Two new sets of regulations have been laid, making a mixed bag of amendments to pensions legislation. In the main, the changes are likely to be welcomed, although some opportunities have been missed, for example in relation to scheme investments. The amendments cover a broad range of issues and concerns which on the one hand will enable schemes to cut costs by introducing overrides so that schemes can take advantage of the reduced caps for revaluation and/or indexation. However, the changes also give the Regulator more teeth, by introducing a power to impose fines on employers who fail to consult members and increasing the look-back period for financial support directions.
Our pensions experts take a look at the key changes, most of which were introduced on 6 April 2009.
Revaluation and indexation: statutory overrides
Trustees are now able to modify scheme rules by resolution so that, for future service accrual, the scheme will be able to apply the new 2.5% revaluation cap provided for in the Pensions Act 2008, even where the scheme rules do not allow such a change. This is one of the "statutory overrides" which the Government promised to introduce following the Deregulatory Review Report published in December 2007. The ability to modify is also introduced for schemes wishing to take advantage of the reduced cap introduced in 2005 for the indexation of pensions in payment.
Any modification will require employer consent. If there is more than one employer then all employers must give their consent or they can all nominate someone to act as their representative for this purpose (or that person can be chosen in accordance with the scheme rules).
Financial support directions
The look-back period which applies to financial support directions (during which the employer must be either a service company or insufficiently resourced) will be increased incrementally between 6 April 2009 and 6 April 2010, from 12 months to 24 months. By definition, this should increase the number of instances in which the Pensions Regulator will be able to issue a financial support direction.
On 6 April 2009 the list of notifiable events was shortened. In future, two or more changes in any key scheme post or key employer post within the previous 12 months and any change in the employer's credit rating will no longer count as notifiable events.
The Department for Work and Pensions (DWP) has said that it plans to work with the Pensions Regulator to reduce the list of notifiable events further, if warranted by the Regulator's experience. A list of the revised notifiable events is available.
Transfers from former salary related contracted-out schemes
In future, transfers to salary related contracted-out schemes can be made from salary related schemes which are no longer contracted-out.
It is becoming more common for scheme mergers to take place between schemes which are no longer contracted-out so it would have been more helpful if the change had been extended to include receiving schemes which have ceased to be contracted-out. Contracting-out can come to an end in a range of circumstances - for example, when a scheme no longer makes future service accrual available.
Pension credit benefit to have greater payment flexibility
Pension credit members will be able to decide when and how to draw pension in the same way as other occupational pension scheme members. It used to be the case that pension credit benefit provided under an occupational pension scheme could be paid before normal benefit age only in circumstances which were more limited than those applying to other members. Those restrictions have now been removed.
The scheme funding regime is amended in two ways:
- The exemption from the scheme funding regime for schemes in wind-up (if certain other conditions are met) now also applies to sections of multi-employer schemes which are winding-up (a section is defined as having assets attributable to it which cannot be used for the purposes of any other section of the scheme).
- Where the actuary sets any (not necessarily all) of the contribution rates then the requirement to include in the actuary's certificate a statement that the rates shown in the schedule of contributions are not lower than the rates the actuary would have provided for (if she/he, rather than the trustees had the responsibility of preparing or revising the schedule) now applies in those circumstances too.
Back in 2003, the European Parliament issued a directive regarding the activities and supervision of institutions providing occupational retirement provision (the IORP Directive). The IORP Directive imposed restrictions on the proportion of a scheme's resources which could be invested in the sponsoring employer, known as "employer-related investments" or "ERIs". The UK already limits ERIs to a maximum of 5% of the market value of the scheme's resources but there are several exemptions which the UK has been allowed to maintain until 23 September 2010 (the date from which IORP Directive must be adopted in full).
However not all the changes made will mean less flexibility.The current ban on employer-related loans will be relaxed so that from 23 September 2010 accounts with certain persons or institutions (including the Bank of England) will be allowed (and, logically, will count as ERIs for the purposes of the 5% cap).
Another relaxation (but only for a limited period) is the addition of the Bank of England to the category of institutions with which accounts are permitted even if they exceed the 5% cap on ERIs. This came into effect on 6 April 2009 but the exemption as a whole will be removed (along with some others) in 2010.
The DWP has, helpfully, taken on board representations made by the Association of Pension Lawyers so that investment in collective investment schemes will continue to be allowed (with some tweaks). However, the DWP did not go so far as to exempt from the 5% cap investment in government bonds (which would have been allowed by the IORP Directive). Introducing such an exemption could have been an appropriate measure, given that the UK Government is now associated or connected with a number of private sector companies.
New fines for failure to consult
The Pensions Regulator is now able to impose fines where an employer fails "without reasonable excuse" to comply with its requirement to consult members about certain future service changes listed in legislation. The fines can be up to £5,000 for an individual or £50,000 in any other case.
The words "without reasonable excuse" will be important in practice. It would be helpful for the DWP to give some guidance as to what would be reasonable but nothing has been produced as yet.
Schemes have been exempt from having to appoint member-nominated directors where the sole director or all the directors on the trustee board are independent. The amending regulations create a further exemption where every trustee of the scheme is a company, at least one trustee only has independent directors and at least one trustee has one or more directors who are not independent. In that situation, the requirement for member-nominated directors will not apply to the company which only has independent directors. This change was first promised by the DWP over a year ago and is likely to be welcomed.
Surrendering a contracting-out certificate when winding-up
Employers are no longer required to consult trade unions before surrendering a contracting-out certificate when the scheme is winding-up. This appears to be a sensible change. It will mean less red tape for schemes which will already have enough other matters to attend to when winding-up.