Let's talk
Pensions bulletin

Pensions Bulletin 2015/28

Pensions & benefits

NEST sets out a blueprint for its scheme members’ retirement income

The National Employment Savings Trust has set out the essential features of a “core” retirement income plan it believes will be well suited to a large proportion of its members in light of the Government’s Freedom and Choice reforms. The plan is aimed at those who in the coming years will have built up a larger DC pot with NEST than those who are currently approaching retirement.

This plan, which also serves as its response to the November 2014 consultation on investing for its members in the new regulatory landscape, identifies three different phases of retirement:

  • Phase 1 – typically mid to late 60’s to mid 70’s, when members first start to move out of full-time work, so want to maximise sustainable income with the option to take lump sums if required
  • Phase 2 – Around mid 70’s to mid 80’s, when members will still want access to a large portion of their pension pot that should be generating good returns, but will accept having a certain amount locked away to provide for later life
  • Phase 3 – Around mid-80’s onwards, when members will want protection from investment and longevity risk

The proposed NEST solution involves a member’s DC pot at retirement being split into three types of fund:

  • An income drawdown fund – which is expected to use about 90% of the member’s initial pot to fund a steady retirement income with a degree of inflation protection during Phases 1 and 2. Any excess returns during this period would be paid into the cash lump sum fund below
  • A highly liquid cash lump sum fund – which is expected to house around 10% of the initial pot for capital expenses throughout retirement
  • A later-life protected income fund – which would be paid for by regular contributions during Phases 1 and 2 from the income drawdown fund – anticipated at around 1.5-2% of that fund. It would remain refundable up to a certain age, perhaps 75, at which point it would be “locked” and used by possibly a collective benefits vehicle to fund a relatively fixed and secure income during Phase 3

NEST is keen for any parties interested in working with them on these proposals to contact them.

The response document also makes clear that NEST has adjusted its investment approach in the “consolidation phase” – ie in the run up to an individual’s retirement. The NEST Retirement Date funds maturing through 2020 now have a consolidation phase objective to manage the risks associated with converting accumulated savings into a cash lump sum.


One must remember that this is merely a blueprint at this stage, with some clear difficulties in bringing it to fruition. However, it is a thoughtful and well-argued proposal to help those retiring in the near future with a reasonable DC pot (and who do not wish to manage their savings to any great degree), get the best value and protection from the funds they have accumulated. Whilst it cannot deal with the issue of people simply not having enough money for retirement, it appears to give members with reasonable DC savings a retirement income solution that balances flexibility with security.

As described, the later-life protected income fund could require the Government to develop (through regulations) the collective benefit provisions outlined in the Pension Schemes Act 2015. Might this NEST fund become the UK’s first collective benefit scheme?

HMRC publishes substantially reduced list of Recognised Overseas Pension Schemes

HMRC has published a revised list of Recognised Overseas Pension Schemes (ROPS) with less than one in five schemes that appeared on the list immediately before its suspension remaining.

The list was suspended in June (see Pensions Bulletin 2015/26) because legislative changes to the definition of a ROPS had made the list unreliable – with many schemes on the list potentially not meeting the new requirements. In particular, a ROPS now cannot pay benefits deriving from the member’s transfer fund earlier than the UK’s normal minimum pension age (NMPA – currently age 55) unless ill-health conditions are met.

It would seem that many schemes were not able to confirm to HMRC that they met this requirement and so have now been removed. The list has reduced hugely, from nearly 4,000 schemes to under 700. As an extreme example, there is now only one scheme in Australia included on the ROPS list (there were around 1,600).


The new list comes with health warnings despite its reduced size – in particular, just because the scheme has told HMRC that it is a ROPS does not mean that it actually does satisfy the conditions to be such a scheme. Therefore it remains important that appropriate due diligence is taken by UK schemes before transferring benefits overseas.

Guidance published on SORP investment disclosures

The Pensions Research Accountants Group and the Investment Association have jointly published guidance whose purpose is to assist practitioners in the preparation of financial statements under the revised Pensions Statement of Recommended Practice (SORP). The revision to the Pensions SORP (applicable for years commencing on or after 1 January 2015) was necessitated by the publication of the new accounting framework (FRS 102).

FRS 102 requires additional investment disclosures in financial statements of trust-based occupational pension schemes. The guidance recommends that trustees engage with their third-party advisors early to get the information, particularly prior year comparators. Appendix 1 provides a summary of which information is expected to be requested from each advisor.

The guidance contains a summary of the new and additional investment disclosure requirements of the Pensions SORP, set out in a useful table, before focussing on three key areas:

  • The new hierarchy for assessing fair value (ie quoted price, recent transaction for an identical asset and use of a valuation technique)
  • the new investment risk disclosures (on which the guidance proposes a narrative approach and which should also reflect the scheme’s investment strategy, using the scheme’s statement of investment principles as a starting point (the guidance recommends trustees review their SIP for consistency); and
  • the additional transaction cost disclosures

In particular, the new investment risk disclosures are illustrated with some useful examples.

The guidance and SORP are available via PRAG’s website.


This is a helpful document. It might also have an impact on accounting under IAS 19 (which requires disclosure of whether assets are quoted and unquoted), and US GAAP (which has a similar fair value hierarchy).

TUC urges Government to end discrimination in survivor benefits

The TUC has called on the Government to remove one of the last differences in survivor benefits between same and opposite-sex couples. Although civil partners and same sex spouses have the right to claim a survivor pension from a DB pension scheme, it only applies in relation to post 5 December 2005 service.

A year has passed since a Government report was published outlining the costs and effects of fully equalising survivor benefits for same sex couples (see Pensions Bulletin 2014/27) with the Government yet to decide whether to take any action.

The TUC has marked the anniversary with a fresh call for action. It estimates that there are about 70,000 members of DB pension schemes in the private sector alone who would leave behind a surviving civil partner or same sex spouse. It also says that about one in four schemes do not treat same sex survivors equally to widows.


The Court of Appeal is hearing this week the case of Walker v Innospec (see Pensions Bulletin 2014/08) where the Government’s current position is being tested against European law. It may be that the Government responds to the report once this case concludes.

Draft regulations enable pension tax to be adjusted for Scottish taxpayers

Draft regulations have been laid before Parliament to deal with consequential changes to tax law to allow for potential differences between the Scottish basic, higher and additional rates of income tax and the UK basic, higher and additional rates.

The Scottish rate of income tax, introduced in the Scotland Act 2012, has effect from 6 April 2016. It works by removing 10% from each of the UK income tax rates for Scottish taxpayers, with the Scottish Parliament then setting add-on rates which, in combination become Scottish rates for Scottish taxpayers.

In relation to pension savings the Scottish Rate of Income Tax (Consequential Amendments) Order 2015 will adjust the “relief at source” provisions (used by personal pension scheme providers and NEST) as follows:

  • By setting tax relief at source at the Scottish basic rate if HMRC has so notified the scheme administrator
  • By allowing Scottish taxpayers to claim higher rate tax relief (though their tax return, rather than at source) at the Scottish higher rate or the Scottish additional rate; and
  • By enabling additional relief to be delivered if an individual receives relief at source at the UK basic rate whilst being a Scottish taxpayer and the Scottish basic rate is higher, or receives relief at source at the Scottish basic rate whilst being a UK taxpayer and the UK basic rate is higher

Part of the reason for enabling additional relief to be delivered is that the Government has accepted that pension providers may not be ready to make relief at source claims at the Scottish basic rate in respect of Scottish taxpayers until 6 April 2018. So to ensure that such members aren't disadvantaged in 2016/17 and 2017/18, the Government has agreed that from 6 April 2016 providers can continue to claim relief at source at the UK basic rate of tax for all members. HMRC will separately identify Scottish taxpayers and make any adjustment (depending on the rate set by the Scottish Government), to the relief given direct with the scheme member. This will be done either through the self-assessment process or PAYE coding.

The Order also adjusts the annual allowance charge and the “scheme pays” rules to ensure that these provisions operate appropriately under the Scottish rate of income tax. This means that if a Scottish taxpayer incurs an annual allowance charge from 2016/17 onwards, the calculation of that charge will be based on Scottish rates of income tax.

This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.