Pensions and Employment: Pensions Bulletin 7 NOVEMBER, 2013 ISSUE 18 Legal and regulatory developments in pensions In this issue NEW LAW POINTS IN PRACTICE There is no Employment Bulletin this week. Pensions Bill 2013: Update...more Regulator s statement on double counting...more Meaning of Money Purchase Benefits DWP Consultation on Charging TAX Pensions Liberation: update...more...more...more Master trust draft assurance framework published PPF annual report 2012/13 MISCELLANEOUS Pensions Law Update Seminar...more...more...more Back issues can be accessed by clicking here. To search them by keyword, click on the search button to the left. Find out more about our pensions and employment practice by clicking here. For details of our work in the pensions and employment field click here. For more information, or if you have a query in relation to any of the above items, please contact the person with whom you normally deal at Slaughter and May or Rebecca Hardy. To unsubscribe click here.
New Law Pensions Bill 2013: Update A. Overview 1. The Pensions Bill 2013 underwent the third reading and report stage in the House of Commons on 29th October, 2013. A number of Government amendments were discussed and accepted. 2. The Bill, reprinted to reflect the House of Commons amendments, moves to the House of Lords. Royal assent is expected in Spring 2014. 3. The Bill: 3.1 introduces the single-tier state pension and consequent abolition of DB contracting-out with effect from 6th April, 2016, 3.2 brings forward the increase in state pension age to 67 for those born on or after 6th April, 1960, 3.3 establishes a framework for future changes to be made in light of increasing life expectancy, 3.4 provides for a system of automatic transfers of small pension pots, 3.5 introduces a new statutory objective for the Pensions Regulator to take account of sustainable growth for employers, 3.6 makes changes to the auto-enrolment legislation, including a regulation-making power to allow the exclusion of certain categories of jobholder, 3.7 introduces a power to prohibit transfer incentives in relation to transfers from salary-related schemes, and 3.8 provides increased PPF compensation for long servers. B. Amendments The latest amendments reflect concerns expressed by the pensions industry. 1. Administration charges: 1.1 A regulation-making power to limit or prohibit charges and to impose governance and administration in workplace pension schemes is included. The intention is to ensure that the Government has the ability to apply the same standards to a broad set of schemes, in particular those that are closed to new members or new accruals. 1.2 The proposed amendment follows the OFT report on the market for DC workplace pension schemes which raised particular concerns about standards in legacy schemes. Comment: The DWP separately published a consultation paper (see below) on whether a charging cap should be introduced in autoenrolment qualifying schemes. 2. Employer override provisions reflecting the loss of the NI rebate following abolition of DB contracting-out: amendments make it clear that the override power applies only to changes that affect active members (new and existing), not deferreds or pensioner members. 3. Abolition of short service refunds in money purchase schemes: a 30-day vesting period for short service benefit will apply to all DC schemes, to align with the 30-day cooling off period in contract-based schemes. Consolidated Disclosure Regulations laid A. Overview 1. The regulations consolidating the principal disclosure regulation for occupational and 2
personal pension schemes 1 have been laid before Parliament and come into force on 6th April, 2014. 2. The regulations also simplify the legislation governing basic scheme information, annual benefit statements and statutory money purchase illustrations ( SMPIs ). 3. The majority of the proposed amendments are permissive, the exception being a new requirement to provide additional information on lifestyling where applicable. 4. The DWP is considering whether additional guidance would be helpful. B. Personal Pension Schemes 1. Much of the disclosure legislation currently applicable to personal pension schemes is not carried forward into the consolidated regulations. 2. The only requirements carried forward are: 2.1 those relating to annual benefit statements, including SMPIs, 1 The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 (SI 2013/2734). 2.2 the requirement to provide pre-retirement information, 2.3 the requirement to provide information on benefits on the death of a member or beneficiary, and 2.4 the requirement to provide information when the scheme has begun to wind-up. C. Timescales 1. Where possible, the timescales for disclosing information have been harmonised across all scheme types. The time limits for providing basic scheme information are unchanged. For those being auto-enrolled, the information must be given within 1 month of the date the trustees receive the jobholder information from the employer. For those not being auto-enrolled, the information must be given within 2 months of the date the member joins the scheme. 2. The majority of the proposed changes will not require schemes to provide information any earlier than is currently required, so schemes will not need to make any changes to existing procedures unless they wish to do so. D. Changes to information to be disclosed 1. The following changes are made in relation to basic scheme information. 1.1 Simplification of the rules about when occupational schemes must give information about material alterations to basic scheme information. This information must be given as soon as possible, and no later than 3 months, after the decision to make the change has been made. Comment: The current requirement is to provide the information before the change takes effect where practicable, and in any event within 3 months of the change taking effect. 1.2 To require that only basic information on transfers out needs to be provided to new members, with a statement that more detailed information is available on request. Comment: The current requirements for information on transfers-out are detailed, and unnecessarily complex for new members. 1.3 A new requirement to inform members about lifestyling (i.e. where the money invested closer to retirement is moved 3
gradually to less volatile investments). Both occupational and personal DC schemes that use lifestyling will be required to provide members and prospective members as part of the basic scheme information with a statement explaining what lifestyling is, and from when it will be adopted. 1.4 This information must also be provided between 5 and 15 years before retirement. Comment: The regulations define lifestyling as an investment strategy that aims progressively to reduce the potential for significant variation caused by market conditions in the value of the member s rights. The DWP says it intends the requirement to apply to all types of lifestyling, including the use of target date funds. 2. SMPIs are simplified so as to remove the specific annuity requirements. Schemes will no longer have to assume the purchase of an annually increasing annuity and provision of a dependant s pension. According to the DWP, schemes will be able to choose the most appropriate assumptions for their members based on their knowledge of the member s individual situation. The regulations also allow members to chose their own assumptions should they wish to do so. 3. There is an exemption from the requirement to issue a benefit statement in respect of money purchase benefits for members in respect of whom no contributions have been made by the end of the scheme year, or who are in an autoenrolment opt-out period. E. Electronic communications 1. The regulations simplify the requirements for electronic communications. But members will still be able to opt-out of receiving information electronically, and those who were members on 1st December, 2010 must, as at present, be notified of the scheme s intention to provide information electronically and their ability to optout. 2. The DWP proposes to extend the ability to use electronic communications to the disclosure requirements in other DWP regulations such as those relating to contracting out, transfersout, winding-up, scheme funding, employer consultation and pension sharing on divorce. Comment: All the changes, apart from the requirement to provide information on lifestyling, are permissive; schemes need only change existing procedures to take advantage of them if they want to. Meaning of money purchase benefits : draft regulations published 1. On 31st October, 2013, the DWP published draft regulations (running to 55 pages) providing transitional measures supporting Section 29 of the Pensions Act 2011 ( Section 29 ), which clarifies the definition of money purchase benefits following the Supreme Court judgment in Bridge Trustees v. Houldsworth ( Bridge ) (Pensions Bulletin 11/12). 2. The regulations will have an impact on schemes which include: 2.1 cash balance benefits treated as money purchase benefits, or 2.2 pensions derived from money purchase benefits or cash balance benefits that have been treated as money purchase benefits. 3. The regulations will have no impact on schemes that regard themselves as offering only defined benefits. 4. The focus accompanying this Bulletin examines the proposals in more detail. 4
DWP Consultation on Charging A. Overview 1. This was published on 30th October, 2013, following the OFT s September, 2013 report into DC workplace pensions. It examines whether the pensions industry can be relied on to address the issues identified by the OFT or whether the Government should intervene. B. Consultation 1. The DWP is consulting on: 1.1 whether further action is required to improve disclosure of information about pension scheme charges. Options include: 1.1.1 widening the disclosure requirements to include information about charges in the basic scheme information and annual benefit statement, 1.1.2 introducing a standard framework for the disclosure of costs and charges to employers, and 1.1.3 requiring disclosure of transaction costs to members, employers and trustees, 1.2 whether a cap on pension scheme charges should be introduced for all members, active and deferred, of default funds in qualifying DC schemes. The proposed cap would initially apply only to those employers whose auto-enrolment staging date is from April, 2014 onwards. The cap would then be extended by April, 2015 to include all employers who have staged from October, 2012 up to and including March, 2014, 1.3 the Government is considering 3 options for capping charges: 1.3.1 a charge cap of 1% of funds under management, reflecting the current stakeholder pension cap, 1.3.2 a lower charge cap of 0.75% of funds under management, reflecting the charging levels already achieved by many schemes, and 1.3.3 a 2-tier comply or explain cap, with a standard cap of 0.75% of funds under management for all default funds in DC qualifying schemes and a higher 1% cap available to employers who explain to the Pensions Regulator the reason for levying charges in excess of 0.75%, 1.4 introducing a ban on differential charging between active and deferred members in DC qualifying schemes, to take effect for schemes put in place for employers staging from April, 2014. The DWP is interested in views on transitional arrangements for dealing with schemes in place prior to this date, 1.5 extending the ban on consultancy charges that currently applies only to autoenrolment schemes to all qualifying DC schemes, and 1.6 banning adviser commissions in qualifying schemes set up prior to the introduction of the retail distribution review. 2. The consultation paper, on which comments are invited by 28th November, 2013, is on the DWP website. Comment: The OFT report found that the average charge level in new contract-based schemes and bundled trust schemes was 0.51% for schemes set up in 2012. But NEST currently levies an annual management charge of 0.3% and a contribution charge of 1.8% and DWP research shows that 6% of employers with trust-based schemes report an annual management charge of more than 1%. 5
Tax Pensions liberation: update Two developments since our last Bulletin should make life easier for trustees concerned about inadvertently making transfers to pension liberation vehicles. A. HMRC tightens its registration procedures 1. On 21st October, 2013, HMRC announced changes, with immediate effect, to its registration and confirmation of registration procedures. 2. Registering a pension scheme: Registration will no longer be confirmed automatically. 3. From 21st October, 2013, when an application has been submitted, the applicant will get a message confirming that submission has been successful. At this point the scheme is not registered so: 3.1 contributions will not qualify for tax relief, and 3.2 transfers received from another registered pension scheme will be an unauthorised payment. 4. HMRC will review the application and may ask further questions or request additional information before deciding if the scheme can be registered. 5. If the pension scheme: 5.1 can be registered HMRC will confirm the date of registration (the date the decision is made by HMRC and from which the pension scheme qualifies for tax relief and exemptions), 5.2 cannot be registered HMRC will give reasons for its decision, against which the applicant may appeal. 6. Transfer requests: From 21st October, 2013, HMRC will only confirm the registration status of a receiving scheme where: 6.1 the scheme is registered, and 6.2 HMRC has no information to suggest that there is a significant risk of the scheme being set up or used to facilitate pension liberation. 7. HMRC will respond to requests for information without seeking consent from the receiving scheme. 8. HMRC warns: 8.1 that checking with HMRC should not be the only check that the scheme carries out and relies on. The scheme should make further checks to satisfy itself before making a transfer, and 8.2 any confirmation provided is not to be taken as a recommendation of the scheme or product by HMRC. 9. Other information: Also on 21st October, 2013, HMRC and the Pensions Regulator jointly published a factsheet with more information on their work to combat pension liberation. 10. Points to note are: 10.1 the Pensions Regulator is involved in a number of ongoing High Court cases (see below) in a bid to disrupt those pension liberation models that pose the most risk. In addition, it has used its powers to freeze assets, and to appoint independent trustees to take control of suspect schemes, and 10.2 the Regulator is working with the DWP to explore whether changes to legislation should be made. 6
The updated information is on HMRC s website. B. Pensions liberation scheme is an occupational pension scheme : Pi Consulting (Trustee Services) Limited v. The Pensions Regulator 1. Overview 1.1 On 23rd October, 2013, the High Court (Morgan J) decided that 9 suspected pension liberation schemes were occupational pension schemes within the definition in Section 1 Pension Schemes Act 1993 (the definition ). 1.2. As a consequence, the appointment by the Pensions Regulator of independent trustees to the scheme was valid. 1.3. The parties had agreed that the Court would not decide whether the schemes were in fact fraudulent pension liberation vehicles. 2. Background 2.1. Although the case concerned 9 schemes alleged to be pension liberation vehicles, for the purposes of the hearing only 2 schemes (the 5G Futures Scheme and the Ironstream Scheme) were considered on the basis they were representative of the other 7. 2.2. The 5G Futures Scheme was established by written agreement in June, 2008 with 1 corporate and 2 individual trustees and 5G Futures Limited being described as the provider. In May, 2013, the Pensions Regulator suspended the 3 trustees and appointed Pi Consulting (Trustee Services) Limited as independent trustee. 2.3. The Ironstream Scheme was established by a deed dated 10th December, 2012 and made between Ironstream Limited as the provider and Nidd Vale Trustees Limited as the trustee. In May, 2013, Dalriada Trustees Limited was appointed as an independent trustee. 2.4. Concerns arose that the schemes may not be occupational pension schemes. If the scheme was not on occupational pension scheme, the Regulator s power to appoint trustees would not apply to it. 2.5 As an interim measure, Pi and Dalriada were granted orders by the High Court appointing them as trustees of the schemes under the Court s inherent jurisdiction. Pi and Dalriada then sought orders from the Court that the 2 schemes were occupational pension schemes. 3. Judgment 3.1 The Court identified 2 main issues in relation to each scheme: 3.1.1 the purpose issue i.e. was the scheme established for the purpose of providing benefits to, or in respect of, people with service in employments of a description or for that purpose and also for the purpose of providing benefits to, or in respect of, other people as required by the definition, and 3.1.2 the founder issue i.e. whether the scheme was established by, or by persons who included, a founder who employed persons within the definition. 3.2 Morgan J ruled that the 9 schemes were occupational pension schemes. 3.3 So far as the purpose issue was concerned, in each case, the question for the Court was whether the purpose of the scheme fell within the purposes identified in the definition. It was not whether the parties called the scheme an occupational pension scheme or something else, nor what the scheme s governing documents suggested were the parties beliefs at the time the scheme was established. Here the Court found that the purpose of each scheme as expressed in the language of the 7
scheme, on its true construction, came within the definition. 3.4 On the founder issue, the Court held that the founder here did employ a person within the definition at the time when each scheme was established. The judge noted that the statutory language plainly required an employment link of some sort, although it was somewhat surprising to find that the employment link required was relatively weak and insignificant. Comment: Trustees of registered occupational pension schemes are obliged to make a transfer to another registered pension scheme where the member is exercising his statutory right so long as the trustees of the receiving scheme are able and willing to accept the transfer payment. There are 3 hurdles to overcome: the receiving scheme must be an occupational pension scheme, the trustees must be able and willing to accept the transfer payment, and the member must acquire transfer credits. The effect of the High Court decision in Pi Consulting, giving a broad interpretation of occupational pension scheme, means that it is more difficult for transferring trustees to decline to make a transfer to such a scheme on the grounds the scheme is not an occupational pension scheme. But the receiving scheme must still be able and willing to accept the payment and the receiving scheme must provide transfer credits. In addition, all the other applicable requirements in the Pension Schemes Act 1993 and the Occupational Pension Schemes (Transfer Value) Regulations 1996 must be met. Action point: In addition to the other precautions that trustees are taking on transfer value requests, where the transfer is to another occupational pension scheme trustees should now check the registration status of the receiving scheme with HMRC; HMRC will now give confirmation only if it has no information to suggest there is a risk of pension liberation. Please get in touch with your usual pensions contact at Slaughter and May for more information on the precautions trustees should take to ensure they get a good discharge on a transfer. Points in Practice Regulator s statement on double counting A. Overview 1. On 25th October, 2013, the Pensions Regulator issued a statement that a payment under a schedule of contributions cannot be used to settle a Section 75 debt (or vice versa). 2. The Regulator claims this double counting of payments is not permitted by pensions legislation and that where it becomes aware of it, it will raise the issue with the trustees and expect it to be addressed. 3. The Regulator says the statement does not represent a shift in the Regulator s stance, referring to the following statement in its multiemployer schemes and employer departures guidance: The Section 75 debt of an employer is a discontinuance debt and is distinct from ongoing funding obligations. Care should be taken not to double count deficit payments paid as part of a recovery plan as payments towards Section 75 debts, or vice versa. A recovery plan should reflect the covenant of the employer whereas a Section 75 debt is often a result of an event that changes the covenant. 8
B. Statement 1. The statement sets out the risks and implications of double counting, noting the Regulator s view that discharging an obligation arising under the ongoing scheme funding requirements or the Section 75 debt requirements does not extinguish an obligation that arises under the other. 2. The statement sets out what the Regulator sees as the correct approach on an employer departure, being: 2.1 trustees should carry out appropriate analysis of the impact of the departure on the employer covenant of the scheme, 2.2 as a starting point the trustees should consider whether the departing employer should pay its full Section 75 debt, 2.3 if the trustees reasonably believe that payment of the employer s full debt is not necessary or possible, then instead of seeking to double count the scheme funding payments, the trustee may consider legislative mechanisms which modify Section 75 debts or even prevent them from arising. Whether these mechanisms are available and appropriate will depend upon the circumstances at the time, including the impact on employer covenant, and 2.4 whether or not the employer s Section 75 debt is paid in full, trustees may conclude that an employer departure is detrimental to the scheme and may require mitigation over and above the payment of its Section 75 debt. The trustees should discuss this with the employers. 3. Once the trustees have assessed the impact of the employer departure and any mitigation received, including payment of the Section 75 debt, they may consider that there is still a detriment to the covenant s strength. They also need to consider whether the investment strategy and funding plans are still appropriate, considering both any increase in the scheme s assets (resulting from the payment of the Section 75 debt or other mitigation) and any deterioration in covenant. This may lead to a decision to revise the existing recovery plan, schedule of contributions and/or statement of funding principles. In some cases it may be appropriate for the trustees to call for an early valuation. 4. The Regulator says its statement applies equally to past occurrences of double counting. 5. Where double counting is not addressed, the Regulator says it may consider the use of its powers, for example those relating to moral hazard, scheme funding and governance, including the removal or appointment of trustees. Attempts to double count are, in the Regulator s view, reportable matters and may be notifiable events. 6. The statement is on the Regulator s website. Comment: The Regulation s statement is, in our view, misconceived. As a matter of law, there is no objection to a properly drafted schedule of contributions providing: for deficit reduction contributions to be payable over the specified recovery period, but for any Section 75 debt that is paid in full in relation to a departing employer to be set off against future payment obligations under the schedule of contributions on a for basis. It is a matter for the trustees, when agreeing to the schedule of contributions, to consider: the overall strength of the employer covenant, the existence of any guarantees from group companies, and whether the transaction giving rise to the Section 75 debt results in assets leaking 9
from the part of the employer group that has the legally binding commitment to fund the scheme. We understand that a number of other law firms share our view. This is a case of the Pensions Regulator making guidance which damages its reputation and diverts attention away from the real issue that the Regulator is quite properly seeking to address. Master trust draft assurance framework published A. Overview 1. On 16th October, 2013, the Pensions Regulator and ICAEW jointly published a framework for master trusts to obtain independent assurance to demonstrate the presence of governance and administration standards that meet the Regulator s DC Code and DC regulatory guidance. 2. A master trust is defined by the Pensions Regulator as an occupational trust-based pension scheme which is or has been promoted to provide benefits to employers which are not connected and where each employer group is not included in a separate section with its own trustees. 3. The framework was referred to in the Regulator s strategy for occupational DC trust-based schemes published on 3rd October, 2013 (Pensions Bulletin 13/17). 4. The provision of a trustee report or independent assurance report is not mandatory but the Regulator expects independent assurance to be carried out annually by all master trusts once the framework goes live in 2014. B. Framework 1. The independent assurance framework focuses on 6 key areas: 1.1 the essential characteristics: schemes should be designed to be durable, fair and deliver good outcomes for members, 1.2 establishing governance: a comprehensive governance framework should be established at set up, with clear accountabilities and responsibilities agreed and made transparent, 1.3 people: those who are accountable for scheme decisions and activity should understand their duties and be fit and proper to carry them out, 1.4 ongoing governance and monitoring: schemes should benefit from effective governance and monitoring through their full life cycle, 1.5 administration: schemes should be well administered with timely, accurate and comprehensive processes and records, and 1.6 communication to members: communication to members should be designed and delivered to ensure members are able to make informed decisions about their retirement savings. 2. Although the framework has been developed for master trusts, the Regulator believes that other large DC schemes may want to adopt it as best practice. The consultation paper, on which comments are invited by 16th December, 2013, is on the Regulator s website. PPF annual report 2012/13 This was published on 29th October, 2013. Points to note include: during 2012/13, 43,904 people transferred to the PPF, making a total of 172,018 people who have transferred since the PPF began, 10
at the end of 2013, there were 223 schemes in a PPF assessment period with assets of 5 billion and liabilities of 6.5 billion, by 31st March, 2013, the PPF was 1.8 billion in surplus, up from 1.07 billion in March 2012, a funding level of 109.6% compared with 106.9% in 2012, by 31st March, 2013, the PPF was 87% confident of meeting its target of being financially selfsufficient by 2030, and investment assets grew from 11.1 billion at 31st March, 2012 to 14.9 billion at 31st March, 2013 and the PPF s investment strategy delivered an overall return of 11.1%. Also on 29th October, 2013, the PPF published its long-term funding strategy update, noting the risks to the PPF over the long-term with scheme deficits, as measured by the PPF s 7800 Index, being at record levels. Both documents are on the PPF website. Miscellaneous Pensions Law Update Seminar An invitation to our next Pensions Law Update Seminar, which takes place on Wednesday 13th November, 2013, between 9.30 am and 1 pm, accompanies this Bulletin. 518104096 11
Meaning of money purchase benefits : draft regulations published A. Overview 1. On 31st October, 2013, the DWP published draft regulations (running to 55 pages) providing transitional measures supporting Section 29 of the Pensions Act 2011 ( Section 29 ), which clarifies the definition of money purchase benefits following the Supreme Court judgment in Bridge Trustees v. Houldsworth ( Bridge ) (Pensions Bulletin 11/12). 2. The regulations will have an impact on schemes which include: 2.1 cash balance benefits treated as money purchase benefits, or 2.2 pensions derived from money purchase benefits or cash balance benefits that have been treated as money purchase benefits. 3. The regulations will have no impact on schemes that regard themselves as offering only defined benefits. 4. The judgment in Bridge found that: 4.1 benefits subject to a guaranteed interest rate, and 4.2 money purchase benefits which had been converted into a scheme pension remained money purchase benefits, raising the possibility that a deficit could arise in relation to such benefits. 5. Section 29 inserts a new section 181B into the Pensions Scheme Act 1993 to ensure that a benefit is only money purchase when it is calculated solely by reference to the assets i.e. the assets must always suffice to meet the liabilities. 6. The scheme funding requirements and PPF protect members of schemes offering benefits that are non-money purchase against the risk that their scheme is not able to meet the pension promised or guaranteed to a scheme member. 7. The decision in Bridge was counter to the DWP s view that money purchase benefits were benefits where there was no risk of a funding deficit, in line with the decision of the Court of Appeal in AON Trustees v. KPMG in 2005. B. Section 29 1. Immediately following the Supreme Court judgment, the Government published a statement noting it intended to introduce legislation as soon as practicable to ensure appropriate protection for scheme members benefits to ensure that a deficit could not arise in relation to those benefits. 2. The amendments made by Section 29 will take effect from 1st January, 1997 when the section is commenced, expected to be on 6th April, 2014. The regulations are also expected to come into force on 6th April, 2014. C. The Regulations 1. The Government recognises that schemes may have had a different understanding of money purchase benefits in the past. As a consequence, the draft regulations make transitional, supplementary and consequential changes to: 1.1 give schemes give time to comply with Section 29 and meet the necessary legal and funding requirements attached to what are now non-money purchase benefits, 1.2 ensure that, in most circumstances, past decisions do not have to be revisited, and 1.3 ensure other pensions legislation is aligned with Section 29. 12
2. The draft regulations are intended to remove the requirement for schemes to revisit decisions made from 1997 to 27th July, 2011, the date of the DWP statement following Bridge. D. The type of scheme affected 1. The DWP believes that most schemes affected by the change to the definition will be hybrid schemes i.e. those where benefits have any of the following features: 1.1 a guarantee in the accumulation phase, including, for example, a promise of an amount linked to salary, or a guaranteed interest rate, or 1.2 a pension in payment by the scheme derived from money purchase benefits or cash balance benefits, unless this is backed by a matching insurance policy. E. Winding up 1. Schemes that: 1.1 began winding-up on or before 27th July, 2011, or 1.2 began winding-up after 27th July, 2011 and that completed winding-up by 6th April 2014 will not have to revisit past decisions unless members entitlements under a scheme have not been met in full, or the former trustees take the view that assets may be obtained by re-opening the employer debt calculation. 2. The regulations are intended to align with the law in force at the date and time that the wind-up began i.e. whether before or after 6th April, 2005, the date on which the PPF commenced operations and the priority order for scheme wind-ups under Section 73 Pensions Act 1995 changed. 3. Schemes that entered a PPF assessment period before 6th April, 2014 and that, at the end of the assessment, have wound up, or are continuing to wind-up, outside the PPF, may, subject to a direction by the PPF Board, treat the benefits as money purchase. F. Employer debt legislation 1. Trustees will not have to revisit employer debt events occurring on or before 27th July, 2011. They will be required to reopen employer debt events occurring in the period between 28th July, 2011 and 5th April, 2014 unless particular conditions are met. 2. Section 29 has effect from 1st January, 1997 and will validate all employer debt decisions made where schemes have treated cash balance benefits, or scheme pensions derived from cash balance benefits or money purchase benefits, as non-money purchase benefits and which are therefore subject to employer debt requirements. The DWP anticipates that most schemes will fall into this category and will not be required to do anything once Section 29 is commenced. 3. The regulations provide transitional protection for schemes where an employer debt event has occurred on or before 27th July, 2011 and the benefits of the scheme were treated as money purchase. To avoid such schemes being required to recalculate all employer debts due since 6th April, 1997, the regulations validate employer debt calculations for hybrid schemes made during the period 6th April, 1997 to 28th July, 2011. 4. Schemes that have experienced an employer debt event between 27th July, 2011 and 5th April, 2014 should, in the DWP s view, have been aware of the DWP s intention to legislate following Bridge and so should calculate the debt on the new Section 29 basis. 13
5. The following exceptions to the requirement to recalculate apply: 5.1 the scheme has entered a regulated apportionment arrangement or approved withdrawal arrangement, (but see 6. below), 5.2 the trustees are satisfied that recalculation would make members less likely to receive their full benefit entitlement, or 5.3 the trustees are satisfied that the recovery of the debt could not be made without disproportionate cost. 6. For schemes that have entered into scheme apportionment arrangements, withdrawal arrangements or flexible apportionment arrangements on or after 28th July, 2011 that included benefits affected by Section 29, the trustees must consider whether the funding test will continue to be met in light of the additional non-money purchase liabilities. 7. If the funding test is not met, the regulations provide for additional liabilities to be allocated in proportionate amounts between the remaining employers and guarantors unless the parties choose to enter into a new agreement. 8. Schemes that have undertaken a regulated apportionment arrangement or an approved withdrawal arrangement with the Pensions Regulator will not have to revisit those arrangements because the DWP believes the Regulator will already have ensured a fair debt determination. G. Scheme Administration 1. Money purchase schemes are exempted from the requirement that occupational pension schemes appoint an actuary. When Section 29 comes into force, any scheme that had been considered to be money purchase and will now be treated as non-money purchase could be in breach of this requirement. 2. The regulations therefore provide transitional protection for such schemes. They will be treated as if they were money purchase schemes in relation to periods up to 6th April, 2014. They will not be required to appoint an actuary until 3 months after the coming into force of the regulations. H. PPF 1. Schemes that are already eligible for the PPF and paying the pension protection levy will not need to revisit past valuations. 2. Schemes that become eligible for the PPF as a result of Section 29 will need to submit their first valuation by 31st March, 2015 and will pay the levy from 2015/2016. I. Scheme Funding 1. The regulations modify the effect of Section 29 on schemes that have treated non-money purchase benefits as money purchase before 6th April, 2014. Schemes will not have to undertake or revisit scheme funding valuations in relation to past periods. 2. Where schemes become subject to the scheme funding requirements on the commencement of Section 29, the DWP proposes that the existing money purchase schedule of contributions will continue in force with full effect until the trustees prepare the scheme s first schedule of contributions under the scheme funding regime. 3. This must be within 15 months of the effective date, which must be a date that is not more than one year after the commencement of Section 29. 4. When Section 29 comes into force, some schemes that have previously classified themselves as entirely money purchase will no longer have to prepare a schedule of payments but will instead have to prepare a schedule of contributions. The 14
DWP anticipates there will be no administrative difficulties in such a move, the only difference being that the new schedule of contributions will have to be certified by an actuary as meeting the scheme funding requirements. J. Disclosure 1. With the coming into force of Section 29, some schemes currently operating as providing purely money purchase benefits could be classified as providing some non-money purchase benefits and so may need to provide information to members where they have not previously done so. 2. Affected schemes will not be required to give this information before 6th April, 2014 and will not be subject to civil penalties if the information is not provided. The consultation paper and draft regulations, on which comments are invited by 12th December 2013, are on the DWP website The DWP also intends to hold stakeholder forms. Anyone wishing to take part should contact the DWP by 15th November, 2013. The NAPF has also organised a meeting with the DWP on 20th November, 2013 for those of it members who are affected by Section 29. Comment: Any money purchase scheme that has paid AVCs or other money purchase contributions as scheme pension, or that guarantees or underpins an investment return on members DC accounts, even where such schemes have been, or are in the process of being, wound up, will need to consider the impact of the proposed transitional relief on their schemes. It hardly needs to be said that the rules are complex. Such schemes need to consider as a matter of urgency how the draft regulations may affect them. 15
This Bulletin is prepared by the Pensions and Employment Group of Slaughter and May in London. We advise on a wide range of pension matters, acting both for corporate sponsors (UK and non-uk) and for trustees. We also advise on a wide range of both contentious and non-contentious employments matters, and generally on employee benefit matters. Our pensions team is described in the 2012 edition of The Legal 500 as extremely knowledgable and as having strength in depth. Our recent work includes advising: The Trustee of the General Motors UK Retirees Pension Plan, on the surrender in October, 2012 of 2 insurance policies and the purchase of a bulk purchase annuity policy with Rothesay Life. The transaction covered all or substantially all of the Plan s benefit obligations and had an aggregate value of approximately 230 million The Trustee of ConocoPhillips Pension Plan, on the UK pensions issues arising from the demerger of the ConocoPhillips downstream oil business in May, 2012, including establishment of a new mirror image defined benefit pension scheme for the downstream UK business. ConocoPhillips is a US company and a number of crossborder issues arose from the pension demerger as a result. We coordinated our advice on these issues with legal advice from Cravath Swaine & Moore in the US Global Infrastructure Partners, on the establishment of the Edinburgh Airport Pension Plan, a new defined benefit scheme, in June, 2012 Unilever Plc on a benefit change exercise in June, 2012 involving the closure of the final salary section of the Unilever UK Pension Fund and the provision of future benefits under the career average and defined contribution sections of the Fund Having advised Marks and Spencer plc on the master trust arrangement which provides an overarching framework under which multiple pension schemes from different companies can operate, we have subsequently advised other clients on these arrangements. GlaxoSmithKline plc on an arrangement under which from 1st April, 2013 increases in basic salary for employees in one of its defined benefit pension plans are capped at 2% pa. Pay increases which would otherwise have been awarded above that 2% pa level take the form of a non-pensionable salary supplement. If you would like to find out more about our Pensions and Employment Group or require advice on a pensions, employment or employee benefits matters, please contact Jonathan Fenn jonathan.fenn@slaughterandmay.com or your usual Slaughter and May adviser. London T +44 (0)20 7600 1200 F +44 (0)20 7090 5000 Brussels T +32 (0)2 737 94 00 F +32 (0)2 737 94 01 Hong Kong T +852 2521 0551 F +852 2845 2125 Beijing T +86 10 5965 0600 F +86 10 5965 0650 Published to provide general information and not as legal advice. Slaughter and May, 2013. For further information, please speak to your usual Slaughter and May contact. www.slaughterandmay.com