Blog | 12/03/2019

Viewpoints: Pensions complification

The volume of pensions legislation in force has been increasing exponentially in the last fifteen years with annual Finance Acts, six Pensions Acts and two Pension Schemes Acts, plus hundreds of sets of regulations.  The twin drivers have been a Treasury obsession with tax relief and the potential for its abuse, and a DWP passion to protect pension scheme members seemingly almost regardless of cost.

The rise of the Regulators has added to the burden.  Initially triggered by the Maxwell scandal in the early nineties, first we got Opra and then from 2004 The Pensions Regulator.  Guidance proliferated; not only explaining the requirements of legislation, but also setting out what was expected from trustees and administrators in terms of governance and compliance.

From HMRC, the few hundred pages of IR12 were replaced in 2006 by several thousand pages in the Registered Pension Schemes Manual (and now the Pensions Tax Manual).  What had begun as a brave new world labeled ‘simplification’ rapidly became ‘complification’ instead.

In large measure the burden heaped upon administrators has resulted in the first place from political over-reaction to bad behavior by a few, and then the failure of attempts such as David Cameron’s ‘Red Tape Challenge’ to reverse the tide of new legislation.  The whole sad history has been entertainingly described in leading pensions lawyer Robin Ellison’s magisterial survey “Red Tape”.

Constant tinkering with the legislation by politicians who cannot leave things alone is not the only problem: the consequences of major policy errors can take decades to overcome.  Take contracting-out for example. This failed experiment in cost-sharing between the state and scheme sponsors was finally terminated in 2016, but the reverberations continue.

Post-April 2016, administrators first had to grapple with the consequences of less-than-perfect historical membership records.  GMP reconciliation required alignment of scheme liabilities with HMRC records.  Just as this tortuous and costly exercise comes to an end, schemes holding GMP liabilities are faced with the uncertain prospect of equalisation, following the High Court judgment in the Lloyds Banking Group case.

Unsurprisingly, money to pay for all this extra work is short: not least because the demands of the defined benefit scheme funding legislation have required sponsors to continually stump up more and more in deficit repair contributions.  Pensions administration has been the Cinderella by comparison, as there are limits to how much more can be done without being paid more.

Another trend which has impacted pensions administrators has been the development of completely new law.  In the year 2000, for example, pension sharing orders arrived on the statute book, creating a particularly fraught subject for conflict and error as the administrator has to deal with the court as well as both divorcing parties and their respective solicitors.

And then came pension freedoms, enormously ramping up demand for transfers from DB schemes.  With little support initially from HMRC and regulators, administrators found themselves struggling at times against pressure from increasingly sophisticated fraudsters keen to separate scheme members from their money.

The rise of so-called ‘International SIPPs’ as a means of channeling pension fund money into high-risk investments has supplanted more straightforward ‘pension liberation’.  Due diligence is taking longer, as much as ten hours or more in some cases: a cost the administrator often has to absorb.

Part of the problem with pensions legislation is that the past is never history.  Administrators cannot simply disregard what, for example, was the Lifetime Allowance in previous years.  Such details are not academic: knowledge of legislation in force at different stages during an individual’s period of scheme membership must remain accessible if it might affect their entitlement to benefits.

Not to mention their beneficiaries.  The last surviving widow of a US Civil War veteran died only fifteen years ago!

This is a guest blog from Ian Neale, Director at Aries Insight

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