Deep dive into pensions hot topics
Christine Scott reflects on some of the key issues discussed at the recent Pensions and Lifetime Savings Association’s Scottish Conference.
The Scottish pensions industry gathered at Dynamic Earth in Edinburgh (19 November) for the Pensions and Lifetime Savings Association’s Scottish Conference, to consider both the macro and micro-level issues which are currently front of mind.
This was the PLSA’s third Scottish Conference, and the first since it changed its name from the National Association of Pension Funds.
The rebrand is more than a name change. It recognises the ongoing, long-term shift from defined benefit pension provision to defined contribution pension provision, the significant increase in the number of people saving for a pension through auto-enrolment and the importance of other forms of saving for retirement.
Between 2012, when auto-enrolment began, and March 2015, the number of pensions savers increased by more than 5.2 million to 16.1 million: this is out of a total work force of around 20 million.
Lesley Williams, Chair of the PLSA, spoke of a “wave of change” and the need to think “more about savers and less about the legislation”.
Perhaps the most striking presentation of the day came from Ashok Gupta, Deputy Chair of the Bank of England’s working group which undertook a study into the “Pro-cyclicality and Structural Trends in Investment Allocation by Insurance Companies and Pension Funds”. A complex title for a complex topic which nevertheless had some clear messages for the trustees of defined benefit schemes, politicians, The Pensions Regulator (TPR) and ….. wait for it……accounting standard setters.
Ashok explained that the wholesale de-risking by private sector schemes, illustrated by the trend away from investing in equities to investing in index-linked gilts, had increased employer covenant risk: meaning that investment strategies have contributed to the growth in defined benefit pension deficits to a whopping £550bn on a buy-out basis.
What really matters is that pension schemes have sufficient cash to pay pensions when they fall due
TPR’s regulatory approach and accounting standards, which bring defined benefit pension liabilities on to employers’ balance sheets, came under fire as factors contributing to inefficient investment strategies.
What really matters is that pension schemes have sufficient cash to pay pensions when they fall due. It is perhaps time for the overt focus on pension deficits, which are measured in different ways for different purposes, to be given a less prominent role in the way the financial health of schemes are assessed. Deficits still need to be measured but the regulatory underpinnings need to change so that trustees have the confidence to be bolder.
The conference had a distinctly Scottish flavour with keynote speeches from RT Hon David Mundell MP, Secretary of State for Scotland, and leading Scottish historian Sir Tom Devine.
The Secretary of State acknowledged that the introduction of new income tax powers for Scotland would impact on pensions administration and he assured delegates that HMRC had matters in hand from the UK Government’s perspective.
Changes to payroll and pensions administration systems are required to ensure that individuals are correctly identified as Scottish or rest of UK taxpayers and therefore receive the appropriate amount of pension tax relief. Systems need to be in a state of readiness regardless of whether there is any immediate divergence between Scottish and rest of the UK income tax rates.
Being ready to implement different rates of tax will ensure that pension contributions are invested in a timely manner and that those about to retire can identify the amount of their pension pots prior to entering a drawn down arrangement or purchasing an annuity.
Sir Tom Devine’s perspective on the Scottish independence referendum and its aftermath had the delegates gripped
HMRC has published two technical notes clarifying the scope of the Scottish Rate of Income Tax (SRIT) which consider its impact on payroll and pensions administration.
While the Scottish Rate of Income Tax, enshrined in the Scotland Act 2012, will be implemented from 1 April 2016, there remains a degree of uncertainty around the devolution of further income tax powers to Scotland under the Smith Agreement.
The UK Government has announced that these further powers could be in place from 1 April 2017. However, the Secretary of State pointed out that the Scottish Parliament must consent to the Scotland Bill 2015 before it becomes an Act and that this is dependent on both the Scottish and UK governments reaching agreement on the fiscal framework. The fiscal framework will deal with any additional borrowing powers and the calculation of Scotland’s block grant: the new tax powers can’t function without it.
By coincidence, late last week, the House of Lords Economic Affairs Committee called for a pause in the progress of the Scotland Bill 2015 through Westminster until the fiscal framework is published.
Pensions professionals love to talk pensions and of late they have not been short of material. However, Sir Tom Devine’s perspective on the Scottish independence referendum and its aftermath had the delegates gripped.
Although Sir Tom was at pains to state “The future is not my period”, there was no-one left in the auditorium in any doubt that the “The Scottish question is not yet settled or resolved”. Perhaps things will be a bit clearer when we gather together for the 2016 PLSA Scottish Conference!