This is the third update in our series on regulations and codes of practice issued under the Pensions Act 2004. Further explanation of the Act and related documents can be found in our Plain English Guide to the Pensions Act.
The following is a summary of some recent Pensions Act related developments, plus details of impending changes on civil partners and age discrimination.
The Pensions Act will end the ability of schemes to opt-out of the member-nominated trustee requirement and almost all schemes will be required to have one third of their trustees to be nominated by the members. Draft Regulations and a draft code of practice have been issued on how the new requirements are intended to operate.
Existing opt-outs will be allowed to continue until they expire or 31 October 2007 (which ever is the earlier). The draft code of practice says that schemes should take a maximum of six months to put new MNT arrangements in place but where existing opt-outs are coming to an end, the Regulator feels that the full six months should not be required as trustees should have been considering the issue before the expiry of the current arrangements. The code suggests that it should take no more than a further six months to go through the nomination and selection procedure once the appropriate arrangements are in place.
The Government introduced a regulation-making power in the Act allowing it to require schemes to have 50% MNTs. The recent consultation paper on MNTs indicates that they expect to implement this requirement sometime in 2009.
Modification of subsisting rights
A draft code of practice has been issued on how the Regulator expects trustees to comply with requirements in the Act to allow members to make representations when certain amendments are proposed or, in some cases, to seek their consent. The draft code sets out suggested time scales for such communications.
Financial Assistance Scheme (FAS)
Draft regulations have been issued about FAS.
The draft Regulations clarify which schemes are eligible to benefit from FAS. The employer must have become insolvent by 28 February 2006 or such later date that the Secretary of State indicates in the case of a particular scheme. The scheme must have gone into winding up between 1 January 1997 and 5 April 2005.
The draft also provides further information about FAS benefits. To be eligible for FAS benefits, a member must have been within three years of scheme pension age on 14 May 2004 (although this is subject to future review). FAS benefits are to be capped at 80% of the expected pension and the total pension is capped at £12,000 p.a. Only members who will receive at least £520 a year and survivors who will receive at least £260 a year or equivalent from the FAS will be entitled to a payment.
The Pensions Act 2004 will provide members who leave after three months' pensionable service a right to either a transfer payment or a refund of their own contributions. Draft regulations and a draft code of practice have now been issued which provide further details.
Once a member has left the scheme, the trustees must, within a reasonable period (which the draft code suggests would be as soon as possible and in any event within two months from the date of leaving), give the member certain information including:
- the amount of the cash transfer sum and the reason for any reduction
- how it may be used
- the amount of the contribution refund and the reason for any reduction
- details of any tax liability
- the date by which the member must notify the trustees of his choice
- how the exercise of these rights may affect any other benefits
- if the scheme begins to wind up, the cash transfer sum or contribution refund may be reduced
- if the member does not exercise their rights on or before a certain date, the trustees will be entitled to pay a contribution refund to him.
The draft code suggests that the member should have three months from being provided with information to respond. The trustees must then comply with the member's request within a reasonable period (suggested to be as soon as possible and in any event within three months). If the member fails to notify the trustees of his choice, the trustees may refund his contributions.
The draft Regulations say the calculation of a cash transfer sum should be on the same basis as cash equivalent transfer values.
The Civil Partnership Act comes into force on 5 December 2005. If a scheme member dies after 5 December 2005, their civil partner will be entitled to a survivor's pension as of right at the same level as a member's spouse, but only for pension based on pensionable service after 5 December 2005.
The law will go further for benefits in respect of contracted-out service. From 5 December 2005, a civil partner will get survivor benefits based on contracted-out rights accrued from 1988 (reflecting the fact that surviving civil partners will be able to access their deceased civil partner's state pension provision).
Legislation will be introduced in October 2006 on age discrimination to comply with the European Equality Directive. The Government's consultation paper says that a default retirement age of 65 will be introduced. It will not be age discrimination if an employer requires employees to retire at 65 (or above). Retirement ages below 65 for employment purposes will generally be prohibited unless objectively justified. Employees may request to work beyond a compulsory retirement age and the employer must consider any such request.
For occupational pension schemes, the Regulations will make it unlawful for trustees to discriminate against a member or prospective member on grounds of age. Schemes will be treated as including a non-discrimination rule and trustees can alter schemes to comply with the rule. However, a remarkable number of provisions in occupational pension schemes are exempted from the requirements including:
- closing schemes or parts of schemes to new members
- providing different schemes to employees of different ages or with different lengths of service
- the use of minimum and maximum ages for admission to schemes
- setting different ages of admission to a scheme for different groups of employees
- having a normal pension age
- age-related or flat-rate employer contributions
- the use of age criteria in actuarial calculations
- setting the level of pension benefits by reference to years of service
- young spouse reductions
- age limits on payments of pensions to dependent children.
It will be open to trustees to objectively justify any other age-related provisions.