The Green Paper - Where are we now?

Karen Mumgaard looks at how far the Government’s proposals for reform have progressed

General

Occupational pension schemes are, in the view of the Government, the great welfare success story of century; and the stated intention of the current proposals for reform is to “create an environment in which they can flourish”.

Since the publication of the initial Green Paper, the Government has published a variety of consultation papers and draft legislation. The first stage of the consultation is now largely completed and the draft legislation has recently finished its House of Lords stage. The second stage of consultation will begin over the next few months when wider issues such as the general tax regime for pension schemes will be looked at and some of the original proposals will be revisited.

What does this all mean for occupational pension schemes? Will they flourish or will even more regulation be imposed on an arguably already over-burdened industry?

Quality in Pensions Accreditation

One of the most controversial proposals was the idea of quality testing for occupational pension schemes. Some indication of what the proposed standard might require was given in a March consultation paper which suggested in general terms that qualifying schemes should provide members with at least 50% of pensionable pay after 40 years and various other minimum benefits. Schemes would also have had to meet various governance criteria.

However, many responses received by the Government during the consultation period were generally opposed to the notion. It was argued that schemes which did not meet the criteria might terminate as they would not look attractive to members (even if they were better than a stakeholder alternative) or alternatively, it could encourage schemes to provide only the minimum benefits necessary to satisfy the test. The cost of the proposed scheme was also thought likely to deter smaller schemes. As a result the Government have now abandoned the suggestion in favour of developing “best practice guides”. A group comprised of people from various sectors of the pensions industry has been set up to advise on the development and promotion of these guidelines.

Divorce

The provisions from last year’s Pension Sharing Bill, which allowed spouses to receive a credit from their partner’s pension scheme on divorce, have been included in the Welfare Reform and Pensions Bill, in a broadly similar form.
One of the main criticisms of these provisions was that they did not allow a divorced member to rebuild his pension benefit as the spouse’s pension credit would be taken into account in valuing his benefits for Revenue limits purposes. However, Stephen Timms has announced that for members earning up to 25% of the earnings cap at the date of divorce (currently £22,650), schemes will be able to disregard any benefits subject to a pension sharing order, enabling members to rebuild their pension rights.

Investment

Regulations have now been issued which will require schemes to disclose the extent to which their investments are guided by social, ethical or environmental considerations. These Regulations also contain provisions requiring schemes to disclose their policy in relation to the exercise of any voting rights attaching to scheme assets. The relevant provisions will come into force on 3 July 2000.

Member-nominated trustees

It was originally suggested that the employer opt out in relation to member nominated trustees should be removed so all schemes would need to have at least one third member nominated trustees and, depending on their size and membership profile, possibly one pensioner trustee. Whether schemes would have had any flexibility as to the manner in which member-nominated trustees would be chosen was left open.

Again the responses received to this proposal were not favourable and we understand that the DSS is currently working to produce revised proposals. A new consultation paper should be issued around September. The intention remains that no changes should be required until existing MNT arrangements expire.

Forfeiture and bankruptcy

Provisions in scheme rules that allow forfeiture on bankruptcy will no longer be valid. Instead, approved pension benefits will be excluded from a member’s estate for bankruptcy purposes. These provisions will also cover approved personal pension schemes and there is also a regulation making provision to allow for protection of unapproved pension rights where, for example, other pension arrangements are inadequate to provide for the needs of the member and his family.

Winding-up

A consultation paper issued in May set out proposals for accelerating the winding-up of schemes. The suggestions made in the consultation paper include:

• time limits for appointing an independent trustee where the employer is insolvent;
• extending Opra’s powers to modify scheme rules where the modification is needed to complete the winding-up, and introducing a monitoring role for Opra;
• additional information to be provided to members after 3 years; and
• extending the Ombudsman’s jurisdiction to allow him to investigate complaints about schemes in wind-up referred to him by Opra.

Stakeholder schemes

Employees who are not members of an occupational pension scheme will need to be offered membership of a stakeholder scheme in the future. However, it seems that there will be exemptions for employers whose employees all earn below the lower earnings limit or who have an occupational pension scheme that all employees are eligible to join. For this purpose schemes with waiting periods of less than 6 months will be acceptable. It is proposed that employers will have 12 months from the introduction of stakeholder schemes in April 2001 to nominate a stakeholder arrangement. Employers may have to consult employees about which arrangement they are nominating.

In relation to charges, it is was initially proposed that they should be levied as a fixed percentage of the member’s fund at 1% per annum (including initial advice on the merits of joining a stakeholder arrangement), although many insurance companies think that the 1% figure is too low. No scheme will be able to require a minimum contribution of more than £10 and there should be no minimum frequency of contributions. If schemes do offer investment choice there must be a clearly specified default option. There will also be requirements in relation to certain basic information which must be supplied to members. These proposals have not met with much enthusiasm from the financial services industry.

The Green Paper suggested that there might be a central clearing house for employer and employee contributions. However, in a recent consultation paper, the Government favour making use of existing Bank clearing facilities.
Although it is still proposed that stakeholder schemes should generally be trust based, the Government has accepted that trustee boards may pose difficulties in some cases (where for example schemes are set up by financial service companies). To encourage the development of stakeholder schemes, they have suggested that there should be an alternative governance structure. This alternative would consist of a “stakeholder pension manager” who would be authorised by the FSA. members’ rights would then be governed by the terms of a contract with the manager. The Government have invited views about the possibility of a members’ advisory committee that could require reports from the manager on certain aspects of the scheme.

Finally, depending on what form all of these proposals finally take, it seems increasingly likely that employers who currently offer GPPs may not need to provide employees with a stakeholder alternative providing the GPP meets certain minimum standards.

State second pension

SERPS is to be the subject of major reform in recognition of the fact that, because of its earnings-related nature, it provides least for those who need more and it no longer provides a real retirement income for middle and high earners.

It was originally proposed that the reforms would be introduced in 2 stages, the first giving increased benefits for low earners and the second introducing a new flat rate benefit. However, the Government announced at the end of April that it could “be persuaded” that the reforms should be introduced in a single stage. This was in response to industry complaints that 2 stage implementation could cause confusion and result in people receiving the wrong advice.
If it appears that stakeholder schemes may take a while to get off the ground, a later single stage implementation date may become more likely, as the Government will be advising people to move into funded pension arrangements, which they cannot do if stakeholder is not in place.

Conclusion

The Government’s stated intention in many of these reforms is to simplify the current regulatory regime and strengthen the framework for occupational pension schemes. To the extent that the reforms achieve this they are to be welcomed. However, it must be wondered whether, or to what extent, they will instead simply impose yet more regulation on the already heavily regulated pensions industry. We will have to wait and see.