Pensions & Retirement Plans in United Kingdom

Statutory and regulatory framework

What are the main statutes and regulations relating to pensions and retirement plans?

UK pensions are highly regulated through statutes and regulations, overlaid with common law duties and requirements arising from case law. The legal framework has to be consistent with European pension directives.

The main statutes are:

• the Pension Schemes Act 1993;
• the Pensions Act 1995;
• the Pensions Act 2004;
• the Finance Act 2004;
• the Pensions Act 2008;
• the Equality Act 2010;
• the Pensions Act 2011;
• the Marriage (Same Sex Couples) Act 2013;
• the Pensions Act 2014;
• the Pension Schemes Act 2015; and
• the Pension Schemes Act 2017.

The main regulations are:

• the Employment Equality Age Regulations 2006;
• the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006;
• the Occupational Pension Schemes (Cross-border Activities) Regulations 2005;
• the Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013;
• the Occupational Pension Schemes (Employer Debt) Regulations 2005;
• the Occupational Pension Schemes (Investment) Regulations 2005;
• the Occupational Pension Schemes (Member-nominated Trustees and Directors) Regulations 2006;
• the Occupational Pension Schemes (Payment to Employers) Regulations 2006;
• the Occupational Pension Schemes (Revaluation) Regulations 1991;
• the Occupational Pension Schemes (Transfer Values) Regulations 1991;
• the Occupational Pension Schemes (Scheme Administration) Regulations 1996;
• the Pension Protection Fund (Entry Rules) Regulations 2005;
• the Pensions Regulator (Notifiable Events) Regulations 2005;
• the Transfer of Undertakings (Protection of Employment) Regulations 2006;
• the Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations 2010; and
• the Occupational Pension Schemes (Charges and Governance) Regulations 2015; and
• the Occupational Pension Schemes (Master Trusts) Regulations 2018.

What are the primary regulatory authorities and how do they enforce the governing laws?

The Pensions Regulator is the primary regulatory body for work-based pension plans. Its statutory objectives are to:

• protect the benefits of members of work-based pension schemes;
• reduce the risk of situations arising that may lead to claims for compensation from the Pension Protection Fund;
• maximise employer compliance with automatic enrolment;
• promote, and improve understanding of, the good administration of work-based pension plans; and
• minimise any adverse impact on the sustainable growth of an employer when exercising its scheme funding functions.

The Pensions Regulator aims to intervene where defined benefit plans are underfunded or avoidance is suspected and to ensure that defined benefit plans are properly funded, administrated and supported by a solvent employer. It supervises auto-enrolment and protects consumers by regulating master trusts (a type of collective defined contribution scheme used by different employers). It is also driving up standards for professional trusteeship and for data maintenance.

It achieves its objectives through a series of codes and guidance notes for employers, trustees and plan advisers, and explains what people need to do.

What is the framework for taxation of pensions?

As the government wants to encourage saving for retirement, fiscal relief is available for contributions to registered pension plans - those satisfying statutory requirements.

An employee can gain income tax relief (annual allowance) on contributions of up to £40,000 for the tax year 2018/19, unless they have taken money from their pension savings in a flexi-access way or their total income is more than £150,000. For these, the annual allowance reduces to £4,000 or tapers down to £10,000 respectively. Employees have a lifetime allowance on their total pension savings of £1.03 million from April 2018 and £1.055 million from April 2019, unless they have put in place special protection of a higher pension limit. Penal tax charges apply on potentially both the plan and the individual if these limits are exceeded. An employee can carry forward unused annual tax allowances from the previous three years.

An employer can claim tax relief on its contributions to a plan against corporation tax and all the plan’s capital gains are free of tax.

Individuals pay income tax on receipt of their benefits, but they can receive limited amounts of tax-free cash. Small pensions can be commuted for triviality, but payment is subject to income tax, once the tax-free element has been taken.

An employer can reclaim VAT on some of its pension costs in certain circumstances.

State pension provisions

What is the state pension system?

The current state pension system is very complex and a new flat-rate state pension, which runs alongside the earlier system, was introduced in April 2016. Pensions start to be paid when the individual reaches his or her state pension age, which is 65 for women and men, but from December 2018 to October 2020 state pension age will start to increase to 66, depending on the individual’s date of birth. It is a freestanding pension right.

How is the state pension calculated and what factors may cause the pension to be enhanced or reduced?

The amount of the state pension depends on how long the employee has worked and how much national insurance has been paid on his or her behalf, and for how long.

The state pension can be topped up for the following reasons.

• The individual may separately receive the state second pension (formerly the additional or graduated pension, or state earnings-related pension scheme (SERPS), an earnings-related additional pension). This can come from the employer’s pension arrangement if it contracted out of SERPS and meets certain criteria. In defined benefit plans, these replacement benefits are guaranteed minimum pensions.
• A couple can partly share their national insurance contribution record to increase a state pension.
• Individuals aged 80 or over who have little or no state pension also receive a small additional age-related pension.
• By the individual’s own private pension provision or, for poorer pensioners, by the state pension credit system, which is means-tested.

Also, an individual with an incomplete national insurance record can sometimes voluntarily pay extra national insurance contributions to increase the state pension.

Is the state pension designed to provide a certain level of replacement income to workers who have worked continuously until retirement age?

The new flat-rate state pension is designed to be fairer to women and self-employed workers but, arguably, penalises younger workers. Overall it still remains controversial.

Is the state pension system under pressure to reduce benefits or otherwise change its current structure in any way on account of current fiscal realities?

The new flat-rate state pension is higher than the previous basic state pension. The state pension age is now equalised for men and women and is increasing to 66 for both sexes by 2020 and then to 67 by 2028. The primary aim of the new pension is to simplify and improve the state pension, but the changes also reduce its cost. However, individuals will still need to have paid a minimum amount of national insurance to qualify for the new state pension. Both the new and the earlier state pension systems remain in force.

Occupational pension schemes

What are the main types of private pensions and retirement plans that are provided to a broad base of employees?

Plan types available in the UK are defined benefit, defined contribution, and hybrid plans (in which the ‘pension risk’ is more fairly shared between a plan’s employer and employees on a career average (CARE) or cash balance basis). The same plan can have both defined benefit and defined contribution sections. They can be for one employer or for a group of employers.

Owing to increasing governance requirements, some employers are replacing their defined contribution plan with a defined contribution master trust. These are also often used by non-associated employers to comply with their auto-enrolment obligations - the employer’s obligation to auto-enrol all eligible workers into a qualifying pension arrangement (a workplace pension plan), to which both the employer and the employees have to pay a minimum level of contributions.

From 1 October 2018 master trusts have been given six months to apply for authorisation from The Pensions Regulator to continue operating under new legislation. This has placed the master trust regime under considerable uncertainty and it is expected that many current master trusts will cease to operate, leaving just a small number of large well-run master trusts.

What restrictions or prohibitions limit an employer’s ability to exclude certain employees from participation in broad-based retirement plans?

An employer can exclude certain employees from its broad-based retirement plans, despite this leading to a two-tier workforce in pension terms. Often this happens for historical reasons leading to different groups of employees earning different pension benefits with the same employer. Different pension provision can arise for legal reasons owing to the transfer in of a business from another employer. Alternatively, an employer’s defined benefit plan may be closed to new joiners, who can join the employer’s defined contribution plan, while current employees still earn defined benefits.

With defined contribution plans, different employees can be entitled to different rates of employer contributions and an employer may also have, for historical reasons, different defined contribution plans for various groups of employees. There have been a series of cases challenging these types of distinctions.

An employer should not discriminate against an individual owing to, for example, sex, gender, age, sexual orientation or because the employee works part-time.

Care should be taken with defined contribution plans that have different pension provisions for different ages of employee, with older employees being entitled to a higher level of employer’s contributions.

Because of employers’ statutory auto-enrolment obligations, nearly all workers (subject to some minimal requirements) have to be given access to a minimum level of pension provision.

Can plans require employees to work for a specified period to participate in the plan or become vested in benefits they have accrued?

Employers have slightly more than three months to pay a newly auto-enrolled worker’s initial contributions over to the provider of its workplace pension plan to comply with statutory minimum pension requirements. However, employers and plans can require employees to work for a specified period before the employee can join any other plan. Benefits in these plans vest for new joiners after 30 days’ membership.

What are the considerations regarding employees working permanently and temporarily overseas? Are they eligible to join or remain in a plan regulated in your jurisdiction?

Employees who work permanently outside the UK should be excluded from membership of the employer’s plan.

Employees who are only working overseas on a temporary basis can continue to be members of an employer’s plan, as long as there is a reasonable expectation the employee will, in the next five years, return to work in the UK or retire.

There are serious consequences for defined benefit plans if these requirements are breached and the employee is working in another EU country as the plan has, for example, to be fully funded immediately. Employer auto-enrolment duties apply to workers who are based in the UK but work abroad.

EU Directive 2014/50/EU currently gives EU workers better pension rights when they move to another member state.

Do employer and employees share in the financing of the benefits and are the benefits funded in a trust or other secure vehicle?

Occupational pension plans are set up as trusts, with trustees who hold the plan’s assets separately from the employer for the benefit of its members.

With defined benefit plans, employees usually have to contribute to the plan and the employers pay the balance of the costs of funding the plan, depending on the value of the plan’s assets and what assumptions are used to determine the plan’s liabilities.

Many defined benefit plans are closed to the future accrual of benefits, so members no longer pay contributions and cease to earn extra pension funding, although the employer must still fund the plan. Sometimes in these cases, the terms of the plan require a final salary link to be maintained for calculating benefits while the member remains employed with the plan’s employer, but no contributions are required from the member.

With defined contribution plans, the employer can match, in either a simple or more complicated form, the employee’s contributions to the plan and the plan is set up with a third-party pension provider.

With auto-enrolment, currently the minimum employer contribution has increased to 2 per cent of the worker’s qualifying earnings, with the worker paying 3 per cent. This is to increase again in April 2019 to 3 per cent employer contributions and 5 per cent employee contributions. Salary sacrifice is often used as a tax-efficient way for these contributions to be paid.

What rules apply to the level at which benefits are funded and what is the process for an employer to determine how much to fund a defined benefit pension plan annually?

Many defined benefit plans have deficits, which usually the employer has to make good over a period of years. Deficits arise because of adjustments over the years to funding assumptions, for example, over what investment returns the plan’s assets will earn, the future level of inflation and mortality rates.

The funding of defined benefit plans is controlled by the results of the plan’s triennial valuation, which values its liabilities on the following bases:

• scheme-specific funding: the plan’s own ongoing funding basis determined primarily by the trustees after taking advice from the plan’s actuary. Depending on the plan’s rules, the employer may also agree the funding rate;
• pension protection funding: the statutory basis that determines whether, if an insolvency event occurs in respect of the plan’s employer, the plan would enter and stay in the Pension Protection Fund; and
• full buyout, statutory section 75 basis: the most expensive funding basis. It is the cost of winding up the plan and securing all benefits with an insurance company, together with the trustees’ costs of doing this.

Under some plans’ rules, trustees have separate freestanding funding powers to require an employer to pay additional sums into a plan.

The UK accounting standard FRS102, which brings the UK’s accounting standards in line with the equivalent international financial reporting standards (IAS19 revised), is used to value a plan’s assets and liabilities for the employer’s accounts.

If the valuation shows the plan has a scheme-specific funding deficit the plan’s scheme needs a recovery plan, setting out what employer contributions will be paid over a set number of years to eliminate the deficit. The valuation is used to compile a statement of funding principles showing how the trustees intend to ensure the plan is appropriately funded. Contributions are paid in accordance with a schedule of contributions.

The plan’s funding position must be reconsidered annually in the light of plan and employer experiences. The plan’s actuary prepares an annual funding report comparing the plan’s actual funding position to the funding position anticipated by the plan’s valuation and its statement of funding principles. If the discrepancies are too wide, the trustees can bring forward the plan’s next valuation or formally alter the plan’s schedule of contributions to change the contribution rate.

No valuations are needed for defined contribution plans, but they must have a payment schedule that sets out what contributions are due and when.

No payment schedule is needed for auto-enrolment.

What are customary levels of benefits provided to employees participating in private plans?

In a defined benefit plan, the pension is based on the salary the employee was receiving at the end of his or her working life with that employer, and the number of years of the employee’s employment with the employer, with a proportion of benefits earned in the plan for each year of such work.

Typically, an employed member earns one-sixtieth of his or her final salary from that employer for each year of employment, and the plan provides a maximum pension of two-thirds of the member’s final salary after 40 years’ employment with that employer.

With defined contribution plans, employees have their own notional pension account in the plan into which employer and employee contributions are paid. The pension savings on retirement depend on how much has been contributed to the plan for the employee, investment returns achieved for that account and the charges paid. Once the employee reaches the age of 55, he or she can access his or her pension savings and decide how to use them, including buying a pension, an annuity, from an insurance company, once tax-free cash has been taken (with potentially pension increases and dependants’ pensions paid from the annuity) or taking cash or flexible drawdown (less in both cases tax), or a combination of all these to the extent these options are permitted by the plan.

Are there statutory provisions for the increase of pensions in payment and the revaluation of deferred pensions?

For defined benefit plans, benefits earned from 6 April 1997 must be increased when in payment by 5 per cent or price indexation, if less. This is reduced for pensions in payment to increases of 2.5 per cent or price indexation, if less, for pensions earned from 6 April 2005 onwards.

From 1 January 2011, the index used for statutory increases changed from the retail prices index to the consumer prices index. Whether plans are affected by this change depends on the plan’s rules.

There is no statutory requirement to increase pensions in payment earned before 6 April 1997, apart from guaranteed minimum pensions where special rules apply; however, many defined benefit plans do increase them. What increases are granted for these benefits depend on each plan’s rules.

Legislation requires most deferred pensions to be revalued. The precise revaluation requirements depend on each plan’s rules and when the member joined the plan.

Defined contribution benefits for employment from 6 April 1997 that came into payment before 6 April 2005 also have to increase by 5 per cent or by price indexation, if less. Apart from this, there are no statutory requirements for pension escalation or the revaluation of deferred pensions with defined contribution plans. However, the defined contribution benefit must be purely defined contribution, otherwise there may be overriding statutory requirements to provide, for example, pension increases.

What pre-retirement death benefits are customarily provided to employees’ beneficiaries and are there any mandatory rules with respect to death benefits?

In defined benefit plans, an employee’s spouse (including a same-sex spouse or civil partner) is usually provided with a pension if the employee dies before retirement. That benefit can, but does not have to, be extended to cover a member’s dependant children up to a certain age, and other dependants.

For both defined benefit and defined contribution plans, the death of the employee usually triggers a lump-sum death benefit paid by the trustees to the employee’s nominee. These payments can be funded through separate life assurance, with the pension plans then providing a smaller benefit.

When can employees retire and receive their full plan benefits? How does early retirement affect benefit calculations?

When employees can retire and receive their full benefits depends on each plan’s rules - normal retirement age usually ranges between 60 and 65. For historical reasons, benefits in some defined benefit plans are determined on the basis of a split normal retirement age of 60 and 65. For these, members are entitled to retire as of right when they reach 60, but benefits determined by reference to a normal retirement age of 65 tend to be reduced for early payment.

Employees can usually retire at any time after 55 on a reduced pension. Often a plan’s rules require the employer’s or the trustees’ consent, or the consent of both, to early retirement. Whether consent is given in respect of a defined benefit plan usually depends on whether early retirement will result in additional costs to the plan, which depends on how the plan’s early retirement actuarial adjustment factors apply.

Early retirement is not usually an issue for defined contribution plans. An employer may have to auto-enrol employees into its statutory auto-enrolment plan if it continues to employ them after they have accessed their pension savings and their annual allowance will reduce (see question 3).

Are plans permitted to allow distributions or loans of all or some of the plan benefits to members that are still employed?

No, this is not generally permitted. However, employees can receive their pension from a plan while still employed by the plan’s employer, as long as the plan’s rules permit this.

Is the sufficiency of retirement benefits affected greatly if employees change employer while they are accruing benefits?

A defined benefit plan’s funding is not immediately affected if an employee changes employment - it is picked up on the plan’s next actuarial valuation.

For a defined contribution plan, an employer ceases to pay contributions for an employee once the employee has left employment.

In what circumstances may members transfer their benefits to another pension scheme?

There is currently no requirement for an employee to transfer his or her pension benefits from one plan to another if he or she changes employer. Often employees do not transfer their pension benefits when they change jobs.

Although many members have a statutory right to transfer their benefits out of a plan, as long as they are not in receipt of their pension from that plan, they do not have the same statutory right to require a new plan to accept that transfer. The trustees of many defined benefit plans do not accept any transfers in from any other plans. So historically the transfer of benefits from one plan to another is uncommon, even for defined contribution plans. Auto-enrolment and the April 2015 pension flexibilities are gradually resulting in more employees transferring their pension benefits (defined benefit or defined contribution) to plans that allow them access to the new flexibilities.

A member of a defined benefit scheme must take specialist advice before transferring his or her benefits out of a defined benefit plan to a defined contribution plan, or to an overseas plan.

Who is responsible for the investment of plan funds and the sufficiency of investment returns?

With defined benefit plans, the plan’s trustees have overall responsibility for the investment of its assets. They decide its investment strategy, after taking written advice from an investment adviser authorised by the Financial Services and Markets Act 2000 on how to implement that strategy. The investment adviser advises the trustees on which investment or fund manager to use and how to invest the plan’s assets in the various asset classes, how to measure performance, what the performance has been and what costs have been charged. The trustees delegate the detailed implementation of their investment strategy to the investment or fund managers and sometimes appoint a fiduciary fund manager. As long as they do so in a way that satisfies the statutory requirements, the trustees are not then responsible for the actions of their managers.

The trustees’ key investment decisions are set out in the plan’s statement of investment principles, which is used by the plan’s investment managers when they manage the plan’s investments. It includes the plan’s investment objectives, its asset allocation strategy, governance, target funding levels, implementation and responsible investment. The Pensions Regulator also provides guidance for trustees. Trustees of trust -based defined contribution plans are required to produce an annual governance statement signed by their chair, called the ‘Chair’s Statement’, showing among other things, investment charges and core transaction costs. These statements are inspected by The Pensions Regulator.

With a defined contribution plan, the investment and mortality risk rests with the member. The trustees decide the range of investment options the plan provides, but the members decide which options they want to use. If they make no decision, then the default investment option or options, chosen by the trustees, is used. The default investment option of a plan used for auto-enrolment is subject to statutory charging restrictions.

Can plan benefits be enhanced for certain groups of employees in connection with a voluntary or involuntary reduction in workforce programme?

Whether a defined benefit plan’s benefits can be enhanced for groups of employees because of a voluntary or involuntary reduction in the workforce varies from plan to plan. There is no general statutory right to such enhancements - they form part of a plan’s rules.

Under a plan’s early retirement rules, members may be entitled to draw their pensions without reduction for early retirement, if they have reached a certain age, or the trustees or employer may agree to a member’s early retirement request in these circumstances on favourable, rather than cost-neutral, early retirement terms.

Defined contribution plans are not structured in a way that enhances benefits on a voluntary or involuntary reduction in the workforce. However, an employer can make an extra contribution to the employee’s pension account.

Are non-broad-based (eg, executive-only) plans permitted and what types of benefits do they typically provide?

Non-broad-based (executive-only) plans are permitted. They can be agreed on a common basis, so all executives of a particular type obtain the same benefits, or they can be agreed on an individual basis. As the tax regime has become less favourable for executive pension arrangements, it is becoming increasingly common for employers to agree terms on an individual basis to reflect that person’s own tax position and for employers to put in place generous tax-favourable life assurance arrangements.

Executive pension plans can be defined benefit, defined contribution or hybrid. Tax changes to the annual allowance and the lifetime allowance (see question 3) make it much less tax-efficient for many executives to add to their pension savings, so many look for pension alternatives such as enhanced pay.

How do the legal requirements for non-broad-based plans differ from the requirements that apply to broad-based plans?

Some relaxations in general pension law apply to some forms of executive plans. They vary depending on the type of plan, but small self-administered schemes have the most relaxations.

The key legal concern for setting up executive plans is that they do not breach HM Revenue & Customs (HMRC) tax-avoidance rules.

Executive plans for public limited companies are subject to disclosure rules.

How do retirement benefits provided to employees in a trade union differ from those provided to non-unionised employees?

There is no difference in the retirement benefits provided to employees in a trade union from those provided to non-unionised employees. However, trade union involvement often results in better pension terms being negotiated for all employees of that employer.

How do the legal requirements for trade-union-sponsored arrangements differ from the requirements that apply to other broad-based arrangements?

There are no special legal requirements for trade-union-sponsored pension arrangements.

Enforcement

What is the process for plan regulators to examine a plan for periodic legal compliance?

Each plan has to complete an online annual return for The Pensions Regulator, so it can monitor changes in the plan’s arrangements. Additionally, HMRC also checks plans periodically for legal compliance.

What sanctions will employers face if plans are not legally compliant?

The Pensions Regulator aims to educate the pensions industry about what it requires for compliance. If this is insufficient, it can issue, for example, improvement notices or require that a professional trustee is put on the plan’s trustee board. Ultimately, it can issue civil penalties and some breaches of pension law can result in imprisonment.

There are certain key requirements every plan employer has to satisfy or be directly answerable to The Pensions Regulator. This includes ensuring that employee contributions are deducted and paid over to the plan within 19 days of the end of the month in which the contributions are deducted. Additionally, employers risk a daily fine if they breach their auto-enrolment obligations and risk criminal prosecution if they fail to provide requested information to The Pensions Regulator.

In February 2019, the Department for Work and Pensions announced a new package of powers for The Pensions Regulator, including the ability to jail company directors who recklessly or willfully risk their workers’ pensions and the ability to impose an unlimited fine for those who fail to comply with contribution notices (a notice issued by The Pensions Regulator requiring a specific amount of money to be paid into a pension scheme).

How can employers correct errors in plan documentation or administration in advance of a review by governing agencies?

If an employer identifies errors in its plan documentation or administration, it needs to liaise with the plan’s trustees and their advisers to correct those errors. Depending on the type of error, it may be necessary to ‘blow the whistle’ regarding the error to The Pensions Regulator.

What disclosures must be provided to the authorities in connection with plan administration?

A defined benefit plan’s funding documentation must be submitted to The Pensions Regulator for review.

A plan’s actuary and auditors, as well as its trustees, have whistle-blowing obligations. Also, employers and trustees have to notify The Pensions Regulator if key events occur.

The Pensions Regulator also requires defined contribution governance statements (including the chair’s statement), or the administrator or trustees will be fined and The Pensions Regulator can request certain information from them.

Both defined benefit and defined contribution plans need to be registered with HMRC, which also monitors them.

What disclosures must be provided to plan participants?

Members must be given information about their own individual benefits in the plan, general information about the plan and what changes have been made to the plan. This is provided through a membership letter, the plan booklet, its annual report and accounts, the member’s benefit statement and, for defined benefit plans, annual funding update.

Members can also request further information about the plan from its trustees. All plans must provide information about their compliance with the Data Protection Act 2018, including issuing a fair-processing notice to members.

What means are available to plan participants to enforce their rights under pension and retirement plans?

If a member is in dispute with the trustees or the employer over pension benefits, he or she can use the plan’s internal dispute resolution process, which is free for members. The Early Resolution Team at the Pensions Ombudsman helps members resolve their pension difficulties. If the problem remains unresolved, the member can, without cost, complain to the Pensions Ombudsman, which issues a determination, after representations from the parties.

Some pension disputes can also be resolved through the employment tribunals and a member can usually go to court, although this is expensive.

Depending on the dispute, the Pensions Regulator may take an interest.

Plan changes and termination

What restrictions and requirements exist with respect to an employer’s changing the terms of a plan?

An effective change to a plan’s terms must be made in accordance with the plan’s alteration power.

Restrictions in a defined benefit plan’s alteration power can prohibit certain changes being made to a member’s benefits.

If the member’s benefits are to be changed, depending on the nature of the change and the number of employees, a formal consultation exercise may be required. However, a consultation may not be needed if the employer is increasing the level of auto-enrolment contributions in accordance with the statutory requirements.

What restrictions and requirements exist with respect to an employer terminating a plan?

Employers rarely terminate defined benefit plans because to do so may trigger the plan’s winding up and its statutory section 75 debt - the employer’s obligation to fund the plan’s buyout deficit. Most employers using defined benefit plans close their plans to future accrual and continue to fund the plan on its scheme’s specific funding basis. Closing the plan to future accrual usually has to be done in accordance with its alteration power. (See question 33.)

An employer of a plan must consider whether it needs to go through a formal consultation exercise with its employees if it wants to terminate the plan, and what legally binding representations it might have given its employees over the years about keeping the plan open. In any event all employers have a duty to auto-enrol their qualifying workers into a qualifying pension scheme for auto-enrolment purposes.

What protections are in place for plan benefits in the event of employer insolvency?

Occupational pension plans are established as irrevocable trusts: their assets cannot revert back to the employer, except in very limited circumstances, and this is key to the security of members’ benefits.

The Pension Protection Fund acts as a lifeboat for defined benefit plans whose employer has suffered an insolvency event where the plan is below 100 per cent funded on the Pension Protection Fund funding level. It ensures a minimum level of plan benefits are paid to members. Solvent employers pay for the Pension Protection Fund through a levy.

Some employer and employee or worker contributions that are outstanding when the employer goes insolvent are also safeguarded.

An employer insolvency should not adversely affect pension savings in a defined contribution plan.

How are retirement benefits affected if the employer is acquired?

A share acquisition is not likely to affect an employer’s plan, if the employer is the only employer in that plan, as the plan stays with the employer. However the plan’s trustees should be informed of the sale before it occurs.

If the plan is for the employer’s wider group, then, for defined benefit and defined contribution plans, the decision needs to be taken as to whether the plan will go with the employer or whether it will stay with the group and alternative pension arrangements will be put in place for the employer’s employees. Depending on the circumstances, employee consultation about the pension changes may be necessary.

Care needs to be taken with defined benefit plans. If the employer ceases to participate in the group’s plan, this can trigger the employer’s statutory section 75 debt - buyout debt - which the employer must discharge. There are various statutory mechanisms for dealing with this. They ensure the employer is sold free of its defined benefit pension liabilities, but they require the cooperation and agreement of the plan’s trustees and ‘clearance’ from The Pensions Regulator if there is an event that is likely to have a materially detrimental impact on the employers’ ability to fund the plan and insufficient mitigation has been provided to the plan in compensation for this. Clearance is how The Pensions Regulator regulates the consequences of corporate transactions on pension funds. In any event, The Pensions Regulator may have to be notified about the sale.

The same types of problems do not arise for defined contribution plans.

Slightly different considerations apply on the sale of a business or part of a business. Employees are likely to be transferred over to a new employer under the Transfer of Undertakings (Protection of Employment) Regulations. As these exclude the transfer of an employee’s pension benefits, special statutory rules apply. There is usually consultation about the change in the pension (and other) arrangements. Then the new arrangements apply after the acquisition.

Care needs to be taken with a defined benefit plan that the sale of a business (or part of it) does not, under the plan’s rules, trigger a termination or part-termination of the plan. If it does, then there are mechanisms for dealing with this (see above).

Upon plan termination, how can any surplus amounts be utilised?

Employers rarely terminate defined benefit plans for the reasons set out in question 34.

The plan’s rules specify what happens if the plan terminates with a surplus. With a defined contribution plan, usually the surplus can be refunded to the employers, less tax.

With defined benefit plans, sometimes the trustees have to use the surplus to augment members’ benefits - sometimes by a specific amount, sometimes by as much as the trustees or the employer decide, or sometimes both - before any remaining surplus can be refunded to the employer less tax. As the rules of some defined benefit plans prohibit the payment of a surplus to the employer, even on plan termination, the surplus has to be used to augment members’ benefits.

Fiduciary responsibilities

Which persons and entities are ‘fiduciaries’?

The trustees are a plan’s fiduciaries. They act independently of the employer. Their specific powers arise from the plan’s trust deed and rules, legislation and common law.

What duties apply to fiduciaries?

The trustees’ duty is to administer the plan in accordance with its trust deed and rules and relevant legislation and case law. In doing this, they are required to act in the best interests of the plan’s members, and this is usually taken to mean their financial interests.

What are the consequences of fiduciaries’ failing to discharge their duties?

Trustees of plans can ultimately face personal liability if they have committed, for example, a breach of trust or an act of dishonesty, but other than this, a plan’s rules often contain an exoneration clause making the trustees not liable for their acts under the plan’s rules. There may also be an indemnity for the trustees from the employer or from the plan out of the plan’s assets.

Trustees have to manage their conflicts of interest properly or risk potentially having a decision challenged and set aside. As trustees are there to safeguard members’ interests, they are directly answerable to the members if they fail to do so.

The Pensions Regulator can impose the same types of sanctions on trustees as it can on employers (see question 28) including prohibiting someone from acting as a trustee.

As detailed at question 28, in the future company directors will face a jail sentence where they recklessly or willfully risk their workers’ pensions.

Legal developments and trends

Have there been legal challenges when certain types of plans are converted to different types of plan?

There have been challenges about how defined benefit plans have converted to defined contribution plans and about how defined benefit plans closed to future accrual. These concern whether members properly understood and agreed to the proposed change, there has been proper consultation, members have any reasonable expectations that are legally binding, and whether the change could legally be made in accordance with the plan’s alteration power. Ultimately, the question is whether all the proper formalities have undertaken when changing members’ pension benefits and that members understand the change.

Have there been legal challenges to other aspects of plan design and administration?

It is now known that defined benefit plans, which provide guaranteed minimum pensions, need to equalise these benefits so that male and female members receive equal benefits from the plan for their guaranteed minimum pensions. Some clarity on this obligation has been delivered by the High Court’s judgments in Lloyds Banking Group Pension Trustees Limited vs Lloyds Bank plc (and others) and guidance from HMRC. Consequently, plans which provide guaranteed minimum pensions are now beginning to take steps to equalise. However, a further court hearing is expected in due course in relation to the Lloyds case so the position is not completely settled. Additionally, there are numerous disputes about the right index to use for pension increases. Current court cases include questions about the scope of the Pension Regulator’s ‘moral hazard’ powers to impose a contribution notice or a financial support direction and what survivor benefits are payable to same-sex spouses.

There are often challenges about changes to pension benefits not being correctly documented, particularly in relation to a plan’s pension increase and retirement age provisions. As trustees have to administer the plan in accordance with a plan’s rules, rather than custom and practice, this often leads to disparities that have to be resolved.

How will funding shortfalls, changing worker demographics and future legislation be likely to affect private pensions in the future?

For private pensions, defined contribution rather than defined benefit plans are the norm, and this makes many defined benefit plans, with their funding shortfalls, a legacy issue, not relevant to current employees but very significant to the companies that still have to fund these plans. The EU IORPS II Directive, designed to secure the retirement income of EU citizens and to be implemented by January 2019, will also have an impact on these plans and their employers, if it is implemented by the UK. The April 2015 pension flexibilities have done much to reinvigorate interest in defined contribution pension savings. They work with an older workforce, although the fiscal advantages of saving into a pension plan are limited if the individual’s defined contribution pension savings have been flexi-accessed at age 55 or over. Good governance of defined contribution plans and master trusts remains key, as does vigilance to ensure fraudsters do not target pension savings. Master trusts are increasingly becoming the pension vehicle of choice for employers and The Pensions Regulator is still formulating the best way to regulate these types of pension schemes.

See question 11 for information about changes to pension rights for EU workers when they move between member states.

Update and trends

Are there any current developments or trends that should be noted?

In the defined contribution sector, master trusts have increasingly been becoming the pension vehicle of choice for employers. However, the changes in legislation and the need for authorisation have temporarily put the brakes on this new pension vehicle while master trusts gain authorisation. Collective defined contribution schemes are also on the horizon and the government has consulted with the pensions industry on whether to permit the use of these schemes, with a decision expected at some point in 2019.

Alongside this, The Pensions Regulator and the Department for Work and Pensions are encouraging the use of superfunds to assist with the consolidation of defined benefit schemes.

What is clear is that The Pensions Regulator and the Department for Work and Pensions are continuing their push for increased consolidation in both the defined contribution and defined benefit sector. Therefore we are likely to see continued innovation to achieve this goal whether through the master trusts, superfunds or in some other form.