Helping staff with pension decisions

Response to COVID-19

There is growing evidence that employees have taken the decision to opt out of workplace pensions given the pressure on household finances. They should be aware that this will also mean that many will lose life insurance that is embedded in their pension scheme. An alternative option might be to opt down rather than opt out. It is worth exploring with pension providers if they offer the option for employees to reduce their contributions below the statutory minimum for a period of time. They will of course revert to the statutory minimum in force at re-enrolment, although the employee could then opt down again.

Employers should not promote opting down as this is a breach of the “sole or main purpose test” in s. 54 Pensions Act 2008, which prohibits employers from offering any sort of inducement that would be detrimental to the employee. The reason that promoting opting down would breach this test is that if somebody opts down they become an entitled worker, rather than an eligible jobholder and as such the employer is not obliged to make any contributions.

Pension scams

Sadly, COVID-19 has presented an opportunity for fraudsters in many areas and the Financial Conduct Authority has been investigating 85 rogue pension advisors who have been encouraging people to give up final salary pensions for transfer out values, only to find that the risky investments that they were offered as a home for their fund and the very high charges that had not been made clear to them have led to hundreds of thousands of pounds being lost. For those aged under 55 there is also a tax charge to pay as HMRC will class this as an unauthorised withdrawal. The government is trying to raise awareness of pension scams, but employers should inform staff too.

Lifetime allowance

From 6 April 2021 the lifetime allowance (LTA) was supposed rise by inflation. However, the 2021 Spring Budget saw the current level frozen (£1,073,100) for the next five years. The LTA caps the value of all pension funds (not including the state pension) and the benefits that can be drawn from the fund without incurring an extra punitive tax charge. Whilst this sounds like a very significant pension fund, for those in a money purchase arrangement a £1m fund will only purchase around £28,000 per year as an annuity.

Pension Schemes Bill

The Pension Schemes Act 2021 was enacted on 11 February 2021. It introduces a new type of pension scheme called collective money purchase (CMP). A CMP aims to reduce the risk to an employer of offering a final salary pension scheme by providing a halfway house for employees rather than just being moved to a riskier money purchase option, where the employee’s personal final fund value depends upon investment returns at the point that they retire. In a CMP investments are pooled across the whole membership and target a final pension for the employee, for example 30% of final salary at retirement. An actuarial calculation is conducted each year that can lead to pensions in payment having to be reduced to keep the fund finances in a strong position for all members. So, whilst a final pension is not guaranteed, it is hoped that a larger investment pool will drive greater returns and more likelihood that the target will be met.