Legislation, consultations and other developments affecting pensions 2005

Section 309 A–C of Companies Act 1985, 2004

Has effect from 6 April 2005 on exonerations and on certain new indemnities granted by group companies to directors after 29 October 2004.

An exoneration for the benefit of a director made after 29 October 2004 in respect of negligence, default, or breach of duty or trust will be void if conferred by the company suffering the loss. So an exoneration given by a company to directors of a group trustee company would be void to the extent that it exonerated them from a loss to the exonerating company caused by their negligence, default, or breach of duty or trust.

Indemnification against regulatory penalties (such as those levied by the Pensions Regulator) and indemnification in respect of civil proceedings brought against the director by the company of which he is a director or certain related companies would also be void, whether the indemnity came from the trust company itself or from a group company.

Exonerations and indemnities provided to individual trustees by companies are unaffected by these changes, as are indemnities to trustees or trustee directors from trust assets. The legislation also contains exceptions for indemnities which satisfy certain conditions.

DWP consultation - The Occupational Pension Schemes (Internal Dispute Resolution Procedures) Regulations 2005, January 2005

The Pensions Act 2004 has changed the requirements for schemes’ internal dispute resolution procedures.

The procedures can now be simplified to a one-stage process (in which it appears all the trustee body must be involved), where prescribed deadlines will be replaced by a requirement to act within a reasonable period (the Regulator has issued a draft Code of Practice giving guidance on “reasonable periods” – see Regulator section of this Update).

DWP consultation, contracting-out – Occupational and Personal Pension Schemes (Miscellaneous Amendments) Regulations 2005, March 2005

The Government aims to simplify the administration of schemes which are contracted-out. The key proposals are to:

Allow protected rights to be paid pro-rata with the excess benefit on retirement as tax-free cash.

Increase trivial commutation limit to allow commutation of protected rights.

Allow protected rights to be paid at the same time as other benefits.

DWP consultation – the Occupational Pension Schemes (Consultation by Employers) Regulations 2006, June 2005

Requirement, proposed to be effective from 6 April 2006, for employers to consult with prospective and active members and their representatives about “major or significant” changes to future private or occupational pension arrangements.

For occupational pension schemes, the changes are: increasing the age at which benefits can be paid; preventing all or certain prospective members from being admitted to the scheme; preventing future benefit accrual for active or prospective members; removing an employer’s liability to make contributions to the scheme; and introducing member contributions when there were not previously payable.

Certain specific changes also apply in relation to occupational defined contribution and non-defined contribution schemes.

In the case of defined contribution schemes, consultation is required in respect of reducing employer contributions by 2% or to below 3%.

In the case of non-defined contribution schemes, changing any benefits to money purchase, reducing the rate of future accrual, or increasing member contributions by 2% or more will all require consultation.

The obligation is to provide, at least 2 months before the date of the proposed change, information about the effect of the change, background information and the timescale for introducing the change in an appropriate time and fashion and with appropriate content to permit members’ representatives to study the change.

“Consultation” means exchanging views with and providing advice by, the members’ representatives and/or members directly.

DWP consultation - Occupational Pension Schemes (Early Leavers: Cash Transfer Sums and Contribution Refunds) Regulations 2005, June 2005

Expected to be effective from 6 April 2006.

Option for leavers with at least three months’ pensionable service to receive a transfer value instead of a refund of their own contributions.

The regulations set out further details on how this right will operate. The Minimum Funding Requirement will remain as the underpin for the calculation of this transfer value, pending the scheme’s first scheme-specific funding basis valuation.

These transfer values will be much like a member’s Cash Equivalent Transfer Value (“CETV”) of vested rights, so it will be possible to reduce them where the actuary’s valuation discloses underfunding.

DTI consultation – draft Employment Equality (Age) Regulations 2006, July 2005

The draft Regulations are to implement EU Employment Directive which requires the abolition of direct and indirect discrimination based on age in employment and vocational training. (Harassment and victimisation on the ground of age are also expressly prohibited).

It is thought that the regulations will come into force on 1 October 2006.

Objective justification can apply for discriminatory treatment, whether direct or (more unusually) indirect.

The directive permits certain exemptions from this protection in relation to occupational pension schemes and the Regulations make use of this flexibility. For example it seems to be permitted to set ages for admission to membership and for receiving benefits, and to vary rates of contributions and benefits based on the salary, seniority and the amount of the member’s pensionable service.

DWP guidance – “Automatic enrolment in workplace pension schemes: Guidance on the regulatory framework”, July 2005

Sets out DWP’s thoughts on various obstacles to employers applying a policy of automatic enrolment (see also the report of the Pensions Commission below) to new employees regarding their stakeholder arrangement or group personal pension plan.

These obstacles include EU law, restrictions on ‘financial promotion’ under the Financial Services and Markets Act 2000, employment law, and the Data Protection Act 1998.

Solutions and/or comfort are offered to employers on these various points. DWP believes that the only obstacles which cannot easily be overcome are the protections in employment law (in particular, the prohibition on unauthorised deductions from wages).

DWP consultation - Occupational Pension Schemes (Disclosure of Information) Regulations 2005, September 2005

Expected to be effective from April 2006.

Aims to make the pensions disclosure regime more proportionate than the current prescriptive regime, by requiring information to be provided within a “reasonable period”.

A separate consultation exercise has just concluded on what constitutes a “reasonable period” in various circumstances – in the majority of cases this will reflect current prescribed limits.

Aims to provide comparable rights to information for members of final salary and money purchase schemes.

From 6 April 2007, a statement of annual benefit information should be provided in respect of non-money purchase benefits to active members, actives who become deferreds and those becoming pension credit members on or after that date. Other deferred and pension credit members can receive that information on request.

At the trustees’ option, the member can also be provided with an indication of their own and their survivors’ benefits assuming that pensionable service were to terminate within a month of the date of the provision of that information.

GN 19 – Winding up and Scheme Asset Deficiency, September 2005

New version in force from 2 September 2005.

Provides actuaries with further guidance about assessing and apportioning statutory debts under section 75 Pensions Act 1995 and identifying the assets that should be allotted to each category of members.

New guidance is offered in particular on apportionment of liabilities under withdrawal arrangements.

DWP consultation – Occupational Pension Schemes (Modification of Subsisting Rights) Regulations, October 2005

Expected to be effective 6 April 2006.

Prescribe requirements that must be met when a scheme modifies the rules relating to the subsisting rights of members, and exclude categories of schemes and specific modifications from the subsisting rights requirements.

DWP Consultation – Occupational Pension Schemes (Exemption) Regulations 2006, October 2005

Expected to be effective 6 April 2006.

Provide exemptions from certain Pensions Act requirements for unregistered pension schemes (e.g. requirement to have an internal dispute resolution procedure, requirement to appoint professional advisers).

The Pensions Commission Report (the “Turner Report”), 30 November 2005

The Government’s latest effort to tackle the UK’s “pensions crisis”, attacked in some quarters even before it was released.

Suggests a ‘National Pension Savings Scheme’ with ‘soft’ automatic enrolment (i.e. the individual can still opt out) into this (or alternatively into an employer arrangement), to which broadly at least 8% annual contributions are made: 4% by the member, 1% from Government in tax relief, and 3% from the employer.

Suggests state second pension to become flat-rate over time by calculating it by reference to a ‘flat’ element of earnings.

Phase out contracting-out by 2030 for defined benefit schemes, and before that for others.

GN 16 – Transfers without consent, November 2005

New version in force from 29 November 2005.

Relevant when seeking to make a transfer between schemes without obtaining each individual member’s consent.

Consideration of relative benefit security, assuming winding-up were triggered pre-and post-merger, is no longer a pre-condition for issuing the actuary’s certificate. The actuary must consider the rights provided for under the rules, not the rights which might be delivered in practice.

When assessing whether discretionary benefits will be “broadly, no less favourable” in the receiving scheme, employer covenant and commitment to funding these benefits may be relevant.

However, relative benefit security remains a major issue for trustees in deciding whether to transfer.

This article first appeared in our Pensions update January 2006. To view this publication please click here to download it as a pdf in a new window.