2009 has picked up where 2008 left off – with further developments in pensions legislation. Two key issues likely to feature in 2009 are changes to the statutory rate of revaluation, and DWP proposals to address concerns about the impact of age discrimination legislation on flexible retirement arrangements. Both issues go to the heart of how to make pensions cost-effective, and appropriate to the shape of the employer’s business.
Are you ready for the revaluation changes?
One of the changes that the Pensions Act 2008 will introduce affects the revaluation of deferred final salary pensions. At present, the law requires, as a minimum, that each deferred pension be revalued at a rate based on the increase in the retail prices index (RPI), subject to a cap of 5%. When the key provisions of the Pensions Act 2008 come into force (expected to be on 6 April 2009) the statutory cap will reduce to 2.5% in respect of pensions accrued on and from that date. It will remain 5% in respect of pensions accrued before that date. The change will not therefore affect members who have already left pensionable service.
Trustees and employers should check their scheme rules now to see whether they will automatically apply the new lower cap to the deferred pensions payable from their scheme. This will be the case unless the rules explicitly specify a more generous revaluation rate, such as the current minimum increase of RPI capped at 5%. Once this has been established, trustees and employers should decide whether they wish to apply the new 2.5% cap, or if they want to retain the old higher rate of revaluation. A decision either way could involve a rule change depending on the formulation of the rules.
If a rule change is required, generally the amendment must be made in accordance with the scheme’s amendment power. However, the trustees may be able to validly make the change unilaterally under new draft legislation. When the draft Occupational Personal and Stakeholder Pensions (Miscellaneous Amendments) Regulations 2009 come into force, it is intended that trustees will have the power to change their scheme’s rate of revaluation by resolution, which will be of particular use if their scheme amendment power is deficient in some way.
If the rate of revaluation is changed trustees should be aware of their duty to notify members of the change in advance or, at the latest, within 3 months after the change, in accordance with the disclosure legislation. A practical solution would be to include it in the next member newsletter. Disclosure will be required whether the change automatically takes place under the scheme rules or whether it results from a rule amendment.
We are aware that some commentators within the industry have suggested that an alteration to the rate of revaluation arising out of a change in the statutory cap would be a change to “the rate of future accrual of benefit”, which would require at least 60 days of consultation under the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006. Our view is that there is room for a more commercial approach under which employers are not required to carry out pensions consultation with their employees before changing their revaluation cap in line with the Pensions Act 2008 changes. Of course, if employers are consulting on other changes to the scheme, it might be sensible to notify members (thus discharging the disclosure duty) at the same time.
Flexible Retirement – The Government’s Response to the Consultation
The DWP has now published the responses to its consultation on flexible retirement – where an employee seeks to continue working (perhaps part time or in a different role) whilst being entitled to draw some or all of his benefits. The original consultation was published on 1 October 2007 and addressed, amongst other things, issues as to what might constitute direct or indirect age discrimination in relation to flexible retirement. Following on from this, information was sought as to which practices relating to flexibility should be made the subject of a specific exemption from the legislation prohibiting age discrimination, or which could easily be objectively justified.
The consultation also addressed views and opinions on the retention of a normal pension age below the default age of 65. There were also requests for information relating to how flexible retirement was actually dealt with in practice.
Arising from this, the DWP have distilled their views into two sets of draft Regulations on which they now wish to enter into further consultation. The first would give a broad flexible retirement exemption. The second focuses solely on a death in service exemption. The latter has been the subject of particular focus because of a perceived problem in obtaining competitive terms from insurance providers as regards life cover for post State Pension Age workers.
The new consultation period will run until 10 March 2009.
Some Preliminary Views:
Many of those who replied to the initial consultation expressed the view – which we share – that giving employees choices on the shape of their benefits when working beyond retirement age should already allow flexible retirement to be implemented. However, there remains a concern that this approach could still potentially financially disadvantage schemes and/or sponsoring employers.
In taking matters forward the Government seems to have focussed on only one part of the problem. This concerns offering flexible retirement only to those at state pension age (or, if higher, the normal pension age in their scheme). This proviso is present in both sets of draft regulations. This is disappointing because many of the issues around flexible retirement will focus on those who have reached normal pension age within their scheme but have not yet reached the age at which they may draw their state pension.
In all the circumstances, there is little in the consultation as currently drafted which provides any great assurance for those who are wrestling with this problem at the current time. It is to be hoped that following the consultation a broader and more practically based proposal will come forward. The other hope is that the responses to the further consultation will give rise to a solid consensus as to what is or is not considered to be acceptable practice. Without greater clarity on both issues, the provision of flexible retirement will continue to be seen as problematic, confusing and risky – something that is contrary to the interests of employers, pension fund members and pension scheme trustees.