Other current issues
Personal Accounts
One of the proposals made by the Pensions Commission and taken up by the Government is the new system of simple, low-cost, defined contribution pension arrangements, to be known as Personal Accounts. These will be run as a trust-based occupational pension scheme with maximum contributions set at £3,600 a year, to be uprated by the rate of increase in average earnings year on year.
Personal Accounts are proposed to be introduced from 2012 although some doubts are being expressed as to whether this timetable will be achievable. They will involve automatic enrolment and compulsory employer and employee contributions. However employees will have the right to opt-out and employers may be able to seek an exemption from providing Personal Accounts if their existing pension arrangements meet certain minimum requirements.
Much of the new Pensions Bill is devoted to making provision for the operation of Personal Accounts and the requirements that employers will have to meet under that new regime, although most of the real detail is still awaited.
The DWP has also announced its intention to amend the Bill to prohibit employers from offering inducements – such as higher salaries or one-off bonuses – which encourage employees to opt-out. The amendment will also cover circumstances where employers simply to force their employees to opt-out.
Internal controls
Under Section 249A of the Pensions Act 2004, trustees are required to establish and operate adequate internal control mechanisms to enable schemes to be administered and managed:
- in accordance with the scheme rules; and
- in accordance with the requirements of the law.
Internal controls are:
- arrangements and procedures to be followed in the administration and management of the scheme;
- systems and arrangements for monitoring that administration and management; and
- arrangements and procedures to be followed for the safe custody and security of the assets of the scheme.
The Pensions Regulator has published a code of practice and supplemental guidance on how it expects schemes to satisfy the requirement to have adequate internal controls in place, providing a risk-based approach for trustees to assess the adequacy of their internal controls
Under the Pensions Act 2004, a Financial Support Direction (FSD) may be issued where the Pensions Regulator concludes that the sponsoring employer of a pension scheme is either a “service company” or is “insufficiently resourced” and it is reasonable to issue an FSD in the circumstances.
An FSD requires a company to support a scheme sponsored by another company within the same group.
The Regulator announced on 6 February 2008 that it has issued its first two FSDs, against Sea Containers Limited, relating to two schemes of its UK subsidiary company. This follows the withdrawal of the company’s appeal against the decision to issue the FSDs.
If an FSD is ignored, the Regulator has powers to issue a contribution notice for a specified sum, which can be pursued through the civil courts. However, there are questions as to how effectively the Regulator would be able to pursue this, bearing in mind that Sea Containers Limited is based in Bermuda.
(The DWP has consulted on proposed changes to the Regulator’s anti-avoidance powers – including the circumstances in which an FSD can be issued).
Summary funding statements
Schemes are required to produce funding statements for defined benefit members to give them information about the funding position.
Details of what must be included in a summary funding statement are contained in legislation, while the Regulator’s code of practice contains a list of matters that trustees should consider including.
Until a schedule of contributions under the new statutory funding objective (SFO) has been prepared, the statements should be issued annually by 21 September.
Once an SFO schedule of contributions has been prepared, an appropriate statement must be provided within three months from the date the valuation was due for completion. From then on, the statements should be provided within three months of the date each subsequent valuation or annual valuation report is due.
The Deregulatory Review
The Deregulatory Review was set up by the Government in 2006 to look at ways of encouraging workplace pension provision by easing the burden of regulation on employers.
Having considered the Review’s report, the Government’s response was published on 22 October 2007.
The key proposals on which the Government sought views were:
- reducing the cap on revaluation of deferred benefits (in relation to future service benefits) from 5% to 2.5% (this is included in the new Pensions Bill)
- introducing a statutory override to enable schemes to amend their scheme rules to reflect the reduction of the cap on LPI from 5% to 2.5%, which was introduced in April 2005. There would be a similar override to deal with the proposed changes to revaluation.
The Government also proposed to:
- carry out further work to seek a practical solution to the difficulties encountered in relation to the employer debt provisions where there is a group reconstruction in a multi-employer scheme (in addition to the draft Regulations already published)
- move towards a principles-based approach to legislation
- look at simplifying pension-sharing on divorce legislation
- clarify the requirements of the trustee knowledge and understanding legislation
- continue discussions in relation to problems with the administration of the new trivial commutation rules
- consider concerns about the legislative requirements on refunding surplus to employers.
Finance Act 2004 – transitional protection
Trustees are reminded that members who are intending to register with HMRC for primary and/or enhanced protection status in respect of their accrued benefits as at 5 April 2006 must do so by the end of this tax year.
Risk sharing consultation
One of the main recommendations made in the Deregulatory Review’s report to the Government was for the introduction of risk-sharing defined benefit schemes, where employers are unwilling to bear all the scheme risks on an open-ended basis.
A consultation document on risk-sharing was published by the DWP in June 2008. The two main options outlined in the consultation were conditional indexation on new CARE schemes and existing DB schemes, and also the possible introduction of collective DC schemes.
The Government response to the consultation was published by the DWP in December 2008. The conditional indexation idea was dismissed but the Government will explore other ideas, including collective DC, with the industry in 2009.
Calculation of transfer values
From 1 October 2008, trustees are responsible (on the advice of the actuary) for calculating transfer values, including the setting of assumptions.
The Pensions Regulator has issued guidance about the new arrangements and trustees need to ensure that appropriate action is taken to review and document the position for any quotations that are issued post-1 October.
