This miscellany of proposed changes from April 2016 is a can of worms…
27 / 01 / 2016
“Miscellaneous” amendment regulations are often tidying up exercises and of no great consequence. However the DWP’s recent consultation on its proposed Miscellaneous Amendments Regulations 2016 are a different kettle of fish and, if implemented, will in certain areas have a painful bite. We await their outcome with baited breath…
Consultation opened on 23 November 2015 and closed on 15 January 2016. Hopefully the responses will persuade DWP to re-think some of its proposals.
The proposed new regulations cover much ground. This article concentrates on the following:
- problems with orders on divorce in relation to new pension flexibilities introduced in April 2015
- DWP’s wish to oblige trustees communicating on DC benefits to supply “generic risk warnings”
- potential changes to the PPF entry regulations where there is no UK qualifying insolvency event under the PPF existing entry rules
A right dog(fish)’s dinner…
(aka “orders on divorce, or on dissolution of a registered civil partnership”)
DWP are trying to tackle the following problems:
- Earmarking orders and pension flexibility
Earmarking (aka attachment) orders were frequently made prior to the introduction of pension sharing on divorce. Such orders can still be made and there are a large number of historical earmarking orders in place. Under such an order, pension rights remain in the member’s ownership and the member is typically obliged to pay x% of his pension and/or maximum lump sum to the former spouse when the member’s pension comes into payment. This contrasts with ‘pension sharing’ where ownership of the underlying pension itself is split on divorce.
Now that under the April 2015 flexibilities the member can (where scheme rules allow) flexibly access his whole pension rights in one or more capital amounts, there is a risk that a former spouse may be disenfranchised (or find that expected income or capital entitlement may be changed).
DWP’s proposed solution is that scheme trustees be obliged to notify the former spouse on receipt of the member’s application to access benefits flexibly. However, there are practical problems here: for instance, whether the scheme trustees have a current address for the former spouse, and what the former spouse can usefully do even if successfully notified. The DWP envisage the former spouse taking legal advice and/or applying to the Court. In practice, costs will be a barrier to these steps. A better solution needs to be found.
- Pension sharing and the ‘advice’ requirement on transfers
Where DB benefits exceed £30,000 in value the member must obtain independent financial advice before transferring benefits to a DC arrangement. However, at present this is not required where a spouse has been awarded a pension credit on divorce, retained the credit within the scheme (where the scheme permits this) and subsequently wishes to transfer out of the scheme. DWP propose that in these circumstances the ‘advice’ requirement should apply.
Whilst this seems sensible, the fact that no ‘advice’ requirement applies if the (former) spouse chooses an external transfer on implementation of the pension sharing order is anomalous. In principle both situations should be treated the same for the ‘advice’ requirement.
Is there something fishy going on here?
(aka “generic risk warnings – pension flexibilities”)
No sooner is the ink dry on disclosure obligations for pension flexibilities than the Government proposes to extend trustees’ responsibilities.
In the context of trust schemes the ‘second line of defence’ is TPR’s recommended generic risk warnings, to be given at an appropriate time in the retirement process where DC benefits are or may be flexibly accessed. DWP now consider generic risk warnings should be elevated to a legal obligation. The proposed new regulations add Regulation 19A to Disclosure Regulations 18, 18B and 19 to achieve this. There are three main problems with the proposed new Regulation 19A:
- The interaction of these existing regulations between themselves is already unclear in certain respects, and how the new Regulation 19A is to interact with them is also unclear, particularly the timing of the new generic risk warnings.
- The definition of “retirement risk warning” in draft Regulation 19A is more demanding in terms of the amount of additional information to be given to members than TPR’s present recommended generic risk warnings.
- The requirement for a retirement risk warning is envisaged not only in the circumstances of retirement, but also on transfers to other pension arrangements irrespective of retirement intentions: arguably this is going too far.
Hopefully, representations to the DWP will lead to a more user friendly approach. In our view schemes and members are already suffering from information overload!
Protected against employer failure!? Bream on…
(aka “insolvency events and PPF entry”)
In the ‘Olympic Airways’ decision in April 2015, the Supreme Court denied PPF entry to an employer where its UK branch did not qualify as an ‘establishment’ under the Insolvency Regulations. Very limited changes have been made to the PPF Entry Rules to enable the Olympic Scheme to qualify for PPF entry.
In its November 2015 consultation, the Government proposed other ways of bringing special cases within the PPF Entry Rules. However, it is doubtful whether these new provisions will be workable. Government also propose to tackle problems under the existing PPF Entry Rules under which certain types of entity such as industrial and provident societies cannot, it seems, fall within the PPF Entry Rules.
Further thought will be needed in this area, particularly in the light of changes in EU insolvency legislation expected in 2017.
The proposed new regulations are well-intentioned and in particular the idea of cod-ifying trustees’ disclosure obligations is a meritorious one. We are pleased that the Government is not trying to skate around the issue on this occasion, and is seeking instead to put adequate safeguards in plaice. But the new regulations are by no means brill, and unless (on herring the industry’s views) Government decides to hake the opportunity of an overhaul so the regulations become fit for porpoise, they will surely flounder. (Time)scales are tight given the proposed operative date of 6 April 2016, and a turbot-charged effort is shore-ly needed. But as to whether this deadline is achieved, whale just have to wait and sea…