DC scheme sponsors and trustees can now proceed in earnest to review their schemes and ensure that they are fit for purpose from April 2015.
A number of organisations will have been waiting upon this week’s announcement before moving forward. This revolved around the action that the Treasury would take to mitigate reduced tax receipts as older workers used the new freedoms to potentially draw their salary more tax efficiently from next year. There was a very small risk that the new pension freedoms might have been curtailed given the scale of the Treasury’s potential tax losses, but George Osborne has confirmed that this issue will be addressed by placing new restrictions on the level of future contributions eligible for tax relief once maximum tax free cash has been taken.
DC sponsors and trustees will be pleased to hear that the Guidance Guarantee will be provided by independent organisations (The Pensions Advisory Service and the Money Advice Service are mentioned as ‘lead’ organisations) with the costs being funded by a levy paid by the Regulated adviser community. The Financial Conduct Authority has issued a Consultation around the elements of the Guarantee for which it will be responsible. As such, we await further details before a clear picture of the mechanics of the Guarantee becomes clear.
This certainty of direction means that DC scheme sponsors and trustees can move forward with their detailed planning:
- Where it is decided to provide income withdrawal from within the scheme, this will be achievable without the cost/time involved in amending the scheme rules. Instead, new legislation will be introduced to enable the trustees to ignore the existing rules in this area and introduce the new flexibilities by reference to the new tax rules: the so-called ‘permissive statutory override’.
- Appropriate investment advice should be sought regarding a fit for purpose Statement of Investment Principles and default investment option to meet likely member needs from April 2015. The changes provide an ideal opportunity for trustees to consider the merits of remaining with the (typical) lifestyle default or moving to a target date fund structure, as used by NEST.
- Relevant, targeted member communications should be produced to explain how the new freedoms will affect scheme members.
Some of the above work will form part of the current scheme reviews around the DC Code of Practice13 / Regulatory Guidance, leading to the required scheme Governance Statements from next year. The Pensions Regulator has confirmed that the Code will require revising in certain areas to reflect the new freedoms, so trustees should be ready to revisit current compliance activities at some future point.