Forthcoming legislation and other changes
 

Pensions Act 2007

The Pensions Act 2007 contains outline provisions on the following areas:

• Amendment of internal dispute resolution (IDR) procedures to allow for trustees to operate either a one or two-stage procedure
• Conversion of GMP rights into other defined benefit scheme benefits
• Abolition of contracting-out on a protected rights (money purchase) basis
• Establishment of a Delivery Authority for Personal Accounts
• Changes to the State scheme, including a reduction in the number of qualifying years needed for a full basic state pension and a reduction in accrual for higher earners under the state second pension.

The changes in qualification for basic state pension will have effect from April 2010 and the move to make the state second pension flat rate will begin from 2009 by fixing the upper earnings limit for accrual, as contained in the National Insurance Contributions Act 2008.

Regulations and a code of practice on the IDR procedures have been published and the measure came into force on 6 April 2008.

The GMP conversion provisions are expected to be effective from April 2009, and draft regulations are currently subject to consultation.

As yet there is no clear timescale for implementation of the other issues.

Pensions Act 2008

The Pensions Act 2008 received Royal Assent on 26 November 2008..

Aside from the provisions relating to Personal Accounts and the associated auto-enrolment requirements which account for much of the Act, there are also provisions relating to:

• Reducing the cap on annual compulsory revaluation of deferred pensions from 5% to 2.5% - for future accruals only. This was originally announced in the Deregulatory Review
• Abolishing special requirements in respect of protected rights from the date that the money purchase contracting-out facility is abolished
• Abolishing the safeguarded rights provisions (contracted-out rights contained in a pension credit following a pension sharing order
• Applying pension sharing on divorce provisions to PPF compensation
• Extending the Pension Regulator's anti-avoidance provisions.

Finance Act 2008

As in each of the previous three years, HMRC is again using the Finance Act to make easements to the Finance Act 2004. Among the issues in this year’s Act are provisions to increase the the opportunities to pay trivial commutation lump sums and also easements to the rules on unauthorised payments made because of error or for reasons beyond the trustees’ control. These provisions are subject to draft regulations and so the precise impact of these easements is still to be confirmed.

Extending the Regulator's anti-avoidance powers

Earlier this year, the DWP consulted on proposals to enhance the Pensions Regulator's anti-avoidance powers. This followed Government concern at the proliferation of arrangements designed to allow employers to off-load their defined benefit pension liabilities other than by securing them with an FSA regulated insurer. Such arrangements typically involve substituting the employer with another entity owned by an investment group. The new owners expect to ultimately profit from the transaction by creating a surplus within the scheme which can then be realised after the members benefits are bought out.

The Pensions Act 2008 contains provisions to extend the Regulator's anti-avoidance powers. According to the Government the key provisions are:  

• A new alternative test for contribution notices based on material detriment. Contribution notices could be issued where the effect of the act was materially detrimental to the likelihood of a member receiving the benefits he had accrued at the time of the act. The test requires a before and after comparison of the act based only on the circumstances at the time. The Regulator will also be publishing a Code of Practice setting out the circumstances in which it expects to use this test
  
• The Regulator will be able to issue a contribution notice where a person has acted in good faith, but their actions have had the effect of preventing a debt becoming due (Although before issuing a contribution notice, the Regulator will need to have considered the reasonableness of a person’s actions)
  
• The Regulator will be able to issue a financial support direction having taken account of the resources of the whole group of companies rather than needing to identify a single person or entity with sufficient resources
  
• Contribution notices or financial support directions will be able to be issued in respect of a scheme which has received a bulk transfer, but only where it could have been issued if the transfer had not happened
  
• Contribution notices can be issued where there has been a series of acts and not simply in respect of single acts.

The amendments will take effect from 14 April 2008, apart from the clarification relating to ‘the series of acts’ test for contribution notices, which will have effect from 26 November 2008. The provisions in relation to the new material detriment test will take effect once the Regulator's Code comes into force.

The DWP has recently issued, for consultation, some draft amending regulations that extend the prescribed period in which the Regulator can exercise a financial support direction from 12 months to 24 months. This change is likely to be fully implemented from 6 April 2010.

GMP conversion

The Pensions Act 2007 provides for trustees to be given the option to convert GMP rights into normal scheme benefits. This will be subject to the conversion meeting an actuarial equivalence test and the trustees having first consulted with both the employer(s) and members concerned.

Draft regulations, which have been subject to consultation, provide that:

• The assumptions to be used for the actuarial equivalence test must be chosen by the trustees, after taking actuarial advice
• The actuary must certify that the test has been met
• The scheme must continue to provide a spouse’s pension in respect of the converted GMP, to be subject to the same payment conditions as for spouse’s GMP benefits