Time to Act
Member nominated-trustee/director requirements
The Pensions Act 2004 introduced new provisions relating to the requirement for occupational pension schemes to have member-nominated trustees or directors.
Under the new provisions:
- Employers can no longer opt out of the requirement for at least one-third of their scheme’s trustees (or where the scheme has a sole corporate trustee, the company’s directors) to be member-nominated.
- The scheme’s trustees must put in place arrangements for the appointment of member-nominated trustees or directors within a “reasonable period”, and ensure that those arrangements are implemented. The Pension Regulator considers that for most schemes, a reasonable period will be within six months of the new provisions applying to the scheme.
Where schemes already have member-nominated trustees or directors in place under the old legislation (ie there was not previously an employer opt-out in force), trustees should review their existing arrangements in light of the new provisions, and decide whether they are still appropriate; if they are not, they should be amended.
In the past, many schemes had “member-representative” trustees who were nominated by members, but who did not qualify as member-nominated trustees for the purposes of the legislation. It is unlikely that such arrangements will meet the new requirements, and therefore new arrangements will be needed.
The date on which the new provisions apply to schemes varies from scheme to scheme. However (unless exempt), the provisions will apply to all schemes by 31 October 2007 at the very latest - although they already apply to many schemes.
If trustees fail to put in place suitable arrangements that meet the new requirements, the Pensions Regulator can fine them up to £5,000 in the case of an individual, or £50,000 in the case of a corporate trustee.
For more details about the new member-nominated trustee/director provisions, please see Pensions Matters June 2007
The pensions provisions of the Employment Equality (Age) Regulations 2006 came into force on 1 December 2006. Since then, it has been unlawful for employers and trustees to discriminate (whether directly or indirectly) against any member or prospective member of an occupational pension scheme on the basis of age, unless that discrimination falls within one of the exemptions in the regulations, or can be objectively justified.
Although there are a significant number of exemptions in the regulations, there are certain common pension provisions which are now discriminatory. If such discrimination cannot be objectively justified, then until the scheme’s rules have been amended to eliminate that discrimination, the benefits earned by the disadvantaged members in respect of pensionable service after 1 December 2006 must be increased to the level of those earned by the favoured age group.
Therefore, the longer age discriminatory rules remain unaltered, the more expensive it is likely to be for the scheme. Consequently, we recommend that all scheme rules should be reviewed as a matter of urgency, to identify any age discrimination, with a view to making any necessary amendments as soon as practicable.
Pension tax simplification
Employers and trustees will be aware of the new pensions tax regime introduced by the Finance Act 2004, which came into force on “A-Day” (6 April 2006). A number of the changes made, such as the abolition of the old Inland Revenue maximum benefit limits and the earnings cap, would have resulted in some schemes having to pay out higher than anticipated benefits; while other changes would have led to some existing benefits becoming unauthorised payments, triggering tax penalties.
Regulations were introduced in early 2006 to protect schemes against these risks. However, the protection provided is limited and only lasts until 5 April 2011. Also, these regulations do not make existing scheme benefits into authorised payments under the new regime; nor do they enable schemes to take advantage of the new more generous provisions, such as the ability to pay members higher tax-free lump sums on retirement.
Instead, this requires making amendments to schemes’ rules. However, these need not necessarily be detailed amendments at this stage. Instead, interim amendments can be made now, which ensure compliance with the legislation and provide the trustees with the flexibility they need, by means of a relatively short deed of amendment. More comprehensive rule amendments can then be made at a later date.