New occupational wind-up regs
In front of me right now I’ve got a copy of ‘The Occupational Pension Schemes (Winding Up) (Amendment) Regulations 2004’, no less, and I’ve just struggled through it. If you’re interested, what follows is (I hope) a fair translation into everyday English.....
First things first. What this is all about is the Department for Work and Pensions putting their ideas out on how the winding-up priorities for pension schemes can be changed to make them a bit fairer to all scheme members. You’ll already be aware of all the horror stories that have been in the press lately about schemes winding-up and leaving some long-serving employees with the square root of diddly-squat for a pension. People get miffed when that happens and the newspaper guys really go to town on it and point to it as being evidence of what’s wrong at the heart of the UK pension system. And I don’t disagree with that.
I would say, that although this consultation on the draft regulations seems to be being pushed through quickly, it is worth mentioning that we were really expecting to see it in the Summer. So it’s about time we got it I think. Anyway, that aside, the intention is that these new regulations will be brought in as soon as possible now we have seen them, and the short consultation period reflects that intention. Basically they’re giving us until the 3rd of December to comment on the draft.
What will happen after that is that the Government will lay these Regulations as soon as they can in 2004 and they will (presumably) come into force at that time. They’re clearly not going to wait until A-Day, 6 April 2005, to change the priorities on wind-ups. It’s obviously too important to be left that long, and Government apparently wants to be seen to be reacting quickly to what is regarded as a real problem with the current system.
I would think the new priority order will apply to all schemes that start to wind-up after the date the Regulations come into force, but schemes that have commenced winding-up procedures before then look as though they will be governed by the existing wind-up rules. It’s not retrospective.
In a nutshell, the proposal is that the rights of existing scheme members and deferred scheme members (people who have left service and have left their pension entitlement in the scheme) will be pushed up the priority list where a scheme closes with insufficient assets to cover its liabilities in full. At the moment, people who have already retired get the five star treatment when schemes wind-up, getting all their expected pension and guaranteed increases in payment too. That approach sometimes doesn’t leave too much to share out among those still working at the company and those who have left their pensions behind in the pension scheme.
The new priority order will look like this:
First, as now, all benefits secured by Additional Voluntary pension contributions will be secured. Fair enough, it’s people’s own money after all.
The second priority, as now, will be for all pensions in payment, but the guaranteed increases will be dropped down the priority list. This is a big change which means that pensioners will get their increases on their pensions, but only once other priorities have been sorted first.
The next part of the priority list is a bit tricky. It concerns the treatment of pension entitlements that have not yet come into payment. What is being proposed is that each person’s entitlement will be split into two chunks, and one chunk will get more priority on wind-up than the other chunk.
I’ll explain. They are calling these chunks the ‘Non-pensioners - first category’ and the ‘Non-pensioners - second category’. The idea is to treat long-serving members better than short-serving members. The first priority chunk will be made up of 2.5% of each person’s pension for each year of pensionable service in the scheme. So, someone who had been in the scheme for only one year at the time of winding-up would get 2.5% of their pension in the first category and 97.5% (or to put it another way, most) of their pension in the second category. On the other hand, someone with 40 years of scheme membership would get 40 times 2.5%, which is 100%, of their pension in the first priority category, and none in the second. So, the longer you’ve been in, the more of your pension is in the first priority group, and the shorter your period of service, the more of your pension is in the second, lower priority group. To help you explain this to people we’ve added a helpful listing to this BeeLine showing the position on a year-by-year basis.
What won’t be covered in either the first or second category, though, will be the entitlement to indexation. That will drop down the priority list for pensions waiting to come into payment too.
After the AVCs and non-indexed pensions in payment have been secured, and then ‘Non pensioners - first category’ and ‘Non pensioners - second category’ pensions have been secured, if there is any money left in the fund it will then be split as follows:
Firstly, it will go to provide increases to pensions in payment; secondly to provide increases to ‘first category’ pensions; and, finally to provide increases to ‘second category’ pensions.
That’s about it, except to say that all of this, of course, depends really on how much money there is in the fund when the scheme winds-up. If there’s not enough to go round, there’s not enough to go round.
Also, for those of you who think there’s a bit of deja-vu about all this; there is. Similar changes to these were actually proposed by the Pensions Act 1995 and were set to come into force on 6 April 2007 anyway. All that’s happening here is that it is presumably being brought forward a bit and, in a way, I suppose it’s a shame it wasn’t done years ago.....
31 October 2003
|Pensionable service||% of benefit protected in first category||% of benefit protected in second category|
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