Pension funding options

The Pensions Regulator was established by the Pensions Act 2004 to supervise work based pension schemes and took over from the Occupational Pensions Regulatory Authority in April 2005. It has wider powers than its predecessor and under the Pensions Act 2004, was given the following objectives:

Protect the benefits under occupational pension schemes, and the rights of members of occupational pensions

Protect the benefits under personal pensions where there are direct payment arrangements

Reduce situations arising that may lead to compensation being paid from the Pension Protection Fund

Promote and improve understanding of the good administration of occupational schemes and personal pensions where there are direct payment arrangements.

The Pensions Regulator can impose sanctions on employers, administrators and trustees.

Trustees can potentially face dismissal, blacklisting or fines where serious failures of their duties take place. In some cases the misdemeanours can be serious enough to be classed as criminal offences even leading to terms of imprisonment.

The Pensions Regulator requires employers and anyone else involved with administering a scheme to report irregular or dishonest conduct.

Member nominated trustees

The Pensions Act 1995 gave occupational pension scheme members the right to select and nominate one third of a pension scheme’s trustees with a minimum of two seats (one if there were fewer than 100 members).

The Act provided three methods in which this could be achieved:

Trustees or employer invite nominations from active and pensioner members, holding elections if there are more nominations than vacancies

Employer proposes to the scheme’s trustees that they invite the membership to accept the current composition of trustees even with little or no member representation. Should more than 10% of members object, a vote follows. If the vote is lost the statutory default applies unless alternative proposals are accepted

The final method is that trustees make their own proposals. If the members vote against these and alternative proposals cannot be accepted, then the statutory default applies.

The latter two methods had been set to disappear since the turn of the decade but were delayed until pensions simplification came into being. A new MNT regime came into being on 6 April 2006 under the Occupational P...

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Introducing or increasing employee contributions

Switching from defined benefit to a defined contribution arrangement

Reducing employer contributions for defined contribution benefits or removing liability for the employer to contribute to any scheme.

A minimum of 60 days is required for consultation after written notification of the changes has been provided to the employees duly affected. Consultation is not needed if the change arises as a result of having to comply with “statutory provisions”. Similar provisions apply to group personal pensions if employee contributions are increased and/or employer payments go down.

Disclosure

The current disclosure requirements that must be adhered to in respect of information to members are:

Information about the scheme’s terms and conditions must be given within two months of the member joining the scheme. Normally this information will be in the scheme’s booklet or announcement letter

The members and any recognised trade union may request a copy of the scheme’s trust deed and rules

An annual statement of scheme benefits must be provided for defined contributions schemes automatically

Within 15 days of the effective date of the first actuarial valuation on or after 22 September 2006, annual summary funding statements have had to be issued by trustees to all members and beneficiaries of private sector defined benefit schemes with at least 100 members. The statements set out the funding level of benefits based on the most up to date scheme valuation

Details must be provided of benefits to be paid and any options available shortly before the due date on which benefits are to start

If a member dies then his/her beneficiaries should be provided with details of the benefits to be paid and any available options

For scheme leavers, the benefits of the scheme and options available should be provided within two months of the trustees being notified of the termination of pensionable service

The trustees must provide annual report of the scheme which includes the scheme’s accounts.

Reporting requirements are now much simplified following A-Day:

For members, reporting is usually via the self-assessment return system

Schemes only need to make a report if certain events happen, although some schemes must supply information on a new return for pension schemes.

Trustees’ responsibilities

Pension scheme trustees have the general responsibilities to act within the provisions of the trust and to hold and invest trust assets for the benefit of the trust’s beneficiaries (scheme members) in order to achieve the best possible returns. They must act impartially and maintain the pension scheme in the best interests of its members at all times.

However, over the years the realisation that pensions schemes can be and often are co...

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Power to determine all questions and matters of doubt arising in connection with the scheme

Power to carry out any transaction with the scheme.

Where the trust deed says nothing or is not specific on a particular point, the standard provisions of trust law will apply.

Scheme actuaries are appointed by the scheme’s trustees. Appointed actuaries may not act as trustees of the same scheme.

The scheme actuary is responsible following instructions from the trustees for:

Preparing the periodical actuarial valuation

Providing advice about funding principles, calculations of technical provisions, the schedule of contributions, recovery plans or changes to future benefits

Certifying that the calculation of the techni...

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A scheme administrator’s duties would typically include:

Registering the scheme with HMRC

Operating tax relief on contributions under the relief at source system

Reporting events relating to the scheme and the scheme administrator to HMRC

Making returns of information to HMRC

Providing information to scheme members, and others in connection with lifetime allowance, benefits and transfers.

Under the Financial Services and Markets Act 2000, an occupational pension scheme is not classed as an investment. However, management of a pension scheme’s investment fund is regulated meaning that internal or external fund managers require the necessary authorisation from the FSA.

Trustees of occupational pension schemes can provide advice in certain areas without breaching the terms of the FSMA 2000. These include:

Positively recommending that employees join their pension scheme and pay additional voluntary contributions.

Promoting any in house AVC arrangements in a general sense over external pension arrangements (without providing advice on the external contract).

Providing generic criticisms of individual pensions if they wish. Again care should be taken not to provide specific advice on a particular external provider’s pension.

· Since 1 July 2005, employers can promote GPPs provided they receive no direct or indirect financial benefit from doing...

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Protect pensions where employees are transferred from one business to another or when their employer becomes insolvent

Allow freedom of cross border investment of pension funds and fund management services

Cross border membership of pension funds to facilitate the free movement of employees.

The Pensions Directive passed by the EU came into effect on 23 September 2005, and introduced a framework that would enable EU companies to operate a pension scheme across two or more member states. Its impact is noticeable in the UK with the scheme specific funding rules.

The Directive went some way towards achieving harmonisation between member states in relation to private sector pension schemes, however a number of obstacles still stand in the way of complete harmonisation:

Different approach to investment between member states

Differing tax treatment of contributions and benefits between member states

Different social security, transfer and preservation legislation.

Introduction

Over recent years, new legislation has been introduced in an attempt to deal with the position of divorce and a fair way of accounting for pension assets. The results so far have been mixed and in many respects the oldest of the three methods we are going to discuss, offsetting, still remains popular.

Offsetting

Offsetting was introduced in England and Wales by the Matrimonial Causes Act 1973 which enabled divorce courts to account for private pension arrangements when reaching a structured financial settlement although there was no compulsion.

Similar legislation was introduced in Northern Ireland with the Matrimonial Causes (Northern Ireland) Order 1978.

The introduction of the Family Law (Scotland) Act 1985 stated that a person’s pension rights must be treated as a proportion of the ‘matrimonial property’ and that this had to be divided up between the individuals divorcing. No such compulsion existed in England, Wales and Northern Ireland until the introduction of the Pensions Act 1995.

Prior to the Pensions Act 1995 offsetting would entail the pension-owning spouse being ordered to pay over a greater share of other non-pension assets than would otherwise have been the case if no pension rights had existed.

Offset has the advantage of leaving pension benefits intact for the pension owning spouse although the obvious disadvantage is that the other spouse has no pension related provision for retirement. As mentioned earlier, offset is still common in the divorce process, one reason being it gives a clean break.

Earmarking

Earmark...

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If either party subsequently re-marries, there will be no effect on the sharing order as benefits have already been taken away.

Pension sharing like offsetting, provides a clean break.

Post A-Day effects on pensions and divorce

Earmarking of pension benefits and offset were both unaffected by the introduction of simplification. This means than any earmarking is ignored in valuing a member’s pension for lifetime allowance purposes.

For pension sharing:

Any pension credit order taking place on or after 6 April 2006 will count against the recipient's lifetime allowance and not against the member's lifetime allowance

Where a pension credit is applied in situations where the member's pension is already in payment and benefits started after 5 April 2006, the receiving ex-spouse with the pension credit can elect that their lifetime allowance is enhanced to allow for the fact that the pension will have already have been tested against the member's lifetime allowance

Neither pension credits nor pension debits count against the annual allowance

Transitional rules apply to pension sharing orders that were in place already on 5 April 2006

The recipient of a pre A-Day pension credit can elect by 5 April 2009 for an enhanced lifetime allowance which takes accommodates the value of the pension credit at the time it was acquired. This can be, increased in line with the RPI to April 2006.

For the member with a pension debit at A-Day, the value of the debit is ignored. Thus only unshared benefits will be valued for the purpose of testing against any lifetime allowance.