After almost a year of travelling tortuously through Parliament, the Pensions Act 2008 finally received Royal Assent yesterday. This Law-Now summarises the main areas in which it will impact on trustees and employers of occupational pension schemes.
Auto-enrolment and personal accounts
The Act provides a comprehensive framework for the introduction of auto-enrolment from 2012. The objective of the legislation is that all employees will be enrolled automatically either into an existing pension scheme or the personal accounts scheme.
All schemes will be required to meet a minimum standard: the Act requires that each member of a money purchase scheme will have to receive contributions of at least 8% of qualifying earnings, of which at least 3% must be paid by the employer. Final salary schemes will either have to meet existing contracting-out tests or, if contracted-in, a "test scheme standard" based on 1/120ths of average qualifying earnings.
There has been continuing controversy about the width of the definition of qualifying earnings, which includes basic pay, overtime, bonus and commission within a prescribed earnings band. The Government has recently moved to try and quell discontent about the administrative implications for schemes, saying that schemes may "self-certify" that they meet the prescribed standard. However, the detail of what certification might actually entail is not set out in the Act, but will be laid in regulations to be consulted on in 2009.
Revaluation
The Act contains the mechanism to change the rate by which deferred benefits must be increased (or “revalued”) in the period up to retirement. From the date of implementation, the statutory revaluation rate will be RPI capped at 2.5%, rather than at 5%. The change will only relate to benefits accrued after the date the new legislation comes into force, and will not have any impact on existing deferred members. Depending on how individual scheme rules are drafted, however, trustees may need to consider rule amendments whether or not they intend to maintain existing rates of revaluation.
DWP has suggested that the change will be implemented no earlier than February next year, but we understand that they are seriously considering representations from industry that implementation should be postponed until at least 6 April 2009.
Extension of the Pensions Regulator's "moral hazard powers"
The Act also introduces the changes, originally announced in April, designed to extend the Regulator's powers to issue contribution notices or financial support directions. Most notably, these include introducing an alternative test that could trigger the issue of a contribution notice where, regardless of the parties' motives, a course of conduct is "materially detrimental" to the scheme’s ability to pay benefits to members.
The changes made by the Act, when brought into force, will be backdated to 14 April 2008. For more details, click here to see our LawNow, which followed the tabling of the final amendments last month.
Other changes to the Regulator’s powers
The Act widens the Regulator’s powers in two other, discrete, areas.
Existing provisions of the Pensions Act 1995 are extended so that the Regulator may appoint independent trustees from its trustee register if it is satisfied that it is "reasonable" (rather than "necessary") to do so. Under a new catch-all provision, the power can be exercised wherever the Regulator considers it reasonable "to protect the interests of the generality of the members of the scheme.”
The Act also now allows the Regulator to use its intervention powers in relation to pension scheme funding in circumstances where it determines that technical provisions have not been set prudently.
PPF benefits - further refinements
Finally, the Act makes some technical changes relating to the operation of the PPF. These include allowing the sharing of PPF compensation on divorce, and permitting members who have a terminal illness to commute their entitlements for a lump sum.
The DWP has issued a factsheet and a note of the main changes today, which are available here.
If you have any questions, or require more detail, please get in touch with your usual contact.
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