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BeeHive  >  Political Papers  >  The Pensions Bill

The Pensions Bill

Hi! This is the one I know you've all been waiting for - Liz Fleming's epic translation of the recently published Pensions Bill. Basically, we've had Liz locked away in a darkened room ever since the Bill was published and the deal was she only got to get let out once she'd produced a Plain-English version of the Bill for BeeHive readers. Well, she's done it and it's published here for any of you who want the ins and outs of the pension proposals, without the pain of wading through the official text. Everything here came straight out of the Pensions Bill, the only things Liz changed are the words.

Steve Bee
2 March 2004

On 12 February following the first reading in Parliament the Pensions Bill was printed. Before it begins the rest of its passage through the parliamentary process (at which time bits can get changed, added in and taken out) here's a summary of the main points of what we've got so far. I'll be following the Bill as it goes through the process - keeping you up to date with what's going on.

As I expected, the Bill follows the style of most other pensions legislation - it's not easy to read as it takes out and inserts clauses into existing Acts as well as introducing enabling powers, which allow things to be introduced in the future (by regulations). It's relatively light on detail, in some parts, and relies heavily on regulations that are not yet available.

The Pensions Regulator

There's going to be a new regulator - the Pensions Regulator - to replace Opra.

The remit is

• to protect members' pension scheme benefits in occupational pension schemes, grouped personal pensions and grouped stakeholder pensions (where employers collect and pay the contribution over to the pension provider under the direct pay arrangements).
• to promote, and improve understanding of "work based pension schemes" - for example occupational pension schemes, grouped personal pensions, grouped stakeholder pensions and stakeholder pensions.
• to reduce the circumstances where the Pension Protection Fund has to step in and take over defined benefit schemes.

It's going to take a much more "risk-based" approach than Opra's remit really allowed it to, focusing on badly run schemes and risky schemes.

The Pensions Regulator will take over Opra's existing functions as well as being given some new powers such as

• the power to issue "Improvement Notices" to individuals or third parties who it believes are responsible for a scheme not complying with its statutory duties.
• the power to freeze a defined benefit scheme if it's felt that the members' interests are at risk. During the "freeze period" benefits will stop accruing and the employer cannot wind up the scheme. The Regulator could also, during this time, stop anyone joining the scheme, stop any more contributions being made, stop any transfer payments out of the scheme as well as forcing the scheme to obtain an actuarial valuation amongst other things. Schemes can be frozen for up to 3 months at one time, with the power to extend this more than once, but subject to a maximum period of "freeze" of 6 months.
• increased powers covering the suspension and removal of trustees.
• the power to introduce additional whistleblowing responsibilities and duties.
• wider powers of inspection.

The Regulator will issue Codes of Practice aimed at giving practical guidance to those running pension schemes about how to fulfil their duties as well as outlining what's expected of them. We can expect to get ones on

• what constitutes a "reasonable period" - most of the existing regulations state that certain duties have to be carried out within a "reasonable period" but do not necessarily spell out what that is.
• how people are expected to fulfil their duties in terms of reporting certain events, breaches of the law, failure to pay contributions on time etc.
• how trustees and scheme managers are expected to fulfil their duties in terms of preparing, reviewing and revising a statement of funding principles and schedule of contributions for defined benefit schemes.
• member nominated trustees and member nominated directors.
• what's meant by the requirements for trustees to be knowledgeable and informed.

The Pension Protection Fund

The Bill covers the setting up of the Pension Protection Fund (PPF). The PPF is an insurance scheme designed to give protection to members of defined benefit and hybrid schemes (a mix between defined benefit and defined contribution schemes), by paying compensation in situations where the employer goes bust and the scheme is underfunded. In these circumstances the PPF will step in and take over the scheme.

The PPF will also take over the functions of the Pensions Compensation Board and will pay out compensation to members of both defined benefit and defined contribution schemes where funds have been mis-appropriated through fraud.

A Board will run the PPF. There are a number of clauses and schedules in the Bill covering how it's going to be set up and run, as well as its statutory and regulatory duties.

The Bill sets out the circumstances in which the PPF will step in.

When an "insolvency event" occurs, the scheme will enter an assessment period. During this time the benefits will be set at the compensation levels (see below) and if the scheme assets are sufficient to meet this cost plus the cost of any other liabilities then it will. Once done, the scheme will be wound up.

If it is established that a scheme rescue is not possible, the PPF will take over responsibility for the scheme, and the scheme assets will be transferred to the Board.

There will be certain situations where the PPF will not step in and take over the scheme.

Where the PPF assumes responsibility for a scheme, it will pay out the following compensation

• 100% of pensions currently in payment - including pensions to people who have deferred receipt of their pension beyond the scheme's normal pension age.
• for all other members - 90% of the accrued pension subject to a cap on the level of benefit. The explanatory notes to the Bill indicate that the cap could initially be set at £25,000. Capping the level of benefit is a different approach from the one indicated last year in "Action on Occupational Pension Schemes" which suggested that salary levels would be capped.
• when benefits come into payment individuals will be able to commute 25% of the benefit as a lump sum.
• increases to pensions in deferment will be limited to 5%, or RPI if less, but will only apply to rights built up on or after 6 April 1997.
• increases to pensions in payment will be limited to 2.5%, or RPI if less, but will only apply to rights built up on or after 6 April 1997.
• dependants' benefits.

The PPF will be funded by a levy payable by all defined benefit and hybrid schemes. There will be exemptions to this and these will be set out in Regulations in due course.

To begin with the levy will be a flat rate levy. Regulations will set out what this is and how the levy will be calculated. This could be calculated on a different basis from the scheme-based levy referred to below. This levy will be collected during the "initial period" but the Bill does not define how long this is going to be.

After this, the levy can be a combination of both a scheme-based levy and a risk-based levy.

Each year the Government will set a ceiling on the amount of the levy that the Board can raise in order to fund for its expected liabilities. The levy must be set each year by 31 March and it will be up to the Board to determine what the levy is. The Board will also have to determine the split between the scheme-based levy and the risk-based levy. But there will be limits -

• no more than 50% of the total levy can come from the risk-based levy.
• if less than 10% of the ceiling needs to be raised then the Board can impose a scheme-based levy only.

After the initial period (during which only the flat rate levy will be raised) there will be a transitional period (once again not defined) during which the levy can be a combination of both a scheme-based and risk-based levy. During this period the above percentages may be modified. After the end of the transitional period the overall levy cannot be increased by more than 25% in any one year. The draft legislation has been written in such a way that regulations will, in due course, determine how long these periods are.

When calculating the amount of the risk-based levy, the following factors may be taken into account

• the difference between the scheme's assets and liabilities - i.e. the amount needed to meet the cost of providing the benefits - set at the compensation level (see below).
• the likelihood of an "insolvency event" happening.
• the investment profile of the scheme.
• any other factors that regulations may allow for.

The Board will be able to request actuarial valuations from schemes so that it can work out the amount of the risk-based levy. This will be on a standard basis - as set out in regulations - (which may obviously be different from the valuation basis used by schemes to meet the statutory funding objective i.e. the replacement to the minimum funding requirement).

Calculation of the risk-based levy may be different between different categories of schemes - which will be set out in regulations.

When calculating the amount of the scheme based levy the following factors may be taken into account

• the number of members.
• the total amount of pensionable earnings for all active members of the scheme.
• the scheme's liabilities (but benefits for this purpose may not necessarily be set at the compensation level).
• any other factors that regulations may allow for.

The PPF will not be retrospective.

Scheme Funding

The Minimum Funding Requirement introduced by the Pensions Act 1995 is going to be replaced. Defined Benefit schemes will, in the future, have to meet a "statutory funding objective". Its purpose is to make sure that a scheme has sufficient assets to meet its "technical provisions". This is defined as "the amount required, on an actuarial calculation, to make provision for the scheme's liabilities". It looks like there will be various ways that this can be calculated and it will be up to the Trustees to determine which basis the scheme uses. The detail will be set out in regulations - to be issued in due course.

Schemes subject to the statutory funding objective must have a statement of funding principles, which has to be regularly reviewed.

Schemes must obtain regular actuarial valuations, and each time they do, the actuary must certify the calculation of the scheme's "technical provisions".

If, at the valuation, it transpires that the "statutory funding objective" has not been met (on the date of the actuarial valuation) then the Trustees must prepare a recovery plan setting out how and when the objective will be met.

Schemes must maintain a schedule of the contributions payable to the scheme. If the statutory funding objective has not been met, the schedule must be sent to the Regulator.

Trustees, the Scheme Actuary and the Scheme Auditor all have a statutory duty to report failure to pay contributions.

Scheme Trustees do not have an entirely free hand and they will be required to agree certain issues with the Employer - such as the assumptions used in calculating the scheme's "technical provisions", the statement of funding principles, the schedule of contributions and the recovery plan, amongst other things. But if agreement cannot be reached within a prescribed timescale then the Trustees will have the power to modify the scheme (subject of course to the employer's agreement!).

Financial Planning for Retirement

Combined pensions forecasts provide an individual with a forecast of the pension benefits they can expect to receive from both the state and their own, or company, pension scheme. At present the initiative is voluntary but the Government have always indicated that they would make it compulsory if certain targets were not met. The Bill gives them the power to do this at any point in the future.

The Bill also gives the Government wide ranging powers to improve the financial information available to people. As well, the Bill makes it clear that regulations may be issued which require employers to "take action for the purpose of enabling employees to obtain information and advice about pensions and saving for retirement."

The intention to do this was outlined in the DWP paper issued at the beginning of February - "Simplicity, security and choice: Informed Choice for Working and Saving". A summary of the key points raised in the paper was given in the February edition of "So that was pensions...February 2004"

Trusteeship

Member Nominated Trustees

One third of the Scheme Trustees will have to be nominated by the members. In situations where there are corporate trustees, the scheme members must nominate one-third of the directors.

The big change here is that Employers will no longer be able to opt-out of these requirements by proposing alternative arrangements.

The process of selecting and appointing such Nominated Trustees will be less prescriptive than it is at present.

Certain schemes will be exempt. The Bill sets out some of the exemptions - for example where all members are trustees, and all trustees are corporate trustees - but not all of the exemptions.

Failure to comply could result in civil penalties.

Statement of Investment Principles

All occupational pension schemes will have to have a statement of investment principles.

The statement will have to be in a standard format, contain certain information and will have to be regularly reviewed. The detail is to come later in regulations.

There may be exemptions to this - but there's no indication of what these may be. So we don't know if the current exemptions will continue or whether these will be different ones.

Failure to comply could result in civil penalties being applied.

Trustees' knowledge

Although the Bill does not impose a professional standard on Scheme Trustees, they will have to be familiar with, and understand, amongst other things

• the trust deed and scheme rules.
• the statement of investment principles.
• the statement of funding principles.

In addition Trustees will have to know, and understand, both pensions law and trust law, as well as understanding the principles behind scheme funding and investment.

This applies to all trustees of occupational pension schemes and there is no power in the Bill to have exceptions to this rule.

Deficiencies in Scheme Assets

The Bill amends Section 75 of the Pensions Act. Scheme Trustees will be able to choose the date at which the assets and liabilities of a defined benefit scheme are calculated for purposes of working out any debt on the employer when a scheme is winding up with insufficient assets to cover its full liabilities.

Disputes

Occupational Pension Schemes will still have to have a dispute resolution procedure in place to resolve complaints. The Bill amends the existing law, introduced by the Pensions Act 1995, and sets out what the process has to cover in order to resolve the dispute.

It looks like there will be certain exemptions to this requirement - the Bill identifies schemes where all members are trustees, or where there is only one member, as well as cases where "the scheme is of a prescribed description". This is a well-used phrase throughout the Bill which tells us that there will be accompanying regulations.

Benefits

Limited Price Indexation (LPI)

This is the bit of the law that caters for increases to pensions in payment.

LPI will be reduced to 2.5%, or RPI if less, from the current rate of 5%, or RPI if less. This will apply to

• all benefits from an occupational pension scheme, and
• protected rights benefits in a personal, or stakeholder, pension scheme

The revised rate will only apply to benefits built up on or after the date it's introduced. This means that different bits of benefits increase at different rates in payment.

In addition, it means that different benefits will be payable from different types of defined contribution arrangements - for example a CIMP and a Grouped Personal Pension.

Taking benefits

It will be possible to take contracted-out benefits (both Guaranteed Minimum Pensions and Protected Rights) as lump sums in certain circumstances. The circumstances when this can be done will be set out in regulations in due course.

In addition, the Bill makes provisions to allow contracted out benefits to come into payment at the same time as other benefits - lifting some of the restrictions that currently exist.

Safeguarding Pension Rights

Private Sector Business Transfers and TUPE

When an Employer takes over another business, they will, in future, have to provide pension benefits to employees who transferred from their former employer where the former employer provided access to an occupational pension scheme.

The benefits that the new employer offers do not have to be the same as the former employer offered. The new employer will have a choice between providing access to

• a defined benefit scheme with a benefit structure which meets the Reference Scheme Test as a minimum
• a defined contribution scheme with employer contributions up to a certain level
• a stakeholder pension scheme with employer contributions up to a certain level

The actual level of contributions is not set out in the draft legislation but it is expected to be 6%.

Payment of Contributions

At present there are regulations in force covering the late payment of contributions. The Bill makes some changes to the law in this area.

Pension Providers will have to monitor the payment of contributions to Personal Pensions and Stakeholder Pension Schemes (and their grouped equivalents) where contributions are paid under the direct pay arrangements (i.e. where the employer passes the contributions over). They will have the power to request certain information from Employers to ensure that they can fulfil this requirement.

In addition, in circumstances where contributions are not paid then pension providers and scheme trustees (for occupational pension schemes) will have to report this to the Regulator if they believe it to be of "material significance".

There are no changes to the timing of when contributions have to be paid across to the schemes. It is largely about the duties of the scheme trustees and managers. There is no explanation of what constitutes "material significance" in the Bill. The Regulator will issue a Code of Practice.

Paternity and Adoption Leave

In the same way as they do for paid maternity leave, employers will have to pay pension contributions in respect of paid paternity and adoption leave.

State Pensions

Although State Pension Age is not being increased, the Bill introduces greater flexibility to individuals who want to defer receipt of their Basic State Pension by giving them an option to take either a higher amount or a lump sum.

Steve's written a couple of BeeLines about this, if you would like to read them links are below.

Deferring the Basic State Pension

More news from the Government on deferring the Basic State Pension

What else

There are bits I, and I suspect many others, expected to see in the Bill based on what's been issued so far by the Department for Work and Pensions, starting as far back as December 2002. Hopefully, this does not mean that they will never see the light of day - just that they are not there yet. At present though the following seem to be somewhere between the "too difficult tray", the Pensions Bill and changes to existing regulations.

• Changes to the Reference Scheme Test
• Simplification of Guaranteed Minimum Pensions (GMPs)
• Changes to Section 67 of the Pensions Act
• Abolishing the requirement for Employers to offer the facility for scheme members to pay Additional Voluntary Contributions
• Allowing members of occupational pension schemes who leave with more than 3 months membership, but less than two years the choice of taking a refund of their own contributions or a transfer which includes the value of employer contributions
• Changes to the winding up priority order
• Introducing the right for members of defined benefit schemes to receive an annual benefit statement
• Simplifying transfers
• Simplifying the law on pensions and divorce
• Changes to the existing anti-franking provisions
• Abolition of uniform accrual for group money purchase scheme

I'll be following the Bill as it goes through the Parliamentary Process and the regulations as they come out, so keeping popping back to the BeeHive to keep up to date.

Liz Fleming
2 March 2004

This document is based on Scottish Life's understanding of the draft Pensions Bill published on 12 February 2004. This is draft legislation and may be subject to change.

                                                                                                         

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