Different coalition: same pension issues to address – Martin Miles
Professional, independent trusteeship is what Independent Trustee Services (ITS) offers, being one of the longest-standing firms in the field. With an election looming in the UK, company director Martin Miles takes Chief Executive Officer through the pressing questions with regard to short-term pension issues.
The UK national election looks as if it might be one of the closest for some time. However, although the result of the election may change medium-term views on the economy and the future of pensions provision, the short-term pension issues may be exactly the same under any government, whatever shape and hue.
Which issues are of significant concern to your company will depend on whether you have legacy defined-benefit (DB) issues or are embarking on pension provision through auto-enrolment for the first time, but they are likely to include some of the points that follow. Check which apply to you and make sure they have been addressed.
Legacy DB issues
Are you aware of what your year-end accounting figures will look like? The fall in interest rates to unprecedented low levels has had a significant impact on pension liabilities. Don't assume that a small correction upwards will have solved the problem. If your year end is within the next six months, last year's small deficit (or even small surplus) may be a large deficit now.
Have your trustees checked the reasonableness of the scheme's transfer value basis? Some transfer-value bases are looking unduly generous at the moment, which could put your DB scheme under increased financial strain as transfers become more appealing to members in the post-April 2015 environment. Should transfers be reduced in light of the scheme's funding deficit?
Transfers at normal retirement age
Do your scheme documents allow members to transfer their benefits at retirement? Legislation only requires transfers to be provided for members aged one or more years lower than normal retirement age. Many schemes' rules replicate this restriction. Are you concerned that retiring members who are unmarried or in ill health might receive excessive transfers?
Cessation of contracting out from April 2016
If your company pension scheme is contracted out at the moment then your employer national insurance contributions may go up by more than 2% of total payroll costs from April 2016. Have you factored this increase into your budget? Are there options available (such as reducing the company's level of support to the current pension arrangements) that would mitigate this impact? What are your competitors doing and will you remain competitive?
Are you happy with the derisking plans currently being implemented by your pension scheme trustees? Would you prefer to see such plans put on hold until interest rates rise?
Defined contribution (DC) and auto-enrolment issues
Have you reviewed the new governance arrangements and new disclosure requirements for DC pension arrangements? Are you fully compliant with auto-enrolment legislation? The new charge cap for your default fund came into force on 6 April 2015. Has your adviser confirmed that your default fund is compliant? And is it still fit for purpose now that annuity purchase at retirement is unlikely to be the norm?
What, if anything, are you intending to provide retiring employees to supplement the 'Pensions Wise' guidance promised by the government? The new pension and cash options that employees will now have are not easy to evaluate and, for many people, the free guidance is unlikely to be adequate. Some employers are paying for professional advice to be made available to retiring employees.
What will be the impact of further erosions of the tax advantages afforded to pensions savings? Higher rate tax relief on member contributions may soon disappear depending on who forms the next government in the UK. But, whoever that is, the level above which an individual's pension pot receives less generous tax treatment has been reduced (from £1.25 million to £1.00 million).
It is unlikely that all of the above DB and DC issues will apply to you. But if some of them do, then you should probably start to address them pretty soon. Furthermore, regardless of what pension arrangements you have for your employees, have you communicated with them about the new options now available?