Legal and regulatory change was abundant last year and 2016 looks like it will continue in the same vein, as both the UK and Europe are churning out legislation and rules affecting occupational pension schemes.
Tax is the main focus of much of the UK legislation set to hit the pensions industry this year.
Apart from the possibility of a taxed-exempt-exempt system, there are other significant tax changes looming.
Tim Smith, senior associate at law firm Eversheds, said the introduction of a tapered annual allowance in April means employers will have to respond in the dark about which of their employees are affected, as they do not know their employees’ total taxable income.
He predicted that as a result, companies will introduce a cap for all employees.
“It’s leading employers to take a blanket approach and in some cases just cap contributions at £10,000 for everybody,” he said.
The annual allowance that was supposed to be targeted at higher earners, in effect can become an annual allowance for everybody in many cases
Tim Smith, Eversheds
“So the annual allowance that was supposed to be targeted at higher earners, in effect can become an annual allowance for everybody in many cases.”
Europe could grow or diminish in importance
Apart from tax, the possibility of a Brexit will be an issue of growing importance next year and could bring with it a focus on the impact on pension funds, said Smith.
But as long as Britain is in the EU, it will have to comply with EU laws. The new Institutions for Occupational Retirement Provisions II directive, currently working its way through the EU parliament, is one to watch out for in the first six months, said Smith.
Meanwhile, “clearly the European Insurance and Occupational Pensions Authority behind the scenes has been pushing for a more stringent funding requirement,” he said, referring to the planned results disclosure of Eiopa’s occupational pensions stress test analysis in January, and to Eiopa’s Quantitative Assessment.
Eiopa will offer advice to the European Commission on EU solvency rules for IORPs in March.
“In a stressed scenario, not all schemes will be able to cope, and therefore you could see, potentially, Eiopa coming forward again and pushing for solvency-type funding requirements,” he said.
Legislation on member communications
Marcus Fink, partner at law firm Ashurst, also brought up Eiopa, pointing out that a consultation on good communication is underway, which will close on March 22.
“So I’m wondering if we’re going to see new European legislation on and around communication – especially in relation to occupational schemes – coming out from Europe,” he said.
“We have codes of practice, we have a sort of fairly minimalistic framework around disclosure requirements to pension scheme members, so I think something that gives a bit more detail… has to be a good thing for members,” he said.
And again tax is expected to be a hot topic. Fink said: “The wild card for next year would be some form of restriction on the tax free lump sums. At the moment it’s 25 per cent – that’s standing out as an anomaly with the rest of the tax and savings framework. If it’s not attacked next year, possibly the year after.”
For Michael Hayles, pensions partner at law firm Burges Salmon, the biggest change is happening in the Local Government Pension Scheme space.
“In terms of the proposed changes to the investment regulations and coupled with having the pooled funds… that’s a key regulatory challenge to make sure it’s right and particularly that it’s balanced,” he said.
He added that the government’s aim of making local authority schemes invest in infrastructure might be positive but warned that care is needed.
“The important thing is that the way in which that is achieved doesn’t in fact lead to poor investment decisions,” he said.
“There’s no point being forced to invest in infrastructure investments which aren’t suitable for the particular liabilities they’ve got to fund.”
