Pensions Newsletter October 2011
Inside this issue:
Have you identified your statutory employer?
From 1st November 2011 information on a scheme’s statutory employers will require to be included in the scheme return.
In advance of this and in recognition of the fact that the definitions contained in the Pensions Acts 1995 and 2004 are complicated, the Pensions Regulator has embarked on an exercise intended to assist trustees with the process of identification. This was initiated with a statement issued in July and more recently, due to concerns received from practitioners regarding practical difficulties, with an online bitesized learning module for trustees intended to guide the process.
The ultimate impact of a scheme “losing” its statutory employers is that the scheme may no longer be eligible for protection under the PPF or the FAS.
Not all employers associated with a scheme will fall into the definition of being statutory employers and it is not necessarily the case that an employer paying contributions to the scheme will be a statutory employer.
Depending on the status of the scheme it may be fairly simple to indentify the statutory employers. Generally speaking if a scheme is open and has active members then the current employers of those members will fall into the definition of being statutory employers. This does not however mean that the trustees need not take any further steps. They should still investigate any former employers under the scheme as they may still have liabilities too.
If a scheme is closed to future accrual the position may be more complicated and the Regulator recommends seeking legal advice in relation to this.
The Regulator also recommends seeking legal advice on the impact of recent case law. In particular the case of PNPF Trust Co Ltd v Taylor which is generally referred to as “the Pilots case” and which is relevant to the interpretation of the definition of statutory employer as the judgement held that an employer included somebody who employed employees which were eligible to join the scheme.
The Pilots case is currently subject to an appeal which is due to be heard on the 17th November so advice received may require to be reviewed depending on the outcome of this appeal.
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Update on the Pensions Bill 2011
The 3rd reading in the House of Commons on the 18th October saw more amendments being made to this Bill in relation to state pension age for women, scheme management charges and implementation of a new definition of money purchase benefits further to the outcome of the case of Houldsworth & Anor v Bridge Trustees Ltd which we reported on in our August Newsletter.
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Bridging the Gap
By way of reminder, the Bridge Trustees case determined that to fall within the definition of being money purchase benefits there was no requirement that a schemes asset's match up exactly with its corresponding liabilities. As a result there could effectively be a shortfall in the scheme, and this could also still fall outwith the scheme specific funding regime and employer debt legislation and mean that members of such schemes are not protected by the PPF or FAS.
The DWP announced their intention to legislate to negate the effect of this decision and as a result the Bill now includes an amendment which will see a new interpretative section inserted into the Pensions Act 1993.
The new section 181B, which will have retrospective effect from 1 January 1997 (intended to broadly tie in with the commencement of the Pensions Act 1995 and the start of the Financial Assistance Scheme), sets out that a benefit (other than a pension in payment) is to be determined as being money purchase in nature if the amount of the benefit is calculated purely with reference to assets which “must necessarily suffice for the purposes of its provision to or in respect of the member”. Furthermore, a benefit which is a pension in payment is generally to be determined as being money purchase in nature if this is “secured by an annuity contract or insurance policy made or taken out with an insurer” and before coming into payment was calculated purely with reference to assets which “must necessarily suffice for the purposes of its provision to or in respect of the member”.
Due to the retrospective nature of the amendment a section has also been introduced to allow regulations to be made in order to establish transitional provisions to cover a number of circumstances including, for example, schemes which have already been wound up. It is expected that the Government will issue consultation in relation to these regulations in due course.
In practice this means that it is important to assess now if the benefits offered by your scheme do still fall within the new definition as if they do not these may soon become subject to the scheme funding legislation and the employer may be liable for any deficit that arises.
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Active Member Discounts
It had been raised in a previous Committee stage that recent research by Which? had shown that some fund providers operate a practice of active member discounts or deferred member penalties that mean that when a member leaves employment and becomes deferred under a scheme, the management charges can increase significantly.
An amendment was made to the Bill in order to address the fact that the Government can currently only cap charges in relation to active members of a qualifying scheme for the purposes of the new auto enrolment regime and will effectively extend an existing power in order to ensure that caps can be imposed to protect all scheme members whether active or deferred.
Chasing State Pension Age
Due to concerns, which took up the majority of debate at the reading, that certain groups of women were to be disproportionately disadvantaged by the increase in state pension age, an amendment has been made to the timetable.
A delay in the transition from age 65 to age 66 by six months so that the state pension age increases to 66 in October 2020, rather than April 2020 has been introduced to ensure that the maximum amount of extra time that a woman will have to work for will be capped at 18 months.
Consideration of the amendments made by the House of Commons took place in the Lords on 31 October 2011 and all of these were agreed. This was the final reading of the Bill which is now due to receive Royal Assent. The expected date for this has not yet been set.
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Focus on DC Governance
The Regulator is shining its spotlight on DC schemes to ensure trustees are aware of the differences between DB and DC schemes and understand how to govern these properly.
Their scheme governance survey has highlighted “patterns of poor governance standards” and they have issued a Statement setting out the differences between the two types of scheme and offering guidance on the types of behaviour they expect trustees of DC schemes to be demonstrating.
The expectations of the Regulator are grouped into a number of categories:
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Trustee knowledge and understanding - having sufficient skills to manage the scheme effectively, assess the trustee board and address any “knowledge gaps”.
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Conflicts of interest – Have a conflicts of interest policy in place and act impartially in the face of any conflicts.
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Costs and charges – Understand charging structures, ensure that these offer value for money for members and that charges are applied fairly to all categories of members.
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Investment – Regularly review the range and appropriateness of investment funds available to members and ensure the default fund complies with guidance issued by the DWP.
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Asset protection – Invest prudently and predominantly with FSA registered providers or regulated authorities and consider the protection or compensation available in case of a default by the investment provider.
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Administration – Devote sufficient time to managing the scheme, understand the steps necessary for proper management, assess and document key risks in a risk register and maintain accurate scheme records.
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Contributions – Ensure that contributions are paid on time, pursue all late payments and ensure that members are aware of the impact on their pension fund of their contribution patterns.
The Regulator also expressed concern about the DC sections of hybrid arrangements being treated as the “poor relation” by trustees who do not give them the time and attention required and has now issued a Statement entitled “Understanding and managing your hybrid scheme” which sets out a checklist of action points for trustees to ensure that they understand the risks involved in these types of schemes and seek to mitigate them effectively.
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Autofocus
Biggart Baillie recently brought together a panel of experts in a round table discussion in association with CA Magazine to discuss the key issues surrounding retirement provision and explore whether there is any better way to encourage people to save for their retirement.
Read a report of the discussions, chaired by June Crombie, in the October edition of CA Magazine here.
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By Passing the spouse..for once!
In the ever-increasingly taxable world we live in, a Spousal Bypass Trust has much to recommend it and is something that should be considered as a key part of retirement planning, says Mairi Black.
Read Mairi’s full article in the October edition of CA Magazine here (page 37).
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The information contained in these articles is given for general information only, reflects the current law on the date of the article, and does not constitute legal advice on any specific matter