Pensions Act 2004 and life cover only members

Section 255 of the Pensions Act 2004 came into force on 22 September 2005 and requires schemes to limit their activities to "retirement benefit activities" which are benefits paid by reference to retirement and benefits that are supplementary to retirement benefits. This legislation was introduced to implement a requirement of the European Pensions Directive.

There has been some concern as to the impact of these requirements on scheme members who are only entitled to lump sum death in service benefits (often known as "life cover only" members) as they have no retirement benefits as such.

These issues had been put to the Government and the Department of Work and Pensions has now issued a note setting out its views on the application of these requirements. The note identifies a number of scenarios:

• Where an employee is in a waiting period to join the scheme for retirement benefits but is entitled to life cover under the scheme - DWP think that this can be treated as a supplementary benefit and is therefore permitted under the legislation;
• Where an employee has opted out of the scheme for retirement benefits but is entitled to life cover under the scheme - again DWP think that this can be treated as a supplementary benefit;
• Where the scheme has a category of members who are only entitled to life cover - DWP do not think that this would satisfy the supplementary test and as such is not a benefit which an occupational pension scheme should provide. The exception to this is where the employer provides retirement benefits under another arrangement and the "two benefits are part of an overall arrangement provided by an employer ".

This is only the opinion of the DWP and schemes are advised to seek their own legal advice. In addition, the DWP also says that the Regulator is proposing to issue guidance in this area. As the sanction for non-compliance with these requirements is fines from the Regulator, we would suggest schemes wait and see what approach the Regulator is intending to take.

Finally, it should be noted that there is no problem with arrangements which only provide life cover as they are not an occupational pension scheme for these purposes and are therefore not caught by the requirements.