Pensions Act finally gets Royal Assent
These two Acts, as you’ll all know by now, will create the new pensions environment that will soon be with us after A-Day – 6 April 2006 – as well as bringing in all the new bits and pieces of pension paraphernalia like the Pension Protection Fund, the New Pension Regulator, scheme-specific funding and the like, at all points between now and then. Super stuff! We’re now in an unstoppable headlong rush into a period of massive change where the pension rulebook is being rewritten and retrospective tax laws are being implemented at the same time. In a way it’s a shame that the Pensions Act is still missing much of the detail we’ll need to understand what’s going on around us, but that’s just me being ungrateful and picky I guess.
It wasn't the easiest bit of legislation to get through the mill, to be fair. I wouldn't be surprised if the Pensions Bill itself was one of the most amended Bills ever - I mean there's been more than 1,200 amendments to it since it went to the House of Lords in May (having already had bits added to it, taken away and changed in the Commons before that). Many of the amendments were quite contentious and had strong views expressed both for and against them.
A good example, of course being the debates in the Lords and the Commons on the thorny issue of enforced annuitisation at age 75 that eventually ground to a halt with the Lords’ amendments being dismissed by the Commons yesterday. It wasn’t just the amendment to do away with the age-75 rule that bit the dust, but also the late attempt to broker a compromise by shifting the age when annuities must be purchased from 75 up to 80 or 85. That, at least, would have given more time and hope to people who are soon to be 75, but sadly even that was deemed to be outside of the scope of the Lords’ remit as it would “affect the area of taxation”, the reason given for kicking both amendments into touch.
We’ll be putting together a kind of BeeLine double-bubble summary of the Pensions Act and the Finance Act for you to use as a reference document as soon as we can, but I guess as we’ll still be getting the detail in dribs and drabs over the coming months as the Government guys get around to writing up all the delegated legislation that won’t be any day soon. For now you’ll have to put up with the Scheme Audit stuff I put out on 1 September which, if you didn’t see it at the time you can access by clicking here. In the meantime, there has been a fair bit of criticism from the CBI on the position we’ve reached so far and you may be interested in why they have felt strongly enough about things to have put out a press release saying things like “as far as employers are concerned it is a major missed opportunity”, “overall the Bill has become complex and confusing” and even “what a shame”. They also make the observation that the new legislation may “have the perverse effect of encouraging firms to move away from final salary schemes”.
One of the issues that the CBI is unhappy about is the way in which the balance between the responsibilities of the Pensions Protection Fund (PPF) and the Financial Assistance Scheme - Financial Assistance Scheme (FAS) seems to have been affected by the amendments and shifts in Government thinking that have been made as the Pensions Bill has been cobbled together. The Pensions Protection Fund is scheduled to come into existence in 2005 and was originally intended to offer protection for the schemes of firms that become insolvent after that time. (The PPF itself will be funded by an annual levy on solvent companies running Final Salary pension schemes.)
The schemes of firms that have failed before the PPF comes into existence in 2005 were supposed to fall into the remit of the Government-funded FAS, but changes now mean that some could fall into the PPF instead. Obviously if this does happen the PPF would start off on the back-foot and could end up upping the level of the levy on solvent employers to pay for it, while the Government would presumably save money on the FAS. The CBI and others have previously supported the PPF on the basis that it would not impose retrospective liabilities and it does not believe that firms should have to pick up the tab for companies that have failed before the PPF is set up next year. The FAS, of course, has its own particular problems as it has only so far had £400 million of Government money allocated to it, a figure that is regarded as being wholly inadequate by most commentators (I did a BeeLine on this recently that you can access by clicking here if you like).
Another issue related to the PPF that the CBI wants clarification on is the way in which the flat-rate per-member levy is to operate. It thinks that the costs of the PPF should be shared between employers and employees rather than being all loaded on employers. It is still not clear whether employers will be able to pass on a share of the cost of the levy to pension scheme members.
This seems to me to be a key point really, that and the fact that we still have no idea how much the annual per-member levy will actually be. Let’s assume it’s going to be £50, which is what some people are guessing it could be (although some say it could be much more). The way it will work is that it will have to be paid based not just on the number of active members of final-salary schemes, but deferred and possibly retired members too. A scheme with a large number of deferred members could end up paying a small fortune every year into the PPF and employers are arguing, I think, that this is effectively an insurance premium for the benefit of scheme members, so why shouldn’t scheme members pay it?
No-one knows how this is all going to come out in the wash, Government has only had years to work on the detail after all, but the outcome is clearly important not just to employers, but to scheme members too. People with loads of deferred pensions from past jobs could end up paying out loads of money every year in insurance for a start. Whichever way this comes down I would think it will have an enormous impact on the decisions people make with regard to future pension transfers and tidying their past pensions up, which sadly is something made all the more difficult by the changes coming in on A-Day. I mean, is that joined-up thinking or what?
The CBI, like almost everyone else is also unhappy that the Government will not act as guarantor of last resort for the PPF. The PPF after all is just another pension scheme, dependent for funding on the levy on other schemes rather than a central employer. If the benefits underwritten by the PPF ever get too high for the annual levy to support the PPF would need to cut the level of ‘guaranteed’ benefits. Without the Government standing behind it to bail it out if it gets in trouble the pension lifeboat, as the PPF is called, could turn out to be just a bigger ship to go down in for those it rescues. It’s sort of a lifeboat being launched along with its own iceberg really.
On a slightly lighter note I notice the CBI and others have concerns that the introduction of so many new member-sponsored trustees to occupational trustee boards will only serve to gridlock some vital areas of decision making. It was announced at this year’s TUC conference, you’ll remember, that it will be a requirement that 50% of all trustee board members must be member-nominated. I’m not sure where all these trustees are going to come from, or how they are going to be able to get up to speed with all this new pension stuff in time to make the right decisions for the people they will represent. Malcolm Wicks, the current Pensions Minister, is reported to have said just yesterday of these new trustees that “we do not expect that they become professionals, but they should behave professionally” – a sentence I’ve been staring at for hours now but still can’t get my head round…..
19 November 2004
This document is based on Scottish Life's understanding of the Pensions Act 2004 & the Finance Act 2004.
Any research and analysis included has been provided by us for our own purposes and the results of it are being made available only incidentally.