19th March 2009 Issue No: 11 Pensions Bulletin Automatic enrolment Some detail now available The Department for Work and Pensions (DWP) has published a consultation document along with an impact assessment about two sets of proposed regulations that are concerned with implementing the employer duty to enrol from 2012, certain employees into qualifying schemes. The Pensions (Automatic Enrolment) Regulations 2009 are scheduled to come into force from October 2012 and include the following: For occupational pension schemes a window of up to 14 days from the automatic enrolment date (such as when an individual starts a new job) for certain information to be provided and enrolment to occur. For personal pension schemes, FSA rules necessitate a split a 7 day information window followed by a 7 day enrolment window is proposed. A 30 day window that cannot start until the individual has become an active member, during which the individual can then opt out and be treated as if he had never joined the scheme. The Government has chosen 30 days as it wants to limit the risk of refunds (since contributions are calculated from the automatic enrolment date and deducted each time that the payroll is run). Furthermore, in relation to personal pensions 30 days is the maximum permitted by a European Directive. The details of the opt out process (whereby the member obtains a form from the scheme, returns it to the employer which passes it on to the scheme), including a requirement for the employer to then refund the employee s contributions in full (subject to any tax deductions) and the scheme to return the employer s contributions in full (where passed over). The ability of employers to operate a waiting period of up to 90 days before auto-enrolment commences in relation to any qualifying defined benefit scheme and for those qualifying money purchase schemes that have an employer contribution of at least 6% of pay and a total contribution of at least 11% of pay (this will rule out Personal Accounts). This may be of limited assistance to employers operating high quality schemes who also engage some workers on contracts of less than three months. To compensate for the lost contributions for those individuals who do join after the waiting period, they must remain in it for at least 90 days. The Pensions Regulator (Delegation of Powers) Regulations 2009 will enable the Pensions Regulator to delegate specified powers in relation to its role in delivering employer compliance. These delegated powers include the power to issue improvement notices, to recover unpaid contributions or to issue fines. These regulations are scheduled to come into force in the summer of 2009. Two further regulation consultations are planned for spring and summer 2009. These will cover the governing documents for the Personal Accounts scheme followed by the remaining requirements for the www.lcp.uk.com
employer duty, employment safeguards and elements of the compliance regime. Consultation on the above two sets of regulations closes on 3rd June 2009. Comment At last the DWP begins to produce more details about the auto-enrolment requirements. Knowledge of these will be essential for scheme sponsors wishing to plan future pension provision for their employees. However, this first set of draft regulations does not answer many of the most critical questions that will be asked for these we have to wait for the further consultations that are planned. Employers will need to operate very efficient procedures in order to comply with the tight deadlines concerning auto-enrolment set out in the above consultation document. Similarly, employees wishing not to join an auto-enrolment scheme will need to take prompt action to avoid this when starting a new job. This ties in with the Government s intention that many more people should be being provided with workplace pensions, but in some circumstances this may inadvertently upset an individual s existing plans for retirement. At this stage, questions also remain as to what advice can be given to employees concerning auto-enrolment and by whom. For instance, will an employer be penalised for pointing out that employees may lose the means-tested state pension credit benefit if they build up a small pension fund under auto-enrolment and as a result possibly be no better off overall? Disclosure of information Simplification proposed The Department for Work and Pensions (DWP) has published outline proposals whose purpose is to simplify some of the member information requirements placed on pension schemes by regulations, whilst introducing for the first time an overarching principle that disclosure should enable members to make decisions in their best interests. This is the latest development in an issue that has rumbled on for some time. At the end of last year the DWP quietly announced that its intention to replace the current detailed disclosure requirements with a principles-based regime had been abandoned (see Pensions Bulletin 2008/52). It is now clear that not only were there practical drawbacks with an entirely principles-based approach, but the disclosure requirements of the European Pensions Directive had to be set out in national legislation. The consultation proposes a reduction in the number of disclosures in the following areas: Basic scheme information supplied when an individual joins a scheme; The trustees annual report available to members on request; Information sent to members annually such as benefit statements where some unstated simplification is promised; and Statutory Money Purchase Illustrations (SMPIs) where the current requirements are felt to be too prescriptive. Page 2
The consultation document also proposes a consolidation of some of the disclosure requirements and that some unspecified deadlines for providing information will be replaced with reasonable periods which will be set out by the Pensions Regulator in a new Code of Practice. Consultation ends on 6th May 2009. The intention is to implement the new regime by 6th April 2010 but before then to consult on the necessary draft regulations, the success criteria for which include: members receive clear, concise and timely information to enable them to make appropriate decisions (this is broadly speaking, the overarching principle); the total amount of administrative costs incurred across all schemes is reduced; and schemes which are compliant with the current disclosure requirements do not have to make any changes to their procedures. Comment This consultation is very general in nature. Some of the proposals appear sensible, such as explicitly permitting electronic communication to members to meet the requirements. However, it remains to be seen how an overarching principle can be successfully integrated with the prescriptive requirements that will remain, or what simplification will actually be achieved in practice through replacing deadlines in regulations with deadlines in a code of practice. There also appears to be a limited ambition on consolidating disclosure requirements that are spread out over many sets of regulations. Finally, despite their stated success criteria, the DWP will need to overcome a fear within the pensions industry that simplification will in fact result in schemes having to review all their communication processes to ensure continued compliance. PPF acts to reassure fund managers over forced changes to their contracts The Pension Protection Fund (PPF), in conjunction with the fund management industry, has launched a consultation on proposed wording for trustee/fund manager agreements that addresses an issue arising if the scheme transfers into the PPF. The PPF has the power to disclaim or adjust onerous contracts when a transfer notice has been issued (immediately prior to the scheme transferring to the PPF). To prevent the PPF exercising these powers, some fund managers have added a clause in their contracts that terminates the agreement before the PPF can exercise this power. Such premature termination is not generally in the trustees or managers interests. The proposed wording terminates the agreement once the section 143 (PPF entry) valuation has been approved unless the PPF has stated in writing that it will not use the power to disclaim or adjust the contract. Feedback is requested by 8th May 2009. Miscellaneous Pensions Regulations approved The Occupational, Personal and Stakeholder Pensions (Miscellaneous Amendments) Regulations 2009 (SI 2009/615) have been laid before Parliament, implementing a number of minor amendments to pensions Page 3
regulations broadly as set out in a consultation document in December (see Pensions Bulletin 2008/51 and the explanatory memorandum). There are, however, some changes from the draft regulations seen in December. The major ones include: the proposals to extend the circumstances when trivial commutation lump sums can be taken have been dropped presumably this is just a delay in order to tie in with long-awaited easements from HM Revenue and Customs; restrictions in the scope of the proposed statutory override (being brought forward to enable schemes to change their indexation and revaluation provisions, for example to implement the 2.5% inflation cap, where otherwise they would have been blocked); and allowing pension credit benefits to be taken early in the same circumstances as other pension scheme benefits in most arrangements but this is simply the proposals on which the Government consulted last year, which it decided to put off to coincide with the abolition of safeguarded rights (see Pensions Bulletin 2008/36). The majority of the regulations come into force on 6th April 2009, although the ending of the transitional employer-related investment arrangements (which in certain circumstances allowed schemes to hold employer-related investments of more than 5% total assets if they historically have done) comes into force on 23rd September 2010. Notifiable events and financial support directions Changes confirmed The Pensions Regulator (Miscellaneous Amendment) Regulations 2009 (SI 2009/617) have been laid before Parliament and confirm changes to the notifiable events regime and the Pensions Regulator s powers to issue financial support directions as set out in the consultation document issued in December (see Pensions Bulletin 2008/52). The Government s consultation response and the explanatory memorandum have also been published. The regulations come into force on 6th April 2009. Abolition of Safeguarded Rights Removal from regulations The Department for Work and Pensions has made the Pensions Act 2008 (Abolition of Safeguarded Rights) (Consequential) Order 2009 (SI 2009/598) with explanatory memorandum which removes references to safeguarded rights from regulations following the abolition of safeguarded rights from 6th April 2009 (see Pensions Bulletin 2009/04). 2009/10 low earnings threshold for State Second Pension set The Social Security Pensions (Low Earnings Threshold) Order 2009 (SI 2009/610) confirms the Low Earnings Threshold (LET) for 2009/10 as 13,900 (see also the explanatory memorandum). Page 4
The LET forms the earnings boundary between the 40% and 10% accrual segments of the State Second Pension (S2P). Consequently, the upper threshold (the boundary between the 10% and 20% accrual segments of S2P) should be 31,800. Revaluation of earnings factors Section 148 orders The rates of revaluation for the 2009/10 tax year for SERPS/S2P benefits accrued in each of the tax years 1978/79 to 2008/09 have been confirmed. Such revaluation also applies to GMPs accrued between 1978/79 and 1996/97, other than for early leavers where alternative forms of revaluation are permissible. The earnings factors are contained within the Social Security Revaluation of Earnings Factors Order 2009 (SI 2009/608). 2008/09 earnings are uplifted by 3.1% (see also the explanatory memorandum). NI contribution limits and Social Security benefits confirmed for 2009/2010 The Social Security (Contributions) (Amendment No. 2) Regulations 2009 (SI 2009/591) and the Social Security Benefits Up-rating Order 2009 (SI 2009/497), have now been formally approved by Parliament. They provide statutory confirmation of the National Insurance contributions bands and various social security benefit rates respectively (see Pensions Bulletin 2009/05). Responsible Investment NAPF guidance The National Association of Pension Funds (NAPF) has published new guidance on responsible investment, intended to update its Corporate Social Responsibility guidance issued in 2005 (see Pensions Bulletin 2005/34) and to assist investors, particularly pension funds, in the development of their own policies in this area. 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 David Everett at our London office or the partner who normally advises you. Page 5