Retirement Provision Certificate Study Manual PDF

Retirement Provision Certificate Study Manual Retirement Provision Certificate Table of Contents Pensions Industry 1 Origins and overview of pensions 1 Pension provision...

Retirement Provision Certificate Study Manual Retirement Provision Certificate Table of Contents Pensions Industry 1 Origins and overview of pensions 1 Pension provision 1 Employer-sponsored schemes 1 The Employment Package 3 Salary/wages 3 Ancillary Benefits to Workplace Pension Schemes 4 Parties Involved in Pensions 6 Pensions-Related Organisations 6 Role of Government 11 Statutory bodies 11 State Benefits 18 State Pension 18 Other State Benefits 19 Regulation and policing of workplace pension schemes 20 Pensions Tax Regime 20 Tax allowances 21 Unauthorised payments 21 Tax charges on pension schemes 22 Taxation of lump sum death benefits. 23 Inheritance tax (IHT) 23 Auto-enrolment 23 Guidance on auto-enrolment 24 Schemes that may be used for auto-enrolment 24 Employee eligibility 25 Re-enrolment 25 Enforcement of auto-enrolment obligations 25 Record keeping obligations 26 Compliance 26 Study Manual 2023 Edition Retirement Provision Certificate Workplace Pension Schemes 27 Types of workplace schemes 27 Defined Benefit (DB) 27 Defined contribution (DC) 28 Hybrid schemes 29 Cash Balance schemes 29 Career Average Revalued Earnings (CARE) schemes 30 Small Self-Administered Schemes (SSASs) 31 Executive Pension Plans (EPPs) 31 Collective defined contribution schemes (CDC) 32 Contracting out of the State pension schemes 32 Integrating State pension with occupational pensions 32 Increasing GMPs in payment 34 Financing Workplace Pension Schemes 35 Employer contributions 35 Non-contributory schemes 36 Employee contributions 36 Actuarial valuations 37 Occupational DC schemes 40 Discrimination in workplace pension schemes 41 Sex discrimination 41 Age discrimination 42 Benefits paid from workplace pension schemes 42 Retirement 42 Normal retirement 43 Retirement from DC schemes 44 Early retirement 44 Early leavers from DB and DC schemes 45 Non-GMP pension increases and revaluation 45 Spouse’s and dependants’ pensions from DB schemes 46 Pensions for civil partners and same-sex spouses from DB schemes 47 Spouses’ and dependants’ pensions from DC schemes. 47 Lump sum payments 47 Administration and Governance of pension schemes 49 GDPR and The Data Protection Act 2018 49 Disclosure of Information 51 Information to be provided on request 52 Trustees’ responsibilities for scheme governance 53 Governance standards 54 Administrative records 55 Study Manual 2023 Edition Retirement Provision Certificate Trusteeship 56 Types of trustee 56 Requirements for being appointed as a trustee 57 Trusteeship Trust documents 58 Setting up the pension scheme 58 Appointment and removal of trustees 60 Trusteeship Responsibilities 60 General duties and responsibilities under trust law. 60 Trustee knowledge and understanding. 62 Additional duties of pension fund trustees. 63 Trustee Liability and Protection 63 Individual pension provision 64 Pensions that can be taken out by individuals. 64 Personal pensions 64 Stakeholder pensions 65 Retirement Annuity Contracts (RACs) 66 Additional Voluntary Contributions (AVCs) 66 Free Standing Additional Voluntary Contributions (FSAVC) 67 Buy-out contracts 67 Self-Invested Personal Pensions (SIPPs) 68 Personal Savings and Investments 68 Building society and other deposit accounts 68 Share plans 69 Save As You Earn (SAYE) share options 69 Share incentive plans 70 Individual Savings Accounts (ISAs) 70 Junior ISA 72 Owning a business 72 Collections 72 Other Provision 72 Study Manual 2023 Edition Retirement Provision Certificate Investment 73 Investment Considerations 73 Active investment management 73 Passive investment management (also referred to as index tracking) 73 Defined Benefit Provision 74 Small Schemes 74 Surplus and Deficit in DB schemes 75 Change to Liabilities in DB schemes 75 Payment of Benefits from DB schemes 75 Managing risk in DB schemes 75 Statement of Investment Principles (“SIP”) for both DB and DC schemes 76 Defined Contribution Pensions 76 What Types of Assets are there? 78 Investment Categories 78 Investment classes 79 Returns and yield 80 Types of share 81 Index-linked securities 83 Insurance with-profits contracts 83 Managed Funds 84 Cash 84 Property 84 Target Date Funds 85 Pooled Investment Funds 86 Derivatives 87 Commodities 87 Infrastructure 87 Ethical and Socially Responsible Investment 87 Diversified Growth Funds 88 Absolute return funds 88 Private equity 88 Hedge funds 88 Currency 89 Study Manual 2023 Edition Retirement Provision Certificate A number of acronyms are used throughout the text. They are all written out in full where they first appear. A number of them recur with great frequency. To avoid having to refer back to the original, a list of the most commonly used are given here. Most of them can also be found in Digital Pensions Terminology, which PMI members can access in their member portal. CGT Capital Gains Tax CPI Consumer Prices Index DB Defined Benefit DC Defined Contribution DWP Department for Work and Pensions FCA Financial Conduct Authority GMP Guaranteed Minimum Pension HMRC His Majesty’s Revenue and Customs LPI Limited Price Indexation NI National Insurance NIC or NICs National Insurance Contribution(s) NMPA Normal Minimum Pension Age NRA Normal Retirement Age PAYE Pay As You Earn PPF Pension Protection Fund RPI Retail Prices Index SFP Statement of Funding Principles SPA State Pension Age TPO The Pensions Ombudsman TPR The Pensions Regulator Study Manual 2023 Edition Retirement Provision Certificate Pensions Industry Origins and overview of pensions The practice of paying people for work done, once they had ceased to do that work, goes as far back as the 17th century. Initially, the successor paid part of their salary to their predecessor. Subsequently, employers paid pensions to some former workers out of revenue, with no advance funding (called “pay as you go”). In the early 20th century, tax relief was granted on premiums paid by employers to encourage them to fund pensions in advance for former employees. There has been an enormous amount of legislation since 1980. The legislation that introduced the major milestones in pension development are: Social Security Act 1973, which introduced preservation of pensions; Social Security Pensions Act 1975, which introduced contracting out and equal access requirements; Social Security Act 1985, which introduced revaluation of pensions in respect of pensionable service on and after 1 January 1985; Pension Schemes Act 1993, which consolidated previous legislation, including the foregoing; Pensions Act 1995, which introduced a number of governance requirements, including a now-defunct minimum statutory funding requirement and provisions for underfunded final salary/defined benefit (DB) pensions to be a debt on the employer and introduced pension earmarking requirements on divorce; Welfare Reform and Pensions Act 1999, which introduced pension sharing orders on divorce and the requirement for employers to set up (but not contribute to) a stakeholder scheme; Pensions Act 2004, which transferred the regulation of pensions from Occupational Pensions Regulatory Authority to The Pensions Regulator (“TPR”) and strengthened anti-avoidance powers; and introduced the current statutory funding objective for DB schemes; The Finance Act 2004, which introduced pension simplification and did away with the concept of “retirement”, at least from His Majesty’s Revenue and Customs’ (“HMRC”) perspective. Subsequent developments include: Pensions Act 2008, which introduced automatic enrolment, and introduced the National Employment Savings Trust (“NEST”) scheme from 2012; Pension Schemes Act 2017, which regulates Master Trusts. Pension Schemes Act 2021, which regulates and makes provision for collective defined contribution schemes. Pension provision Pension provision comes primarily from three sources: State pension and other State benefits (see “Role of Government”); individual provision (See “Individual Provision”); and employer-sponsored schemes (See “Workplace Pension Schemes”). In practice, most people have a mix of all three, although many people still rely primarily on State provision. Following the introduction of automatic enrolment, it is hoped that, eventually, employer-sponsored schemes will provide a higher proportion of retirement income than they do now. Employer-sponsored schemes There are two types of employer-sponsored schemes in the private sector: trust-based occupational schemes; and contract-based schemes. Study Manual 1 2023 Edition Retirement Provision Certificate Trust-based schemes Trust-based schemes can be either DB, or “career average revalued earnings” (“CARE”), or money purchase/defined contribution (DC). Some trust-based schemes contain a mixture of DB and DC benefits. Contract-based schemes are invariably DC (e.g. stakeholder pensions, group personal pension schemes). DB means that the members of such schemes can expect to receive pay-related benefits, where the benefit is expressed as a proportion of pensionable pay close to retirement, or date of leaving if earlier, for each year of service. However, an increasing number of members will receive benefits on a CARE basis, where benefits are based on average earnings over their working lifetime with that employer. DB schemes tend not to be set up now, because of the cost and risk to the sponsoring employer(s). The majority of DB schemes still in operation no longer accept new members and do not permit members to accrue further benefits. Others now have closed down altogether and moved the employed members into DC schemes, mostly contract-based rather than trust-based. Trust-based DC schemes are run by trustees, just like DB schemes, and still require a high level of involvement by the employer. TPR places a heavy regulatory and quasi-regulatory burden on the employers and trustees of trust-based DC schemes, which is why the preference is for contract-based schemes, where the employer’s involvement is normally limited to paying over the contractual rate of pension contributions. In DC schemes, the benefit is the product of the contributions paid in by, and on behalf of, the member, the investment returns achieved while those contributions are invested, and the price of annuities at the time of retirement. Whilst it is now possible for members of DC schemes to “draw” their pensions down, rather than buy an annuity, employers of trust-based DC schemes are generally unwilling to introduce the complexities of drawdown, given the cost involved. If members do not want an annuity, and would rather draw their benefits down, they usually have to transfer the value of their benefits to a personal pension which will permit it. DC schemes have sometimes contained some form of guarantee (so that the benefit produced is not solely reliant on the product of the investments). These tend to have fallen out of favour because of the problems they can cause and the cost of ensuring the promised guarantee is delivered. Contract-based schemes These are not, truly, employer sponsored. Instead, they are a collection of individual personal pensions, to which the employer contributes on behalf of the employee, should they wish to join (or have to be automatically enrolled (see “Role of Government” module for more information on automatic enrolment). To avoid excessive administration on the part of the employer, the individual pension policies are generally all with one provider, usually an insurance company, and are therefore referred to as “group personal pensions”. They provide benefits on a DC basis. The contract is in the name of the employee. When the employee leaves employment, the contract remains with them, and they can continue to contribute to it, should they wish, unlike employer-sponsored trust schemes, where the ability to contribute ends with the termination of employment. The employee has the option of buying an annuity with the proceeds of the contract, or drawing down their pension, either in tranches or all at once, without the agreement of the employer, as is the case with employer-sponsored DC schemes. Between October 2001 and October 2012, every employer with five or more employees had to provide access to a stakeholder scheme (though employers did not have to contribute), unless they offered an employer-sponsored arrangement which all qualifying employees could choose to join. The requirement to designate a stakeholder pension scheme ceased to apply with effect from October 2012 when automatic enrolment started. Study Manual 2 2023 Edition Retirement Provision Certificate There are many DC automatic enrolment schemes, ranging from group personal pensions to the Government master trust, NEST. There is more information about automatic enrolment in “Role of Government”. Public sector pension schemes Public sector schemes are divided between statutory schemes and non-statutory schemes. Statutory schemes have their provisions set out in legislation. The non-statutory schemes are mainly those of the nationalised industries and are usually established by a trust deed and rules, in a similar way to employer- sponsored private sector schemes. A relatively small number of public sector schemes cover millions of employees whereas, in the private sector, smaller groups of employees are covered by thousands of schemes. The public sector includes public corporations such as the Bank of England and the Civil Aviation Authority and (previously) nationalised industries such as coal mining and railways. The best-known schemes include the Local Government Pension Scheme, The Civil Service Pension Scheme, The Teachers’ Pension Scheme, the NHS Pension Scheme and pension schemes covering police, firefighters and armed forces. Initially, all public sector schemes were DB. The increasing cost of DB pensions has caused some of these public sector schemes to scale back their benefits. Many of them (such as the Civil Service) now consist of a complex mixture of DB, CARE and DC. Auto-enrolment schemes Under the Pensions Act 2008, every employer in the UK must put certain staff into a workplace pension scheme and contribute towards it. Further information about auto-enrolment can be found in the “Role of Government” module. Master trusts The Pension Schemes Act 2017 introduces a definition of ‘master trust’. A master trust is defined as an occupational pension scheme that: provides defined contribution benefits; is used, or intended to be used, by two or more employers; is not used, or intended to be used, only by employers which are connected with each other; and is not a public service pension scheme. A master trust may also be a group of schemes, none of which are already master trusts, which provide defined contribution benefits, and where each scheme in the group is under “common control” with other schemes in the group. TPR refers to such a group of schemes as “cluster schemes” in its master trust Code of Practice. Since 1 October 2018, all new master trusts must apply for and obtain authorisation from TPR before they can operate. There are currently 37 authorised master trusts, as recorded on TPR’s website. In 2018, TPR published its master trust authorisation supervision and enforcement Code, which can be found on its website. The Employment Package Salary/wages The basic component of an employment package is cash. As soon as somebody starts work for somebody else, there is an employment contract. These are usually in written form, although this is not always the case, which can give rise to problems in the event of disputes between employer and employee. The contract will normally set out the rate of pay, either hourly, weekly, or annually. Study Manual 3 2023 Edition Retirement Provision Certificate Remuneration from employment is subject to tax, including additional benefits which involve payment of money or are capable of being turned into money. National Insurance contributions (“NICs”) are also payable on remuneration. Employees do not have to pay NICs on certain benefits in kind, while employers have to pay NICs on almost all benefits. There are some exceptions to tax and National Insurance (“NI”), the most common being that the first £30,000 of redundancy or termination pay is payable tax-free. The whole of the payment was not liable to any NICs but, from April 2018, any excess over £30,000 is subject to employer NICs. Components of the employment package which can (and in some cases, must) be paid in addition to basic pay include the “core benefits” of: minimum holiday entitlement; minimum statutory sick pay; minimum maternity pay/paternity pay/leave; and minimum pension contributions (subject to the right to opt out). Other benefits can include: cash bonuses/commission based on performance, which are taxed as earned income; life insurance, typically a multiple of basic salary and often linked to a pension scheme (see below); company cars; employee share plans; health plans and medical expenses; permanent health insurance (see “Permanent health insurance (PHI)” below). Optional benefit packages may contain childcare, dental plans, buying and selling part of holiday allowance, purchase or lease of laptops, access to employee discounts etc. They are usually called “flexible benefit schemes” since employees can opt in and out of them on an annual basis. These flexible benefit schemes frequently involve “salary sacrifice” arrangements, allowing employees to give up salary in return for receiving the additional benefits. Pension contributions and benefits are commonly calculated on the employee’s remuneration, which may include or exclude bonuses and commission. Ancillary Benefits to Workplace Pension Schemes As well as paying contributions to workplace pension schemes, employers often provide other benefits, linked directly or indirectly to the pension scheme. The most common ancillary benefits are: Life insurance Most employers provide life insurance for their employees. Often whether they are members of a pension scheme or not, but sometimes only when they are members of a pension scheme. Unlike many other benefits, this is not taxable on the employees. Trust-based schemes that still have active members accruing benefits normally provide life insurance as part of their benefit structure. If the trust-based scheme is closed to future accrual, or the employer provides only a contract-based scheme (e.g. a group personal pension scheme or contributes to NEST), life insurance is provided from a separate scheme. Study Manual 4 2023 Edition Retirement Provision Certificate The life insurance usually takes the form of a lump sum, typically a multiple of the member’s salary or earnings; otherwise, it may be a flat rate amount. The benefits are usually paid under trust. This means that the decision as to who receives the lump sum is made by an unconnected third party, usually trustees, or it can be the insurance company itself, depending on how the scheme is structured. The members can let the trustees or managers know to whom they would like the lump sum to be paid in the event of their death, but the trustees/managers are not bound by this “nomination”. The trustees/managers choose the beneficiary or beneficiaries of the lump sum from a class of people included in the scheme rules, which usually comprises: spouse/civil partner; former spouse/civil partner; children, grandchildren, stepchildren, adopted children, their spouses/civil partners; siblings and their spouses/civil partners and children; parents and grandparents; anybody who was financially dependent on the deceased member. The trustees/managers must make appropriate investigations and select recipients from among the classes permitted by the rules. The advantage of paying the benefits under trust is that they can be paid immediately, without waiting for grant of probate or letters of administration, which can sometimes take a long time, and the death benefit does not form part of the deceased member’s estate for inheritance tax purposes. Permanent Health Insurance (PHI) Many DB schemes offer enhanced pension benefits to members who are unable to continue working due to disability, regardless of their age. However, the rules are restrictive, often requiring proof that the member will not be able to work again, in any capacity, at least until the pension scheme’s Normal Retirement Age (“NRA”). PHI is a contractual benefit offered to employees that provides them with income if they become permanently disabled and unable to work in the capacity in which they were previously employed. Like ill-health retirement from a DB scheme, there are rules, but they are generally less restrictive than DB pension rules for ill health early retirement. Employees must be paid a minimum of £96.35 statutory sick pay (“SSP”) per week (2021/22) from their employer for up to 28 weeks, as long as they meet certain qualifying conditions. Many employers supplement SSP under sick pay schemes, sometimes up to full pay, or a proportion of full pay. Once the entitlement to SSP has expired, employees may find themselves reliant on State benefits, and ultimately unable to work again, depending on their level of disability. It is possible for an employer to provide PHI, on a group basis, for some or all of its employees. Cover is usually arranged with a “waiting period” at the start of any sick leave, usually 28 weeks to fall in line with the SSP payment period. Employers who guarantee pay for longer periods may have a longer waiting period to tie in with the expiry of their sick pay schemes. The longer the waiting period, the lower the premiums. Every claim is assessed by the insurer based on medical evidence provided by the member’s doctor. Once a claim is admitted, benefits are payable to the employer who passes these on to the member via payroll. The benefits are less than the employee’s full pay, to encourage them to return to work if possible. All claims in payment will be subject to ongoing medical review. A claim stops when the member has recovered sufficiently to return to work, reached retirement age or dies. Study Manual 5 2023 Edition Retirement Provision Certificate A Group PHI scheme can also cover the employer’s pension contributions for the duration of the claim. This enables a sick or disabled employee to remain a member of their pension scheme and continue to build up pension benefits and remain eligible for life insurance. The termination of the PHI benefit should be tied into the normal retirement age (typically 65) of the pension scheme, to avoid gaps in the cover given to employees. Parties Involved in Pensions Pensions-related organisations Government bodies involved with pensions, which have statutory obligations and regulatory functions, are set out in “Role of Government”. There are many other pensions-related organisations in existence, formal and informal. They are usually trade associations, set up by practitioners in the industry, to represent the interests of the members, and also to educate, inform and share knowledge. The major ones are: Association of British Insurers (abI) The ABI describes itself as “the voice of the UK’s world leading insurance and long-term savings industry”. It is funded by members’ subscriptions on a not-for-profit basis. It was formed in 1985, and has over 200 member companies, accounting for over 90% of the UK insurance market. The ABI produces codes of conduct covering all areas of insurance and long-term saving. For example, the Code of Conduct on Retirement Choices required all ABI members to encourage customers to shop around for annuities, rather than simply rolling their pension savings over into an annuity with their existing provider. The Code sets out ways to provide support to consumers approaching retirement. It was designed to make potential retirees aware of different ways to take retirement income, and to improve understanding of how to buy, in order to change this behaviour. The Association of Corporate Trustees (TACT) TACT is a registered charity, which was founded in 1974 to foster a high standard of corporate trustee service. It seeks to advance education in trust law and practice through information and instruction. It covers a more diverse group than retirement provision, its members providing: Executorships and Private Trusts; Loan Capital Trusteeships; Pension Trusteeships; and Employee Benefit Schemes. Association of Member-Directed Pension Schemes (AMPS) AMPS is a trade body which combines the former association of Pensioneer Trustees and the SIPP Providers Group. AMPS is a specialist organisation, representing the interests of those organisations which provide self- invested personal pensions and those bodies or individuals who act as professional trustees for small self- administered schemes (they used to be called “pensioneer trustees”), (see “Types of Trustees” module). These types of pension schemes are, respectively, trust-based personal pension schemes and occupational pension schemes, where the member(s) have the ability to direct the trustee(s) how to invest their funds. In most cases, the members and trustees are the same people. Study Manual 6 2023 Edition Retirement Provision Certificate AMPS makes representations on behalf of its members, to regulatory bodies such as HMRC, the Financial Conduct Authority (“FCA”), HM Treasury (“HMT”) and the Department for Work and Pensions (“DWP”). Association of Pension Lawyers (APL) The APL is a non-profit-making organisation, established in 1984 and run by lawyers who specialise in UK pensions law. Whilst it is not a political organisation, and does not comment on pension policy, it engages with Government on various initiatives, providing practical experience and technical input on legislation and regulatory guidance. Confederation of British Industry (CBI) The CBI is a not-for-profit membership organisation, founded by Royal Charter in 1965 when the British Employers’ Confederation, the Federation of British Industries and the National Association of British Manufacturers joined together to form the Confederation of British Industry. Although not, in itself, a pension group, the CBI speaks on behalf of 190,000 businesses, from all sectors, and regularly responds to government consultations on retirement provision on behalf of those members. It also provides expert advice and information. Chartered Insurance Institute (CII) The CII is a worldwide professional body, established in 1912 by Royal Charter, which is dedicated to building public trust in the insurance and financial planning professions. Membership is open to anybody working in, or connected with, insurance and financial planning. It provides professional qualifications, ranging from core units to Fellowship. Pension Administration Standards Association (PASA) PaSa is an independent body which sets standards for pensions administration and provides help and guidance to enable companies to achieve them. PaSa is focused on three core activities: defining good standards of pensions administration relevant to all providers, whether in-house, third party or insurers; publishing guidance to support those standards; and being an independent accreditation body, assessing the achievement of good standards for scheme members and sponsors (regardless of provider). Pensions and Lifetime Savings Association (PLSA) - formerly the National Association of Pension Funds (NAPF) The PlSa is a national association with a ninety-year history of helping pension professionals run better pension schemes across master trusts and DB, DC, and local government funds. Members also include some 400 businesses which provide essential services and advice to UK pensions providers. Its purpose is to help everyone to achieve a better income in retirement. It represents pension schemes that together provide a retirement income to more than 30 million savers in the UK and invest more than £1.3 trillion in the UK and abroad. Members include asset managers, consultants, law firms, fintechs and others who play an influential role in people’s financial futures. Fintechs are financial businesses, which compete with more traditional ones like banks, in the way that they deal with mobile payments, transfers, loans, fundraising and investing: the best known currently are Monzo and Bitcoin. It is divided into a dozen local groups, each operating autonomously, providing regular meetings and educational seminars. Study Manual 7 2023 Edition Retirement Provision Certificate Pensions Management Institute (PMI) The PMI exists to promote a high standard of professional conduct among those working in the pensions field. Its members can be those who provide advice, administer schemes, or work on matters connected with retirement provision of all kinds. It is a professional body for its members. PMI offers nationally recognised qualifications at various levels along with the provision of study and examination facilities. It also: promotes and embeds professional standards, setting the benchmarks for best practice; produces qualifications that have a reputation for excellence and ensures that employee benefits and retirement savings professionals, whether they are scheme managers, consultants, administrators or trustees, are educated to the very highest standards and the latest legislation; provides continued lifelong learning designed to strengthen the knowledge and skills of employee benefit and retirement savings practitioners in performing to the best of their ability; plays a pivotal role shaping the industry, working with Government and collaborating with other bodies on research and thought leadership on key issues; presents an annual conference and a wide range of technical seminars from entry-level to those for highly experienced professionals; provides industry-leading insight, including Pensions Aspects, PMI TV, Insight Partner insights, papers, newsletters and blogs to keep practitioners abreast of the very latest developments in a rapidly changing industry; and proactively has a voice in mainstream and social media with a presence on Twitter and LinkedIn. Pensions Policy Institute The Pensions Policy Institute (PPI) was launched in January 2002 by the Pension Provision Group, who recommended that an organisation independent of government needed to lead responsibility for accumulating, analysing, and publishing information about current and future pension provision and its implications for future pensions policy. They carry out original research and compile existing information to inform the analysis of the whole pensions policy framework. Pensions Research Accountants Group (PRAG) PRAG was founded in 1976. PRAG consists of the accountants and pension managers of UK occupational pension schemes, together with practitioners in the actuarial, consultancy and auditing professions who are interested in the financial administration and reporting of pension schemes. PRAG’s primary functions are to produce publications on various pension topics, and to sponsor research into the financial administration and reporting of schemes. The reports are prepared by working parties that are set up for that specific purpose. The working parties are made up of specialist or interested members of the Group and often include individuals from outside the Group to contribute to the deliberations. During 1996 PRAG was recognised by the Accounting Standards Board as the appropriate organisation to issue Statements of Recommended Practice (SoRPs) for pension schemes resulting in the publication of a new SORP entitled “Financial Reports of Pension Schemes” in July 1996, updated in November 2002, and further revised in 2007 and 2015. The Society of Pension Professionals (SPP) Founded in 1958, membership of this society is open to a wide range of providers of advice and services to workplace pension schemes and their sponsors. Firms such as accountants, insurance brokers, merchant bankers, solicitors, life offices, investment houses, investment performance measurers, consultants and actuaries, independent trustees and external pension administrators, are all eligible. It is an independent body and concerned with the business of its members as pensions professionals. Unlike a number of industry-representative groups, such as AMPS, the SPP focuses on the whole range of pensions-related services across the private pensions sector and through a wide spread of providers of advice and services. Study Manual 8 2023 Edition Retirement Provision Certificate The Society has three fundamental aims: influencing policy and strategy – to draw upon the knowledge and experience of members so as to contribute to and influence legislation and other general developments affecting pension and related benefit provision. The Society is consulted by a broad range of policy forming and regulatory bodies. member services – to provide members with access to technical information and insight into the key policy debates in the industry; and industry profile – the Society helps raise the profile of all members and to help address practical industry issues on their behalf. Professions involved in Pensions The Pensions Act 1995 requires trust-based occupational pension schemes to appoint certain advisers. These advisers must be appointed by the trustees, not the employer(s). All appointed advisers, whether statutory or not, have certain duties that can override their duty of confidentiality to their clients, such as reporting breaches of the law to TPR (called “whistleblowing”). If a statutory adviser is not appointed where required, it must be notified to TPR, who can take action against the trustees. Even though trustees have to engage certain advisers and may choose to appoint others, they remain responsible for the running of the scheme. Actuary All funded DB and CARE pension schemes must appoint a Scheme Actuary. They can have other actuarial advisers as well, should they so wish. To become an actuary in the UK, it is necessary to be a Fellow of the Institute and Faculty of Actuaries. The Scheme Actuary has statutory duties, set out in the Pensions Act 2004, in relation to scheme funding. Basically, trustees must have their schemes valued by a Scheme Actuary at least every three years and, if they have 100 or more members, obtain annual actuarial reports. They also have to produce a range of certificates, such as a schedule of contributions, a recovery plan if the scheme is in deficit, a statement of investment principles (“SIP”) (if they have 100 or more members) and statement of funding principles (“SFP”). The trustees must obtain the advice of the Scheme Actuary before: making any decision as to the methods and assumptions to be used in calculating the scheme’s technical provisions; preparing or revising the SFP; preparing or revising a recovery plan; preparing or revising the schedule of contributions; modifying the scheme as regards the future accrual of benefits by resolution. Accountant All occupational pension schemes must have an auditor, with the exception of those with only one member. Audited accounts must be produced annually, within seven months of the end of the scheme’s year-end. Failure to do so must be reported to TPR. Accountants can have other responsibilities in the pension sphere. For example, an insolvency practitioner (who is normally a chartered accountant) is appointed to an employer with a final salary scheme following that employer becoming insolvent. The insolvency practitioner is required to make reports to the Pension Protection fund (“PPf”) and TPR about the existence of the scheme and whether there is any possibility of the scheme being “rescued” (i.e. taken over by another employer). Study Manual 9 2023 Edition Retirement Provision Certificate Fund manager Every occupational pension scheme which has “investments” (within the meaning of the Financial Services and Markets Act 2000) must have an individual or a firm appointed by or on behalf of the trustees or managers as fund manager. Pension schemes may split their investments between several fund managers, to spread risk, or put the investments under the control of a fiduciary, which manages a range of fund managers on behalf of the trustees. It is common for fund managers to offer other services bundled into their investment services, such as custodian services. Independent Financial Adviser (Ifa) It is not a statutory requirement to appoint an IFA. Schemes may do so if, for example, they are thinking about securing benefits with an insurance company, either for a single member, or for a class of members. IFAs dealing with “regulated products”, such as annuities, should be authorised by the FCA or the Prudential Regulation Authority (“PRA”). Lawyers It is not a statutory requirement to appoint a legal adviser to a pension scheme. Most schemes do, either on a permanent basis, or they use legal services as and when required. The term “lawyer” is generic and has no special meaning. The legal profession in England and Wales (Scotland and Northern Ireland are separate legal jurisdictions) is separated into solicitors and barristers. Both these professions are regulated: solicitors by the Solicitors Regulation Authority and barristers by the Bar Council. Depending on the type of work they undertake in addition to advising on pensions, many solicitor firms are also regulated by the FCA. Solicitors are most commonly used by trustees to advise on the effects of new legislation, changing scheme documents and dealing with general problems that arise from time to time. Barristers tend to be used less often, usually only when highly specialised advice is needed on a complex issue, or the trustees require representation in court. Consultants Many trustees appoint a firm of consultants to advise them on the day to day running of their schemes. In some cases, the consultants are firms, or associated firms of the firms, that provide other services (e.g. actuarial services). Third party administrators Trustees often engage separate firms to provide administration services. They are the first port of call for members with queries and they normally calculate retirement and death benefits, set the benefits up and make regular pension payments on behalf of trustees. Study Manual 10 2023 Edition Retirement Provision Certificate Role of Government Statutory bodies There are a number of Government bodies that are involved in pensions and saving. These bodies have varying degrees of statutory authority to regulate and police workplace pension schemes. The principal statutory bodies are: The Department for Work and Pensions (DWP) The DWP is responsible for welfare, pensions and child maintenance policy. As the UK’s biggest public service department, it administers the State Pension and a range of working age, disability and ill health benefits to around 20 million claimants and customers. The DWP is also responsible for most of the non-tax-related legislation affecting workplace pension schemes, even where no link with the State scheme is involved. For example, the DWP consulted on draft changes to the Disclosure Regulations (see “Disclosure of Information” below) to introduce new requirements for trustees to build in a “nudge” to members, who want to make use of flexible access, to take pensions guidance (e.g. from Pension Wise) and to require members (and other relevant beneficiaries) to make an active choice to opt out of receiving guidance. The consultation resulted in regulations that, from 1 June 2022, require scheme trustees to take certain steps under such circumstances. Trustees can trace missing beneficiaries through the DWP’s bulk letter forwarding service. DWP will send information from pensions, insurance companies and solicitors to named people, using their tracing and letter forwarding service. DWP will let trustees know if the beneficiary has died but will not disclose any addresses. If the beneficiary receives a letter from trustees via the service but does not (or is unable to) respond, the trustees cannot make contact by this method. The Pension Service The Pension Service is part of the DWP. It provides its customers with pensions, benefits and retirement information – for example, State Pension and Pension Credit. The Treasury HMT is the government’s economic and finance ministry, maintaining control over public spending, setting the direction of the UK’s economic policy, and working to achieve strong and sustainable economic growth. HMT is a ministerial department, supported by 15 agencies and public bodies. Consequently, HMT has increasingly taken a direct involvement in pension matters, mainly through HMRC. His Majesty’s Revenue and Customs (HMRC) HMRC is the UK’s tax, payments and customs authority, which collects the money that pays for the UK’s public services and helps families and individuals with targeted financial support. It reports to Parliament through the Treasury minister who oversees its spending. HMT leads on strategic tax policy and policy development, which includes setting the Lifetime and Annual Allowances (LTA and AA respectively) for pensions each year. HMRC leads on policy maintenance and implementation. Its strategic objectives for 2022 are to: Collect the right tax and pay out the right financial support Make it easy to get tax right and hard to bend or break the rules Maintain taxpayers’ consent through fair treatment and protect society from harm Make HMRC a great place to work Support wider government economic aims through a resilient, agile tax administration system Study Manual 11 2023 Edition Retirement Provision Certificate HMRC is responsible for registering pension schemes for tax relief and also de-registering schemes if they do not meet the requirements of a registered pension scheme; HMRC’s powers in this area have been increased in recent times to help it combat pension frauds and scams. In addition to receiving information which scheme administrators and others must provide by law, HMRC also has information notice and inspection powers so that it can ensure that the requirements are, and continue to be, met and it can also apply penalties and prosecute where necessary where the requirements are not met. Pension Schemes Online Service is available for schemes registered with HMRC before 4 June 2018. Schemes registered after this date must use the Managing Pension Scheme services. Both services are accessed online. The services are used to update scheme details, such as name, trustees/managers, add and remove scheme administrators and make returns, both statutory and voluntary. HMRC provides a great deal of information about pension administration on dedicated pages. Among the many topics covered are: tax manuals that provide detailed guidance on tax issues affecting pension schemes; and pension scheme newsletters. National Insurance Services NICs are largely collected from workers paid through Pay As You Earn (“PAYE”), by employers alongside Income Tax, on behalf of HMRC. Both PAYE and NICs are collected from employees and submitted through “Real-time information” (“RTI”) which is an electronic link with HMRC. Under RTI, information about tax and other deductions under the PAYE system is transmitted to HMRC by the employer every time an employee is paid. Employers using RTI are no longer required to provide information to HMRC after the end of the tax year. Since April 2014 all employers have been required to report in real time. NI is now dealt with by HMRC. HMRC also provides a number of services to help pension scheme administrators of formerly DB contracted-out pension schemes. The Scheme Reconciliation Service allows pension scheme administrators (who must have registered for the service by 5 April 2016) to reconcile their membership and guaranteed minimum pension (“GMP”) data against the records held by HMRC following the ending of DB contracting out in April 2016. The Scheme Reconciliation Service itself is closed to new enquiries. Until 2019, HMRC released a series of Countdown bulletins providing additional guidance for pension scheme administrators on the ending of DB contracting out in April 2016. They can be found on its website. Study Manual 12 2023 Edition Retirement Provision Certificate Financial Conduct Authority (FCA) The FCA is the conduct regulator for 59,000 financial services firms (including investment advisers and others offering services to consumers) and financial markets in the UK and the prudential regulator for over 18,000 of those firms. Its strategic objective is to ensure that the relevant markets function well. Its operational objectives are to: protect consumers by securing an appropriate degree of protection for them; protect financial markets by protecting and enhancing the integrity of the UK financial system; and promote effective competition in the interests of consumers. The FCA is an independent public body, funded entirely by the firms it regulates by charging them fees. It is accountable to HMT, which is responsible for the UK’s financial system, and to Parliament. Its work and purpose are defined by the Financial Services and Markets Act 2000. The FCA authorises those permitted to provide investment advice. It also works with consumer groups, trade associations and professional bodies, domestic regulators and a wide range of other stakeholders. It uses a proportionate approach to regulation, prioritising the areas and firms that pose a higher risk to its objectives. The FCA produces a publicly accessible register of firms and individuals that are, or ever have been, regulated by it and the PRA. The register now also includes firms selling regulated products by entities not authorised to do so, with prominent warnings. It also produces a handbook of its legislation, rules and guidance. In some respects, the FCA’s work mirrors that of TPR. For example, it also requires publication of costs and charges data for contract-based schemes and is looking to require asset managers, life insurers and FCA- regulated pension providers to report on how they deal with climate-related risks. Prudential Regulation Authority (PRA) The PRA, part of the Bank of England, is the prudential regulator of around 1,500 banks, building societies, credit unions, insurers and major investment firms. As a prudential regulator, it has a general objective to promote the safety and soundness of the firms it regulates. The Pensions Regulator (TPR) TPR is a public body sponsored by the DWP. It works closely with the FCA, which regulates personal pension schemes and with other public bodies including DWP and PPF TPR’s remit is to protect the UK’s workplace pensions, by promoting their good administration, and making sure employers, trustees, pension specialists and business advisers fulfil their duties to scheme members. It has also been given responsibility for regulating the governance and administration of public service schemes and the authorisation and supervision of master trusts. Its aims are: making sure employers put their eligible staff into a pension scheme and pay money into it (known as “automatic enrolment”); protecting people’s savings in workplace pensions; improving the way that workplace pension schemes are run; reducing the risk of pension schemes ending up in the PPF; and making sure employers balance the needs of their DB pension scheme with growing their business. One of TPR’s main areas of interest is its fight against pension “scams”, particularly following the new pension flexibilities introduced in April 2015; it provides guidance on avoiding scams to scheme trustees, members and pensions professionals. Study Manual 13 2023 Edition Retirement Provision Certificate TPR has produced an extensive library of guidance and Codes of Practice. It has introduced a voluntary “pledge to combat pension scams” for trustees and other pension professionals to: regularly warn members about pension scams encourage members asking for cash drawdown to get impartial guidance from MoneyHelper get to know the warning signs of a scam and best practice for transfers by completing the scams module in the Trustee Toolkit and encouraging all relevant staff or trustees to do so; studying and using the resources on the FCA’s ScamSmart website, and the Pension Scams Industry Group code; considering becoming a member of the Pension Scams Industry Forum. take appropriate due diligence measures by carrying out checks on pension transfers and documenting pension transfer procedures clearly warn members if they insist on high-risk transfers being paid report concerns about a scam to the authorities and communicate this to the scheme member. TPR is also responsible for monitoring and enforcing automatic enrolment. TPR has extensive powers, set out in legislation, including powers to intervene where employers, directors and majority shareholders are perceived to be avoiding their responsibilities to pension schemes and where employers are insufficiently resourced to support the pension scheme. It can levy fines and penalties for breaches of the law, although it prefers to assist and educate in the first instance. Its authority to do so is derived from the Pensions Act 2004. Amongst its raft of powers are: issuing a contribution notice, requiring a specified sum of money to be paid to the relevant scheme (or the PPF, if it has assumed responsibility for the scheme) by an employer, individual or somebody (including another company), where TPR had deemed that they were party to a failure to fund a scheme properly; issuing a financial support direction, which requires the recipient to put in place financial support for the scheme, which must remain in place while the scheme is in existence; making a restoration order where there has been a transaction at an undervalue involving scheme assets. This can happen where, for example, an employer sells a commercial property to its pension scheme and leases it back, but the sale and purchase prices, and rental, are not at arms’-length terms; fining trustees and employers and, in more serious cases, removing trustees from the scheme and replacing them with trustees from TPR’s register of professional trustees. Trustees can be banned from acting as trustees of one scheme or banned from acting as trustees of any scheme; instituting proceedings for criminal offences. Examples of those offences include: - failing to comply with automatic enrolment duties; - acting as a trustee when disqualified; - neglecting, or refusing, to produce documents, answer questions in relation to, or cooperate with inspections. The Pension Schemes Act 2021 gave TPR stronger powers with effect from 1 October 2021. TPR now has the power to impose a fine of up to one million pounds to anyone who fails to comply with its powers and functions. TPR can issue three types of penalty notice: * Fixed penalty notice * Escalating penalty notice * “Prohibited recruitment conduct” penalty notice. Study Manual 14 2023 Edition Retirement Provision Certificate The Pension Protection Fund (PPF) The PPF was established to pay compensation to members of eligible DB pension schemes, when there is a “qualifying insolvency event” in relation to the scheme employer, and where there are insufficient assets in the pension scheme to cover PPF levels of compensation. The PPF is a statutory fund run by the Board of the Pension Protection Fund, a statutory corporation established under the provisions of the Pensions Act 2004. The PPF became operational on 6 April 2005. In order to be eligible for entry into the PPF, certain basic conditions have to be met: the scheme must have commenced wind up after 6 April 2005; the scheme’s employer has become insolvent; the scheme cannot be rescued (i.e. taken over by somebody else); and the scheme has insufficient assets to secure benefits on wind-up that are at least equal to the compensation that PPF would pay if it assumed responsibility for the scheme. To help fund the PPF, compulsory annual levies are charged on all eligible schemes. Once the PPF has assumed responsibility for a scheme, benefits will be paid at the PPF level of compensation, which is, broadly speaking: 100% for pensioners over the scheme’s NRA, dependants and those receiving ill health pensions; and 90% for all other members until age 65. Only benefits accrued during pensionable service on and after 6 April 1997 will increase during payment, at CPI capped at 2.5%. The DB assets of the schemes entering the PPF are transferred to the PPF. DC assets are not transferred to the PPF and must be used to secure benefits outside the scheme. The Financial Assistance Scheme (FAS) FAS was set up under the provisions of the Pensions Act 2004, to protect members who had DB benefits in a workplace pension scheme, where: the employer became insolvent before 28 February 2006; the pension scheme started to wind up between 1 January 1997 and 5 April 2005; and the pension scheme could not afford to pay benefits promised to members on wind-up, usually where the sponsoring employer became insolvent. FAS benefits are regarded as “compensation” and are paid in the form of a top-up, which aims to provide members with 90% of the DB pension that they would have received at their scheme NRA. There is a cap on benefits, of £36,901 per annum (2021/22). The cap is increased in line with increases to inflation, measured annually from September to September. FAS is now operated by the PPF. There is an extensive library of booklets explaining how it works on its website. FAS was closed to notification and qualification of new schemes in September 2016. Study Manual 15 2023 Edition Retirement Provision Certificate The Pensions Ombudsman (TPO) TPO can look at complaints about personal and occupational pension schemes, the actions, and decisions of the PPF and some decisions made by the FAS. It will not adjudicate on Social Security benefits or disputes with HMRC. Its main activity is to investigate complaints from members against trustees and employers, about injustice caused by scheme maladministration. Its determinations are final, except on points of law, where an appeal to the courts is possible. There is some cross-over between TPO and the Financial Ombudsman Service in dealing with complaints. Accordingly, the two organisations have produced a “memorandum of understanding”. TPO is, in effect, a tribunal, whose decisions are enforceable in the County Court. Decisions (known as “Determinations”) are publicly available on TPO’s website. Among the remedies that can awarded by TPO are: ordering trustees and/or employers to revisit decisions they have made because they did not make them properly in the first place; pay the correct level of benefits where this has not been carried out properly e.g. if mistakes were made in calculating entitlements; ordering trustees and/or employers to make cash payments, for distress and inconvenience, to employees/pension scheme members who have experienced difficulty in dealing with those employers/ trustees in establishing the correct decision-making process and/or ascertaining the correct level of benefits. TPO is a free service and does not require legal representation. A complaint to TPO must normally be made in writing within 3 years of a dispute or complaint arising. Money and Pensions Service (MaPS) The Money and Pensions Service is sponsored by the DWP and also engages with HMT, which is responsible for policy on financial capability and debt advice. MaPS provides free and impartial money and pensions guidance for people across the UK. It is committed to ensuring that people throughout the UK have guidance and access to the information they need to make effective financial decisions over their lifetime. Its consumer-facing service is MoneyHelper, which was created in June 2021, and which brings together the financial guidance services and content from previous legacy brands. One of its most important services, as far as work-based pension schemes are concerned, is Pension Wise. It offers free, impartial guidance to over 50s, by explaining the options to take money from their pension pots. MaPS is committed to ensuring everybody in the UK can access information needed to help them make the right financial decisions. It is also the largest single funder of free debt advice in England. Study Manual 16 2023 Edition Retirement Provision Certificate Financial Ombudsman Service The Financial Ombudsman Service settles individual disputes between consumers and businesses that provide financial services. There is some cross-over with TPO’s services (see above). The Financial Ombudsman Service does not deal exclusively with pension problems and disputes. It also deals with: bank accounts, payments and cards; payment protection insurance; home, car, travel and other types of insurance; loans and other credit, like car finance; debt collection and repayment problems; mortgages; financial advice, investments and pensions. Its service is free for consumers and does not require legal representation. Government Actuary’s Department (GAD) GAD is a non-ministerial department, that dates back to 1912. Its mission is to improve the stewardship of public sector finances by supporting effective decision-making and robust financial reporting through actuarial analysis, modelling and advice. It provides analysis and commentary on complex financial problems involving risk and uncertainty to solve financial challenges faced by the UK public sector in: insurance and investment data, modelling and quality assurance pensions and social security Information Commissioner’s Office (ICO) The ICO is the UK’s independent body set up to uphold information rights. The mission of the office of the Information Commissioner is to uphold information rights in the public interest, promoting openness by public bodies and data privacy for individuals. The Information Commissioner rules on eligible complaints, gives guidance to individuals and organisations, and takes appropriate action when the law is broken. The ICO’s services are free to consumers. The Data Protection Act 1998 was replaced by the Data Protection Act 2018 (DPA 2018), when the General Data Protection Regulation (“GDPR”) was implemented with effect from 25 May 2018. The DPA 2018 introduced new contractual obligations, enhanced reporting obligations and tougher enforcement and/or sanctions for non-compliance. More information on the DPA 2018 is given in “Workplace Pension Schemes”. National Employment Savings Trust (NEST) Corporation NEST was created as part of the Government’s pension reforms to help employers meet their new duties for automatic enrolment. The NEST Corporation is a non-departmental public body that operates at arms’ length from Government. It is accountable to Parliament through the Secretary of State for Work and Pensions. The DWP is the sponsoring department of the NEST. The Trustee is comprised of up to 15 Board Members and the employees of Nest Corporation. The Board Members are collectively referred to as the Board of Nest Corporation, or simply the Board. They’re supported by an executive team and a range of specialists who aim to make sure Nest works in the way it should. Study Manual 17 2023 Edition Retirement Provision Certificate Pension Tracing Service The Pension Tracing Service is accessed through the GOV.UK website. It operates a free tracing service for individuals who think they may have pension benefits but are not sure of the details or who have lost contact with a previous employer and their pension scheme. The Pension Tracing Service has access to a database of over 200,000 occupational and personal pension schemes and can be used, free of charge, to search for a scheme. Individuals can access this service by phone, post or online. State Benefits In the UK, retirement income is provided partly by the Government, to those who have contributed towards it by means of a set number of years paying NICs. Employed persons have NI deducted from their earnings directly through the payroll operated by their employer. Self-employed persons pay NI through their annual self-assessment return. In addition, paying NICs can make people eligible for other State benefits. State Pension The origins of the State Pension go back centuries, in this case, to Roman times. The first “old age” pension (as we understand it now) was introduced by the Government in 1908, when five shillings per week (worth around £30 per week today), was paid to men over the age of 70. The average male life expectancy was 47, so very few men lived long enough to claim it. The universal State pension was introduced in 1948, at the rate of £1.30 per week (equivalent to just over £45 per week today). State Pension Age (“SPA”) was set at 65 for men and 60 for women. Life expectancy for men was 65 and for women, 70. The apparent generosity of providing women with a State pension for longer periods of time was offset by the fact that most women did not build up the necessary contribution records and received only a proportion of their husband’s State pension as a widow’s benefit, following their husband’s death. Increasing State Pension Ages Increases to SPA were introduced by the Pensions Act 1995. The SPA started to increase for women in 2010 and equalised with the (then) male SPA of 65 in 2018. Originally, female SPA was intended to equalise at 65 in 2020, but the increase timetable was brought forward. It is now 66 for everybody, rising to 67 between 2026 and 2028. It will rise from 67 to 68 between 2044 and 2046. Whilst the default retirement age (“DRA”) of 65 for employment purposes was phased out between 6 April and 1 October 2011, occupational pension schemes can still set their own NRA, within HMRC’s rules. New State pension The original, complicated system of State pension provision, involving paying benefits to widows and (since 2008), widowers was replaced on 6 April 2016, by the single State pension, whereby those reaching SPA, on and after 6 April 2016 only, will receive a State pension based on their own NI record, less an offset for any GMP paid as part of an occupational pension. This replaces the extremely complicated State benefit system, whereby spouses, ex-spouses and civil partners could inherit part of their late and ex-spouse’s/civil partner’s State pension rights. The old system will continue to apply to those who reached SPA on and before 5 April 2016. Under the new system, a minimum of 10 qualifying years (i.e. tax years paying, or being credited with, NICs) will be needed to qualify for State pension. 35 qualifying years will be needed to achieve full State pension (£179.60 per week for 2021/22). Between 10 and 35 qualifying years will achieve a proportion of full State pension. For example, 20 qualifying years will give rise to 20/35 x £179.60 = £102.63 per week. Study Manual 18 2023 Edition Retirement Provision Certificate The amount by which the State pension rises annually in payment is determined by what is known as the “State pension triple lock”. This guarantees that the State pension will rise in line with inflation, wage growth or 2.5%, whichever is highest for the September figures. However, the Government did not honour the triple lock in 2022/2023. State pensions rose only by 2.5% instead of the 8% the triple lock would otherwise have guaranteed. It will be reinstated in 2023/24. It is possible to defer taking State pension, indefinitely, in which case it will start to increase after a certain period of deferment. People may wish to do this if, e.g., they are still earning, since State pension will be added to their wage and taxed as earned income. Deferred State pension increases by the equivalent of 1% for every 9 weeks of deferment. This works out as just under 5.8% for every 52 weeks. The extra amount is paid with the regular State pension payment. Other State Benefits The DWP provides a wide range of State benefits to supplement money received in work and retirement. There are also benefits to assist during periods out of work and illness. There are too many to list here. They are complicated and have many conditions attached to them. The Citizens Advice website has detailed information about State benefits. Examples of State Benefits: Child benefit (qualification for this is not dependent on sufficient NI contributions and the claimant is not penalised for having savings or investments) for each child provided: - the claimant is ‘responsible for the child’, and - the child is under 16 years old - or 16 to 20 years old and still in education or training. Child Benefit will be clawed back in tax if the claimant’s individual income is over £50,000 per annum. Help with council tax. Reduction in council tax, up to 100%, is available for those on a low income or claiming benefits. Applicants can own their home, rent, be unemployed or working. It is paid by way of a discount on council tax bill for those eligible. Each council runs its own scheme. Benefits for those on a low income, whether in work, out of work, or in receipt of certain benefits. - Job-seeker’s allowance (“JSA”) if the claimant is working less than 16 hours a week, among other conditions; - Various tax credits, as part of Universal Credit; - Universal Credit (“UC”), which is a new benefit, gradually replacing; Child Tax Credit; Housing Benefit; Income Support; income-based JSA; income-related Employment and Support Allowance; Working Tax Credit. UC was introduced by the Welfare Reform Act 2012 and rolled out gradually from 2013, initially for new claimants and people with simple circumstances. It replaces and combines six benefits (as listed above) for working-age people who have a low household income, whether in work, out of work, or in receipt of certain benefits. Study Manual 19 2023 Edition Retirement Provision Certificate The purpose of replacing a complex system, that distinguished between those in work and those out of work, with one benefit that is based purely on household income, is that payments to those not in employment will taper off as the recipient moves into work, and not suddenly stop, even if the employment income is less than State benefits. This is intended to avoid a ‘cliff edge’ that trapped people in unemployment. Further examples of State benefits include: Benefits for disabled people; including - Personal Independence Payment; - Disability Living Allowance; - Attendance Allowance; - Benefits for accidents at work and industrial diseases; - Benefits for people injured in the Armed Forces; Benefits during retirement - Pension Credit, and - many of the benefits available to people in work with low incomes; Benefits following bereavement; - Help to pay for a funeral; - Bereavement Support Payment; and Many of the benefits available to people in work with low incomes Regulation and policing of workplace pension schemes Pensions Tax Regime The references to “scheme administrator”, below, is to the person or persons who are responsible for payment and collection of tax to HMRC, and for carrying out the functions set out in the Finance Acts. The “scheme administrator” for this purpose is normally the trustees, not a firm employed to administer the scheme on a day-to-day basis, which is also sometimes referred to as the scheme administrator. Employers are free to set up pension schemes on any basis they wish. They will, however, only receive attractive tax benefits if they remain within the parameters set out by HMRC in the Finance Act 2004. The process of obtaining these tax benefits is called “registration” and schemes that have been registered are called “registered pension schemes”. Payments made from registered pension schemes can only be paid on: retirement; death; having reached a particular age; and onset of serious ill health or incapacity. Schemes that were “approved” under the pre-2006 tax regime automatically became “registered” on 5 April 2006. A scheme set up on and after 5 April 2006 must apply to be registered with HMRC. The scheme administrator (in this case, the person legally responsible for adhering to HMRC’s tax rules and making returns and payments to HMRC) must make certain declarations for this purpose. These declarations include a statement that the scheme’s governing instrument does not entitle any person to receive unauthorised payments. HMRC must register the scheme unless certain circumstances apply. Study Manual 20 2023 Edition Retirement Provision Certificate Registered pension schemes, and their members, are taxed on the “EET principle”. The contributions and investment returns are exempt from income, capital gains and inheritance taxes. Retirement income is taxed, as earned income. The tax advantages enjoyed by registered schemes (whether occupational or personal) are: both employers and employees can claim income tax relief on contributions; contributions made by an individual’s employer to a registered pension scheme are not liable to income tax or NICs as a taxable benefit-in-kind; income from investment returns is exempt from income tax, except in relation to trading income, dividends from shares owned by the pension scheme or property investment limited liability partnerships; gains received on realising investments are exempt from capital gains tax; and Value Added Tax (“VAT”) payable by employers on management services provided by a third party relating to a funded pension scheme is recoverable, although there are issues about the recoverability of VAT on investment services. The authorised payments a registered scheme can make fall into several categories: payments of pensions; payments of lump sums; death benefits payable to a member’s surviving spouse, dependants or other beneficiaries; transfer payments to other pension schemes; payments required under a pension-sharing order on divorce or dissolution of a civil partnership; payments to members in connection with the administration of the scheme; payments to cover the provision of retirement financial advice from a regulated financial adviser; and payments to a scheme’s sponsoring employer or employers. Tax allowances More information is given in “Workplace Pension Schemes” about: Annual Allowance; Lifetime Allowance (“LTA”); and tax relief on employer and employee contributions. Unauthorised payments Payments made by or on behalf of registered schemes to either employers or members, which do not fall within the allowable authorised payments regime outlined above, are called “unauthorised payments”. It does not cover just payments of money, but also transfers of assets and other non-monetary benefits. Payments treated as unauthorised include: assignment or surrender of pension benefits. It is possible to surrender part of a pension entitlement to provide a pension for, or increase a pension to, a dependant. It is also possible to reduce one person’s pension in favour of another on a divorce (“pension sharing”). But surrendering, or attempting to pass ownership of, a pension benefit to another, e.g. to pay off a debt, is an unauthorised payment. scheme pensions. It is possible for authorised pension payments to become unauthorised in circumstances such as where a scheme pension has become payable and the rate of the pension is then reduced, unless it falls within the specific circumstances permitted by HMRC. Study Manual 21 2023 Edition Retirement Provision Certificate Tax charges on pension schemes pensions and annuities are subject to income tax in the hands of the recipient; lump sums paid on commencement of pension and serious ill health lump sums (where the whole pension is commuted for a lump sum) are free from income tax in the hands of the member receiving them; 25% of a trivial lump sum (where the amount of pension available is so small that the whole of it may be taken as a lump sum, or the amount is less than £10,000) is free from income tax. The balance is taxed as though it were income; and lump sums paid on the death of a member are subject to a different tax regime to those paid to the member before death. Tax charges (other than on lump sums paid as death benefits) take the following forms: LTA charge, where the value of the member’s benefits (DB or DC) exceeds the LTA. The charge is 25% on the excess over the LTA if taken as a pension and 55% if taken as a lump sum; AA charge (“AAC”). Contributions by or on behalf of a DC member, and the value of accrual for a DB member in excess of the AA attracts a charge of 20% for a basic rate taxpayer and 40% for a higher rate taxpayer. Contributions/accrual in excess of the additional rate threshold are taxed at 45%; Where the AAC exceeds £2,000 in a year, the charge can be paid from the member’s pension fund, under a system called “scheme pays”; Unauthorised payments surcharge. Unauthorised member payments that exceed a specified proportion of the member’s benefits will attract a surcharge, over and above the unauthorised payments charge; An unauthorised payment made to or in respect of a sponsoring employer can also attract an unauthorised payments surcharge. This can happen if the payment is part of a series of payments made, by the same registered pension scheme to or in respect of that employer, during a 12-month reference period and where the payments made exceed the surcharge threshold; and Scheme sanction charge. This charge is levied on the scheme itself, if it makes unauthorised payments, enters into unauthorised borrowing (which would be permissible loans, but which do not meet HMRC’s requirements) and income or gains accrued from taxable property. The charge is 40% of the scheme chargeable payment. As a general rule, the tax charges on unauthorised payments, set out above, are paid either by the member or the employer, depending on which of them is the recipient of the unauthorised payment. If the unauthorised member payment was made after the member’s death, the recipient of the payment is liable for the charge. It is possible for several people to be jointly and severally liable for a tax charge. De-registration charge. Where HMRC has de-registered a scheme, a tax charge of 40% of the value of the assets immediately before the registration is removed. It is paid by the scheme administrator, direct to HMRC. HMRC must de-register a scheme under certain circumstances, including: the scheme has not been established (or is not being maintained) wholly or mainly for the purpose of making authorised payments of pensions or lump sums. An example of this would be a scheme set up to operate a pension scam; the scheme administrator is not a fit and proper person to fulfil that role; scheme chargeable payments made by the scheme in a 12-month period exceed a permitted threshold, which broadly speaking is 25% of the scheme assets; the scheme administrator fails to pay a substantial amount of tax due; the scheme administrator fails to provide information requested by HMRC under its information- gathering powers, and the failure is significant; any information contained in the scheme’s application for registration (or otherwise provided to HMRC) is inaccurate in a material particular; Study Manual 22 2023 Edition Retirement Provision Certificate the scheme administrator fails to produce any document required to be produced by HMRC, or that any document produced to HMRC contains a material inaccuracy which is not notified and corrected; any declaration made by the scheme administrator accompanying the registration application (or otherwise made to HMRC) is false in a material particular; the scheme administrator has deliberately obstructed HMRC in the course of an inspection; there is no scheme administrator; the pension scheme is an occupational pension scheme, and a sponsoring employer in relation to the scheme is a company that has been dormant during a continuous period of one month within the preceding year; and The scheme is an unauthorised master trust. Taxation of lump sum death benefits. The taxation of lump sum death benefits is very complicated. It depends on whether the member was under or over age 75 when they died, whether they had triggered all of their benefits before death and to whom the death benefit is paid. As a general rule, if a member dies before the age of 75, any death benefits (within the member’s LTA) paid to a dependant or other beneficiary will be paid free of income tax. If the member dies after reaching the age of 75, the recipient will usually be liable for income tax on the benefits they receive, at their marginal tax rate. Under certain circumstances, tax can be charged if the lump sum death benefit is not paid within two years of the member’s death. Inheritance Tax (IHT). In most circumstances, IHT is not paid on, or in respect of, pensions. However, it is still possible for HMRC to determine that funds remaining on the death of a member will be subject to IHT. Broadly speaking, these circumstances are: where the member knows they are in ill health and they and/or their employer start to pay pension contributions, or significantly increase their existing pension contributions within two years preceding the death of the member; or the member knows they are in ill health and, within two years preceding death, transfers their benefits to another registered pension scheme which (for example) pays death benefits under a different form of trust. For example, the originating scheme pays death benefits only to the member’s estate, but the receiving scheme pays death benefits out under discretionary trusts, bypassing the estate. Although HMRC considers a period of two years prior to the member’s death as the significant period, this is only a rule of thumb. HMRC reserves the right to look further back if it considers circumstances warrant it. IHT is only of significance where the deceased member’s estate exceeds the nil-rate band (£325,000 in 2021/22, ignoring any other concessions) and the estate is not transferring between UK domiciled spouses, since IHT is not levied under these circumstances. Auto-enrolment Since 2012, all employers in the UK must automatically enrol eligible jobholders into a pension scheme. The auto-enrolment must take place as soon as the jobholder becomes eligible. This is subject to employers being able to choose to use a three-month postponement period before a jobholder is enrolled, but they can only use this postponement period once for each jobholder. The dates by which employers originally had to comply were determined by the size of their payroll and were called “staging dates”. Staging dates were between 1 October 2012 and 1 February 2018. Once an eligible jobholder has been auto-enrolled, they are free to opt out of the scheme. But while they remain an active member, their employer will be required to pay a minimum level of pension contributions on their behalf. Study Manual 23 2023 Edition Retirement Provision Certificate Guidance on auto-enrolment The legislation on auto-enrolment is very long and complicated. Non-statutory guidance has been published by two main sources: The DWP has produced guidance for employers and actuaries about how pension schemes can meet the criteria needed for a scheme to be an auto-enrolment scheme. This guidance has not been updated since 2017; and TPR, which is responsible for enforcing compliance with the new employer duties, has published online guidance resources about the reforms. This guidance is comprehensive and includes template letters. Schemes that may be used for auto-enrolment Employers may use an existing pension scheme that meets certain criteria set out in legislation or set up a new workplace pension scheme. The Government has also set up a pension scheme for this purpose, called NEST. Different criteria apply, depending on whether the scheme is a DC scheme, a DB scheme, or a mixture of the two, called a “hybrid” scheme. To count as an automatic enrolment scheme, a scheme must meet certain basic requirements: not contain provisions that are specific barriers to entry in the form of restrictions that: - prevent an employer using the scheme to meet its auto-enrolment, opting-in and re-enrolment duties; or - requires a new joiner to make a choice or provide information in order to become an active member. So, for example, a scheme eligibility rule cannot require jobholders to provide evidence of their state of health. Likewise, the prohibition on requiring a jobholder to make a choice before becoming an active member means a jobholder who is automatically enrolled in a DC scheme will need to become a member of a default fund when being auto-enrolled. Be either: - an occupational scheme established in the UK - the European Economic Area (“EEA”); or - a personal pension scheme regulated by a “competent authority” in the EEA. If the scheme is established in an EEA state other than the UK, additional regulatory requirements apply. DC requirements If an employer auto-enrols its eligible jobholders in a qualifying scheme operating on a DC basis, it is obliged to pay minimum contributions. For 2021/22, the statutory minimum contribution for an employer is 3% of a jobholder’s qualifying earnings. Overall contributions (including tax relief) must be at least 8% of qualifying earnings. In many cases, employers require jobholders to pay the balance of 5% contributions, though it is possible for the employer to pay the entire 8% if it chooses. DB requirements DB scheme criteria are much more complicated than DC. To meet the DB criteria, a final salary scheme must provide that all active members will receive a pension for life, beginning at the scheme retirement age, at an annual rate of at least 1/120 of average qualifying earnings in the three years preceding the end of pensionable service, for each year of pensionable service. The benefits must be revalued in accordance with legislation (see “Workplace Pensions” for further information on revaluation). Study Manual 24 2023 Edition Retirement Provision Certificate CARE requirements The DB requirements have been modified for CARE schemes, in relation to the revaluation requirements. CARE schemes can revalue benefits: at a minimum rate of Limited Price Indexation (“LPI”) capped at 2.5% (although it can be capped at a higher rate under the scheme rules); or under a discretionary power, on the assumption that benefits will be revalued at least at the minimum rate, provided the revaluation is funded and included in the scheme’s SFP; or by a combination of the two methods set out above; or on a guaranteed basis that is below the minimum rate, but where the funding of the scheme is based on the assumption that accrued benefits will be revalued at or above the minimum rate (and this is provided for in the scheme’s SFP). Hybrid DB/DC schemes. Hybrid schemes can satisfy either the DB or DC scheme quality requirements. They do not have to satisfy both DB and DC quality tests. Employee eligibility To be eligible for auto-enrolment, a worker must qualify as a “jobholder”. Jobholders include permanent and temporary employees and agency workers. In addition, the worker must: be between age 22 and SPA: and must earn at least £10,000 a year (in the 2021/22 tax year). Jobholders who have been automatically enrolled have a statutory right to opt out of whichever scheme they have joined by giving notice within six weeks of joining. Jobholders who are not automatically enrolled (for example, because they earn less than the earnings trigger or they opted out or are aged under 22 or over SPa) can opt in by giving their employer notice requiring the employer to arrange for them to join an automatic enrolment scheme. But they can only do this once in a 12-month period. Individuals earning less than the lower end of the qualifying earnings band can ask to join a pension scheme too but will not be entitled to receive any employer contributions. Employers must provide information to jobholders (and other workers) about auto-enrolment, including details of the contributions that will be paid by and on behalf of them and information about the right to opt out. TPR has produced an online tool that can be used to generate standard-form communications to help with this. Re-enrolment Every three years, employers will be required to automatically re-enrol any eligible jobholders who were previously automatically enrolled but who opted out of active membership. Once re-enrolled, the jobholder has the right to opt out within the statutory one month opt-out window as before. Enforcement of auto-enrolment obligations TPR polices employer compliance. Its objectives are to: establish and maintain a “pro-compliance” culture among employers; maximise deterrence for employers considering breaching the new duties; detect non-compliance by employers quickly; investigate potential breaches of the employer duties fairly and objectively; and take enforcement action against non-compliance by applying appropriate civil or criminal sanctions. Study Manual 25 2023 Edition Retirement Provision Certificate The most common areas TPR has found for non-compliance are: failure to comply with the auto-enrolment duties and safeguards; poor administration relating to auto-enrolment and opting-out processes; failure to comply with the requirements for qualifying schemes; the provision of incorrect advice to employers about their auto-enrolment duties; fraud; and unpaid contributions. Record keeping obligations Trustees, employers and pension providers are required to keep extensive records, as specified by TPR, to demonstrate compliance with their auto-enrolment obligations. Compliance If TPR suspects an employer is breaching its duties, it can require the employer (and others connected with it) to provide information or disclose documents. TPR can also inspect an employer’s premises under certain circumstances. TPR may issue various notices to compel employers, trustees and pension providers to comply with their obligations if they are in default, or to improve on the execution of their obligations and pay contributions which are due but unpaid. If a breach is not remedied, TPR may order two levels of penalties: fixed penalty notice. If an employer or other party fails to comply with one of the above notices, or TPR considers the employer auto-enrolment duties are being breached, it may issue fixed penalty notices. These may provide for flat-rate penalties of £400; or escalating penalty notice. For more serious or persistent breaches, there is a system of escalating penalties varying according to employer size. These range from £50 a day for employers with one to four workers to £10,000 a day for those with 500 or more workers. Prohibited recruitment penalty notice. Depending on the number of workers, these can range from £1,000 to £5,000. TPR can also use its power to levy civil penalties and suspend or remove trustees or appoint new trustees. Certain acts or omissions by an employer can amount to criminal offences. These include a “wilful” failure by an employer to comply with some of the key duties relating to auto-enrolment, re-enrolment, and the jobholder’s right to opt in. A person found guilty of one of these offences is liable, on conviction, to imprisonment or a fine or both. Since 2017, TPR has successfully prosecuted two employers, one of whose directors were jailed. One accountant has also been fined for providing false information to TPR in relation to his employer’s auto- enrolment failures. Study Manual 26 2023 Edition Retirement Provision Certificate Workplace Pension Schemes Types of workplace schemes Essentially, there are two types of pension provision within the workplace, as summarised in the table below: Defined Benefit Defined Contribution Usually linked to a member’s salary as they Usu