension fraudsters still at large. Data from City of London Police reveal that losses from pension scams have hit a series of record highs, but apart from a video and booklet issued by the Regulator, nothing much has been done about it. Towards the end of 2017, criticism from the industry and the Work and Pensions Committee over the slow approach to introducing a cold-calling ban elicited the promise of a ban by June 2018.
Verify with the FCA any financial adviser with whom you do business. Fraudsters are increasingly directing members to transfer into single-member occupational schemes (known as SSAS) to escape scrutiny, but in these cases too the receiving scheme provider can be FCA-checked.
To demonstrate what consumers are up against, City of London Police says that fraud victims are often targeted a second time by fake letters claiming to be from the ‘National Fraud Intelligence Bureau’. While these letters offer to help scam victims get back their money, in reality they are a second bunch of fraudsters preying on the desperate, and planning to take another bite at the cherry.
Keep up to date with all the latest financial news and investment tips by signing up to our newsletter. Email subscribers will also receive a free print copy of Money Observer magazine.
Subscribe to Money Observer Magazine
Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.Subscribe now