Following its October 2005 update paper, the PPF Board has finally published its proposals for assessing the risk-based levy.  (The risk-based levy, which is relevant to all schemes potentially eligible for the PPF, will apply from financial year 2006/07.)  The final proposals include “incentives to reduce risk, measures to ensure affordability for weaker schemes and refinements”.

After a number of delays, the final Scheme Funding Regulations and the Code of Practice have been laid before Parliament and will come into force on 30 December 2005. Key points:

• The new scheme funding provisions come into force from 30 December 2005 for all actuarial valuations based on an effective date of 22 September 2005 or later
• “Prudent” will not be defined
• There have been tweaks as to who sets the contribution rate where either the trustees or the actuary are currently responsible
• Be aware of the regulatory jigsaw when setting recovery plans
• Conflicts of interest are again under the spotlight

The Pensions Act 2004 transposed the cross border requirements of the European Pensions Directive into UK law. The reason the designation as a cross-border pension scheme is important is that it brings with it a need to be “fully funded at all times”.

The Cross Border Activities Regulations 2005 which detail the exact conditions and procedures schemes must follow to enter into cross border activity have at last been finalised - and there are some significant changes from the draft published for consultation in September.

Rarely has pensions been such an overtly political issue. On 30 November 2005, after weeks of speculation on - and allegedly objections to - its contents, the Pensions Commission’s Second Report finally came in from the cold.

The Report makes the following key recommendations:

• Reform the state pension system to underpin private saving.
• Provide a state pension which is less means-tested and which rises in line with average wages and not prices.
• Increase state pension age, possibly to 66 by 2030, 67 by 2040 and 68 by 2050 (variations on this theme are also put forward). The clear idea is to link state pension age to increasing life expectancy.
• Establish a National Pension Savings Scheme to boost pension savings, with automatic enrolment (subject to the ability to opt-out) for those individuals “not covered by other adequate pension arrangements”.
• Employers who do not operate a work-based pension scheme would face 3% compulsory contributions to the above scheme.
• Contracting-out should be phased out gradually.

Click here for a copy of the Report.

The Civil Partnership Act 2004 (CPA) comes into force on 5 December 2005 which will allow the first civil partnerships to be formed by Christmas. CPA is designed to provide a system of registration for same-sex relationships and does not apply to heterosexual couples. Civil partners will be in a relationship akin to marriage in respect of the laws of survivorship and entitlement to benefits, and pensions are no exception.

CPA (and the Regulations made under this Act) treats contracted-out rights and benefits over and above contracted-out rights separately in respect of the period before 5 December 2005 and we have followed this distinction in this Alert.

The Pensions Act 2004 transposed a number of the provisions of the European Pensions Directive into UK law. This Alert identifies some unexpected effects of the Directive on the activities of UK pension schemes from 22 September 2005.

• Life cover only members - can schemes continue to have this category of member?
• Cross border schemes - it will come as a relief to many schemes that the provisions on secondment may be relaxed, but Anglo-Irish Scheme may be caught
• Stakeholder schemes - if you haven’t designated a scheme, check which exemption you are relying on because providing life cover under an occupational pension scheme will no longer count as an exemption.

Following representations from the pensions industry, the Board of the Pension Protection Fund (PPF) has announced concessions to its proposed approach for assessing the risk-based levy. The PPF’s change in tack is set out in an update paper published on 14 October and takes account of three main themes emerging from responses to its original consultation paper, published back in July 2005.

The Pensions Act 2004 transposed the cross border requirements of the European Pensions Directive into UK law.

The DWP has published for consultation the draft Cross Border Activities Regulations 2005. There are three potential issues for UK occupational pension schemes:

• Schemes who have members currently on secondment outside the UK;
• Anglo-Irish Schemes;
• Schemes with an overseas parent.

Back with a vengeance after the summer break, two separate (but complementary) consultations were published on 9 September 2005 by the Department for Work and Pensions and the Pensions Regulator (TPR) respectively.

In its consultation, the DWP is seeking views on the proposed replacement of the current legislation governing the disclosure of information to members (and beneficiaries) of occupational pension schemes. In a shift away from rigid time-frames for providing such information, the DWP is looking towards information being provided “within a reasonable period”. This is where TPR comes in; with a draft code of practice dealing with what this means.

The Occupational Pension Schemes (Employer Debt etc.) (Amendment) Regulations 2005 were finally published on 18 August and come into force on 2 September 2005. If an employer ceases to have employees who are active members of a defined benefit pension scheme on or after 2 September 2005, the employer debt will be calculated on the full buy-out basis rather than MFR.

The departing employer will not have to pay the full buy-out debt if the Pensions Regulator and the trustees agree to a “withdrawal arrangement”. Broadly, under a withdrawal arrangement, a “guarantor” would take responsibility for the difference between the MFR debt and the full buy-out debt.

The Pensions Act 2004 (PA 2004) will require that at least one-third of the total number of trustees of occupational pension schemes are member-nominated trustees or directors (MNTs). The current proposal is that this moves up to 50% in 2009.

PA 2004 represents a change in direction from the current MNT provisions, which allow an employer to propose alternative arrangements which differ from the legislative requirements (the “opt out”). This will no longer be possible and the existing trustees will need to secure compliance with the new provisions.

The PPF was established in April 2005 in order to provide compensation for members of eligible schemes where benefits cannot be paid in full because: (a) there has been an insolvency event in relation to the employer ; and (b) the scheme is underfunded on winding-up. Compensation is funded partly by the assets from the schemes for which the PPF assumes responsibility and partly by an annual levy raised from potentially eligible schemes.

On 12 July 2005, the Board of the Pension Protection Fund (PPF) published its proposals for the introduction of the risk-based levy for all eligible schemes. The risk-based levy will apply from the financial year 2006/7. As the Pensions Act 2004 makes provision for 80% of the PPF levy to be risk-based, this information is crucial for trustees and employers of eligible schemes.

On 8 July 2005, the Pensions Regulator published a draft code of practice on “Modification of existing rights”.

From 6 April 2006, employers and trustees contemplating changes to occupational pension schemes will have to contend with a significantly revamped section 67 of the Pensions Act 1995. The intention is to afford schemes greater flexibility to introduce changes, with the trade off being that for some there will be even more hoops through which to jump to safeguard members’ rights.

From 6 April 2006 members who leave occupational pension schemes with at least three months’ pensionable service, but without having reached the scheme’s threshold for providing accrued (or vested) benefits, will have new rights. Trustees will need to give such members the option of either a contribution refund or a cash transfer sum.

Like a lot of the new requirements, the PA 2004 contains the bones of the new provisions but we have been waiting for regulations and a code of practice to flesh out the detail. The draft code of practice was published for consultation by the Pensions Regulator in May, followed by the draft regulations on 29 June 2005.

Viewed by the Pensions Regulator (TPR) as a “vital part of the regulatory framework”, the new “whistleblowing” requirements under the Pensions Act 2004 (PA 2004) came into force on 6 April 2005.  The provisions of PA 2004 are supplemented by a TPR code of practice and supporting guidance (published this week). 

Crucially, from 6 April 2005, the responsibility for reporting breaches falls upon a significantly expanded group, including trustees of all occupational pension schemes, scheme managers, administrators, certain professional advisers (including lawyers) and employers. 

As part and parcel of the Pensions Regulator’s responsibilities towards protecting against unnecessary calls upon the Pension Protection Fund, new reporting duties came into effect on 6 April 2005.

Those on the hook for reporting “notifiable” events are trustees and employers of schemes potentially eligible for the Pension Protection Fund.  Subject to some exceptions, notifiable events will need to be reported to the Pensions Regulator in writing as soon as reasonably practicable whenever they arise.  It is therefore essential that trustees and employers of relevant schemes have a procedure in place for dealing with this new responsibility.

Amendments contained in the Pensions Act 2004 will allow trustees of occupational pension schemes to operate a simplified one stage internal dispute resolution procedure under section 50 of the Pensions Act 1995.

Whilst a consultation paper on the draft Regulations was published by the Department for Work and Pensions on 24 January 2005, we have been waiting for details of the time limits which will apply to dealing with complaints. A draft Code of Practice “Dispute Resolution – reasonable periods” was published for consultation by the Pensions Regulator on 1 April 2005.

Parts of the Pensions Act 2004 come into force next Wednesday, on 6 April 2005. In the lead up, we thought it would be helpful to provide you with a quick recap of the areas coming into force. These are:

• The Pensions Regulator (including the "moral hazard powers");
• The Pension Protection Fund;
• Pension protection on transfer of employment; and
• Changes to pension increases.

Following Gordon Brown’s Budget confirmation that “a package of supplementary measures” on tax simplification was in the pipeline, the Finance Bill 2005 was published on 24 March 2005.  The amending provisions are contained in two rather short sections (sections 150 and 151) and a rather chunky schedule (Schedule 19).

The changes in the Bill will form part of the tax simplification changes due to come into force on 6 April 2006 (A-Day). They reflect those changes announced by the Inland Revenue back in February 2005.

It has been a long time coming but we now have the Government’s thinking on life after the minimum funding requirement (MFR).  It will be replaced by a Statutory Funding Objective (SFO), which is designed to reflect the funding standard under the EC Pensions Directive.

Whilst the scheme funding process is contained in the Pensions Act 2004, much of the detail was left to Regulations and to a Code of Practice to be issued by the Pensions Regulator.

Amid the Pensions Act 2004 maelstrom, on 17 March 2005 the Pensions Regulator published a draft code of practice for consultation on trustee knowledge and understanding (TKU).  The consultation period runs until 10 June 2005.

The TKU requirements under the Pensions Act are set to come into force on 6 April 2006.  In summary, all occupational pension scheme trustees must have sufficient TKU of pensions and trusts law to run their schemes properly. Trustees must also be conversant with scheme documents.  But what does this really mean?

Pensions Reform - the Budget and Tax Simplification

In his last Budget before the general election, on 16 March 2005 the Chancellor Gordon Brown confirmed that “a package of supplementary measures” will form part of the tax simplification provisions coming into force in April 2006. The changes are largely anti-abuse measures and will be incorporated into the forthcoming Finance Bill 2005. 

Many of the new measures stem from on-going “liaison” with the pensions industry following the enactment of the Finance Act 2004 in July of last year. The aim is to provide schemes and individuals with additional flexibility, to clarify certain aspects of the 2004 Act, to smooth the transition from the current to the new tax regime and to introduce “further anti-abuse and compliance rules”.

Under the Pensions Act 2004, pension scheme trustees must have sufficient knowledge and understanding of pensions and trusts law to run their schemes properly.  Trustees should also be conversant with scheme documents.

On 4 February 2005, Opra published final lists of issues which “the pensions industry considers trustees need to know and understand, and…policy with which trustees should be conversant” in order to fulfil these requirements.  Opra refers to these lists as “the Scope of knowledge, understanding and conversance”.

• £15 each for all actives and pensioners; and
• £5 each for all deferred members.

The Occupational Pension Scheme (Winding Up, Deficiency on Winding Up and Transfer Values) (Amendment) Regulations 2005 have been laid and will come into force on 15 February 2005. These Regulations were released for consultation in September 2004.

To protect further the position of members whose defined benefit scheme is winding-up, these Regulations change the winding-up legislation so that the level of debt triggered on scheme wind-up is increased to full buy-out in all cases. There are also new disclosure requirements for trustees where members seek a transfer payment from a scheme winding-up.