The Queen’s Speech 2016: The Pensions Bill and the Lifetime Savings Bill
On 18 May, the Queen delivered her 65th speech, outlining the key policies and programmes for the next Parliamentary session. Fiona Matthews and Louise Williamson focus on the pension aspects of the speech and developments affecting the master trust market.
Although it did not appear in the delivery of the speech in Parliament, the following official papers revealed that the Government will be implementing ‘strict new criteria’ for master trusts and greater powers for the Pensions Regulator under the Pensions Bill.
The LifeSight team learned more about the plans at one of three ministerial roundtables following the announcement. It is clear that one of the government’s biggest concerns is how to identify which master trusts are vulnerable to failure and then to work out how to protect members of those schemes (ideally at no expense to the Government) – a Pension Protection Fund style levy is very much on their agenda. Understandably the Government is keen to avoid knocking confidence in master trusts as they are commonly used for automatic enrolment.
An enhanced role for the regulator to ‘authorise’ schemes may result in a licencing regime for multi-employer pension schemes. Higher barriers to entry and standards for master trusts to maintain their licence to operate would benefit most employees who are auto-enrolled into master trusts.
It is one thing to impose more stringent requirements going forward, but enforcing them onto existing master trusts that potentially will not or cannot meet those new standards raises other issues. For example, what will happen to those existing schemes who cannot meet any new requirements is unclear, but, it is possible that some may be forced to wind up and transfer those members’ assets to another scheme.
The specific fear that failure, whether through increased regulation or not meeting business plan targets brings, is that members’ funds could be used to meet the costs of winding up an insolvent, failing master trust and transferring members’ savings to a new provider. This is a particular concern when the master trust is not supported by a profitable enterprise with diverse lines of business and a reputation to protect. Making master trusts hold money in reserve to cover any wind-up costs would be one part of the solution. It must be recognised that very requirement may have the unintended consequence of pushing marginal master trusts into wind-up.
An industry consensus is emerging that a licensing arrangement with more emphasis on a fit and proper regime for master trust trustees, and protection for the inevitable failures is a workable solution. The industry has also expressed a desire to operate a safety net for failing schemes to transfer to, with the possibility of using NEST as the last resort provider.
WHAT ELSE WILL BE IN THE FINAL PENSIONS BILL?
What was also raised was a cap on early exit penalties to enable “consumers to access pension freedoms without unreasonable barriers”. They also laid out the intention to set up a new Pensions Guidance body to provide private pensions guidance by combining Pension Wise, the Pensions Advisory Service and the Money Advice Service’s pension services.
WHAT ELSE COULD BE IN THE FINAL PENSIONS BILL?
When the Bill is published it is possible that some surprises emerge. For example, it might contain measures to bring forward when the State Pension Age will rise to 68 following John Cridland’s Review. Other changes could include how defined benefit pension schemes are regulated and automatic enrolment into Lifetime ISAs.
LIFETIME SAVINGS BILL
The Lifetime Savings Bill makes provision for the Lifetime ISA (LISA) announced in the March Budget, which some have seen as a possible alternative to saving in a pension scheme. No new details of the Lifetime ISA were announced during the Queen’s speech – which is unsurprising as we are expecting to hear more in the autumn. Some employers will be eager to facilitate access to LISAs as employees may find it appealing to save money directly out of their pay cheque, before they have a chance to spend it. Employers may also be able to negotiate better deals than individuals could do themselves. For other employers, the challenge will be to communicate how the benefits of workplace pensions stack up against LISAs.
Generally speaking, Government policy is, for now, focussed on providing stronger incentives to save for retirement through a pension, certainly where employee contributions are being matched by the employer. The Chancellor may not be finished with changes to how pensions can be paid and taxed.
The impending changes to master trusts should underpin the success of the auto-enrolment regime by improving the safety for members. By regulating the up and coming master trust market, the Government will ensure the market’s credibility by eliminating any less reputable or unsustainable schemes.