Pensions Bulletin Number 2006/12 23rd March 2006 TRANSFER VALUES GOVERNMENT TO LEGISLATE The Government has announced that it will consult shortly on the way that transfer values are calculated. This follows the ending of the actuarial profession s consultation on a radically different approach to transfer values which, in the Government s view, gave rise to significant and fundamental differences of view about the way forward. The Government has decided that the best way forward is to legislate, putting the principles underpinning the calculation of individual transfer values into regulations. In an exchange of letters between Stephen Timms, the minister for pensions reform and Michael Pomery, the President of the Institute of Actuaries, the Government indicates that there will continue to be a role for actuarial guidance note GN11 to address the detail but that the framework will be set out in legislation. There is no news on what approach to the determination of transfer values the Government has in mind ie whether expected cost to the scheme is to continue or some other approach is to be favoured such as marked to market proposed in EXD54 (see Pensions Bulletin 2005/19). But the Government asks that, until the revised regulations and associated standards are in place the existing guidance be maintained. The actuarial profession in reply has agreed not to proceed with its EXD54 proposals. But it has said that if transfer values are to remain a member s right, it is essential that the opportunity is taken to reconsider the accompanying disclosure of information requirements to members. The actuarial profession has also published a briefing note on the subject. Comment: On the face of it this is a good result. The current legislative framework leaves the actuarial profession in an invidious position of setting public policy. At least now the Government has agreed that it should shoulder this burden. But it is not yet clear how long we will have to wait before the way forward is implemented. SCHEME MODIFICATIONS SECTION 67 REGULATIONS FINALISED The Occupational Pension Schemes (Modification of Schemes) Regulations 2006 (SI 2006/759) (the Section 67 Regulations ) were laid before Parliament on 16th March 2006. These regulations fill in some of the detail of the subsisting rights provisions of the Pensions Act 2004 (see also the explanatory memorandum). From 6th April 2006 trustees of most occupational pension schemes will need to check whether any proposed modification to benefits that have accrued is a regulated modification and, if it is, decide whether to go down the member consent or actuarial equivalence route. These new requirements replace completely the old section 67 requirements of the Pensions Act 1995.
The regulations are an extended version of those issued in draft (see Pensions Bulletin 2005/43) and do the following: confirm the detail in the draft regulations concerning the actuarial equivalence test; set out those schemes not subject to the new provisions namely one man schemes and non-registered pension schemes; and describe those situations that are exempt. The exemption list starts in a similar fashion to the current exemptions from section 67 but there are some significant additions from the previous draft regulations. One of the most important aspects of the Section 67 Regulations is their interaction with The Registered Pension Schemes (Modification of the Rules of Existing Schemes) Regulations 2006 (the Modification Regulations). The Modification Regulations override scheme rules in six areas with effect from 6 April 2006 so that for example Revenue limits and the earnings cap continue to apply, trustees have the power to deduct the Lifetime allowance charge and unauthorised payments may be paid at the trustees' discretion see Pensions Bulletin 2006/08. However there are two main problems on relying on the Modification Regulations. Firstly, they have only temporary effect and secondly, most legal opinion is that they apply on an all or nothing basis. However, the Section 67 Regulations appear to offer a way around this as they exempt from the subsisting rights provisions any modification that takes place on or after 6th April 2006 which has the same effect as any or all of the six areas covered in the Modification Regulations. It would appear that schemes can use these latest regulations to cherry-pick their way to the post A-day benefit structure they desire. Comment: This is a difficult and complex area of pension law. Legal advice on the application of these regulations to particular schemes and situations is essential. TRUSTEE KNOWLEDGE AND UNDERSTANDING All the legislative materials necessary to bring in the Trustee Knowledge and Understanding requirements from 6th April 2006 are in place. The code of practice has been laid before Parliament. The Pensions Regulator has also made available its scope guidance for defined benefit schemes with associated defined contribution arrangements and that for defined contribution only schemes. The Occupational Pension Schemes (Trustees Knowledge and Understanding) Regulations 2006 (SI 2006/686) have been laid before Parliament and come into force on 6th April 2006 (see also the explanatory memorandum). They provide an exemption for newly appointed trustees within their first six months (as per the draft regulations see Pensions Bulletin 2005/11). They also exempt trustees of small schemes (ie fewer than 12 members, all of whom are trustees and all decisions are made by unanimous agreement by member trustees or the scheme has an independent trustee). FINANCE ACT 2006 DRAFT LEGISLATION HM Treasury and Customs has published draft legislation and explanatory notes for certain measures related to pension tax simplification that will be contained within this year s Finance Bill. The main measures to note are: where a scheme pension is purchased or provided from a money purchase arrangement, the pension commencement lump sum is calculated as 25% of the funds used to provide the benefits as for lifetime annuities from money purchase arrangements; Page 2 of 6
schemes are able to reduce the rate of scheme pension payable when a member reaches state pension age for contracted-out schemes by no more than the single person s basic state pension; otherwise by no more than twice the single person s basic state pension. a ninth benefit crystallisation event is defined when individuals reach age 75 with an unsecured pension fund the value of the fund at this point less the amount crystallised when the fund was first designated will be tested against their lifetime allowance; and the maximum permitted pension for schemes that provide for lump sums as of right (rather than by commutation) takes account of the pension value of this lump sum and hence increases the amount subject to primary or enhanced protection. TURNER REPORT ACTUARIAL PROFESSION PROPOSALS The Actuarial Profession has published two papers in response to the Pensions Commission s report on pension reform. The first paper provides a commentary on the use of life expectancy data in the Pensions Commission report. In particular, it highlights the uncertainty surrounding estimates of life expectancy in 2050. Michael Pomery, President of the Institute of Actuaries, said No-one knows what life expectancy will be that far into the future. The Profession agrees that state pension age should be increased and rejects the argument from some commentators that an increase in state pension age will lead to a work till you drop society. It points out that Turner advocates a system where, for every three years of enhanced life expectancy, people work an additional two years and enjoy one additional year of retirement. It suggests that the design of the pensions system needs in-built flexibility and must be operated in a transparent and fair way. It further believes, given there will be a steady increase in costs falling on future generations, that there is a need for a permanent independent Pensions Commission, with vested authority, to monitor the implications of increasing longevity and prepare formal reports for Parliament on a regular basis. The second paper focuses on decumulation, the conversion of pension assets accumulated during working life into pension income to be spent during retired life. The profession argues that if people are to be encouraged to save more for their retirement, they must also be presented with attractive options for spending their accumulated retirement wealth beyond today s dominant annuity market. PENSION PROTECTION FUND CIVIL PARTNERSHIPS DISSOLUTION ORDER The Civil Partnership Act 2004 (Commencement No 3) Order 2006 (SI 2006/639) has been laid before Parliament and comes into force on 6th April 2006. It provides for Courts to have regard to Pension Protection Fund compensation when considering the question of financial relief on the dissolution or annulment of a civil partnership or on the legal separation of civil partners. UP-RATING AND GMP INCREASE ORDERS The Government has made the Social Security Benefits Up-rating Order 2006 (SI 2006/645) which provides for the up-rating of social security benefits from different dates in the first week of April. The basic state retirement pension increases to 84.25 per week for a single person and to 134.75 for a married couple. SERPS/S2P is also increased by 2.7%. See also the explanatory memorandum. The Guaranteed Minimum Pensions Increase Order 2006 (SI 2006/673) provides for GMPs attributable to earnings factors for the tax years 1988-89 to 1996-97 to be increased by 2.7%. See also the explanatory memorandum. Page 3 of 6
PENSION PROTECTION FUND CONTINGENT ASSETS REGULATIONS The Pension Protection Fund (Risk-based Pension Protection Levy) Regulations 2006 (SI 2006/672) came into force on 9th March 2006. They provide that, for the purposes of determining the riskbased levy, the Board of the Pension Protection Fund (PPF) may take into account the nature of, and any risks associated with, any arrangements which the Board considers may reduce the risk of compensation being payable from the Pension Protection Fund in the event of an insolvency event occurring in respect of an employer in relation to the scheme. This enables the PPF Board to take account of the various forms of contingent assets they have put forward. See also the explanatory memorandum. PENSION PROTECTION FUND REVIEWABLE MATTERS REGULATIONS The Pension Protection Fund (Reviewable Matters and Review and Reconsideration of Reviewable Matters) (Amendment) Regulations 2006 (SI 2006/685) have been laid before Parliament and come into force on 6th April 2006. Their main purpose is to extend the list of decisions of the PPF Board that are subject to review (see Pensions Bulletin 2005/45 and the explanatory memorandum). MEMBER-NOMINATED TRUSTEES AND DIRECTORS REGULATIONS The Occupational Pension Schemes (Member-nominated Trustees and Directors) Regulations 2006 (SI 2006/714) have been laid before Parliament and come into force on 6th April 2006. They largely follow the draft regulations (see Pensions Bulletin 2005/29) but small insured schemes are now exempt. See also the explanatory memorandum. PENSION PROTECTION FUND LEVY CEILING The Occupational Pension Schemes (Levy Ceiling) Order 2006 (SI 2006/742) came into force on 14th March 2006. It sets the levy ceiling at 775 million for the 2006/07 levy year (as per the draft regulations see Pensions Bulletin 2006/06). See also the explanatory memorandum. PENSIONS TAX SIMPLIFICATION CONSEQUENTIAL AMENDING ORDERS Two Orders have been laid before Parliament that make consequential amendments to existing legislation to ensure consistency with the provisions of the Finance Act 2004, such as replacing references to approved schemes with new references to registered pension schemes. The Orders are: the Taxation of Pension Schemes (Consequential Amendments of Occupational and Personal Pension Schemes Legislation) Order 2006 (SI 2006/744); and the Taxation of Pension Schemes (Consequential Amendments) Order 2006 (SI 2006/745). The first of these paves the way for the commutation of protected rights on retirement of up to 25% of their value. We still await some other anticipated changes to the contracting-out rules (see Pensions Bulletin 2006/08). The Orders come into force on 6th April 2006. See also the explanatory memorandum. PENSIONS ACT 2004 MISCELLANEOUS AMENDMENTS The Occupational and Personal Pension Schemes (Miscellaneous Amendments) Regulations 2006 (SI 2006/778) have been laid before Parliament and come into force on 6th April 2006 (see also the explanatory memorandum). They correct minor and technical errors in various current sets of regulations, together with amendments made in the Pensions Act 2004 and consequential amendments to complement pension tax simplification introduced by the Finance Act 2004. Page 4 of 6
Of particular interest are the following: confirmation that a CEP cannot be paid in relation to early leavers who elect to take a cash transfer sum (see Pensions Bulletin 2006/03); EPBs can be commuted without consent, provided trustees have attempted to contact the member concerned; and a correction to reflect the apparent DWP policy intention that individuals cannot have pension credits on divorce commuted before normal benefit age except on incapacity grounds. SURPLUS PAYMENTS FINAL REGULATIONS The Occupational Pension Schemes (Payments to Employers) Regulations 2006 (SI 2006/802) have been laid before Parliament and come into force on 6th April 2006 (see also the explanatory memorandum). They are concerned with the procedures that must be followed before trustees of either a defined benefit or money purchase occupational pension scheme can make a surplus payment to the employer. The main changes from those issued in draft (see Pensions Bulletin 2006/02) are in relation to money purchase schemes. The definition of ear-marked money purchase schemes has been widened to cover both insurance policies and contracts. A number of administrative requirements for such schemes have also been eliminated such as the requirement for the trustees to notify members and the Pensions Regulator and produce a certificate. NATIONAL PENSIONS DAY HELD LAST SATURDAY The Government held its National Pensions Day on Saturday 18th March 2006 (see also Pensions Bulletin 2006/06) with a representative cross-section of the population asked for their views at satellite-linked events in six cities throughout the UK. At the same time, the ABI published its own contribution to the debate in the form of a short film The Pensions Journey which set out its vision for pension reform, as previously published in Partnership Pensions. TRUSTEE TRAINING PENSIONS REGULATOR S E-LEARNING PROGRAMME The Pensions Regulator has updated its e-learning programme (see Pensions Bulletin 2006/07) for pension scheme trustees. It has added a new module which introduces more complex scenarios such as scheme governance, conflicts of interest and financial difficulties for the employer. The module also begins to consider scheme funding issues and looks at the role of the Regulator. ANNUITIES COMPARATIVE TABLES AND OPEN MARKET OPTIONS The Pensions Institute has published a research paper suggesting that all 100 plus annuity providers in the UK should be required to supply their rates for the FSA s online comparative tables (at present only thirteen do). The paper suggests that a full list of comparative rates could enable consumers to secure 20-30% more in retirement income. It also called for the creation of a new trade organisation of specialist financial advisers which can provide low-cost open market option quotes for all fund sizes, and for the FSA and DWP to publicise this body on their websites and in their consumer literature, in order to make consumers more aware of the open market option. Page 5 of 6
NAPF GUIDE TRUSTEE GOVERNANCE GUIDE The National Association of Pension Funds (NAPF) has published a guide to help trustees assess their own performance and that of their third-party administrators, if they have one. The guide forms part of the NAPF s work to promote high standards of pension scheme governance and aims to help trustees of all sizes of scheme. It covers issue such as trustee skills, implementation of policy, adherence to governance structures and successful relations with scheme professionals. The guide may be of particular interest following the introduction of the internal controls requirement (see Pensions Bulletin 20005/51) later this year. The guide is not available on-line, but can ordered directly form NAPF. PENSIONS TAX SIMPLIFICATION RETIREMENT ANNUITY CONTRACTS NEWSLETTER HM Revenue & Customs has published its fourth retirement annuity contracts newsletter. The newsletters are aimed at retirement annuity contract providers and are concerned with Revenue liaison and other administrative matters. PENSIONS TAX SIMPLIFICATION REGISTERED PENSION SCHEMES MANUAL The downloadable version of the Registered Pension Schemes Manual has been updated by HM Revenue & Customs to incorporate regulations and orders made under the Finance Acts 2004 and 2005 which were laid up to 17th February 2006. PENSIONS TAX SIMPLIFICATION TEN KEY FACTS HM Revenue & Customs has published a press release that sets out ten key facts about what individuals should know about pensions from 6th April 2006. PENSION PROTECTION FUND RISK-BASED LEVY QUESTIONS The Pension Protection Fund has published a series of new FAQs on its website which include: information on how sectionalised (or segregated) schemes will be treated for the 2006/07 levy (see the multi-employer FAQ); guidance on how a scheme notifies the Pension Protection Fund if a transfer has taken place in or out of a scheme since the most recent valuation (see the under-funding FAQ); and an updated FAQ and a brief note on how multiple type A contingent assets can be recognised in the levy calculation (see risk-based levy FAQ). PENSION TAX SIMPLIFICATION FORMS HM Revenue & Customs has issued the final version of forms that individuals need to complete in order to protect their rights at 5th April 2006 ie for primary and enhanced protection and lifetime allowance enhancement factors for certain pension sharing on divorce credits and overseas transfers. This Pensions Bulletin should not be relied upon for detailed advice or taken as an authoritative statement of the law. For further help, please contact Chris Gubby at our London office or the partner who normally advises you. The firm is regulated by the Institute of Actuaries in respect of a range of investment business activities. Lane Clark & Peacock LLP Page 6 of 6