the Pensions Act 2004
Roderick Ramage, BSc(Econ), solicitor, www.law-office.co.uk
published (by distribution to professional contacts) on 29 December 2004
This article is not advice to any
person and may not be taken as a definitive statement of the law in general or
in any particular case. The author does not accept any responsibility for
anything that any person does or does not do as a result of reading it.
The Pensions Bill received Royal Assent in November 2004 and will
be brought into force in stages in 2005 and onwards. Its aim is to simplify pension law, but it is
likely to have the opposite effect: the
2004 Act consists of 325 sections and 13 schedules (compared with 181 sections
and 7 schedules in the 1995 Act). It is
said to contain about 250 references to regulations to be made by statutory
instruments to flesh out the details.
Some of the main topics with a practical impact on employers and
trustees are as follows.
new regulator (April 2005)
OPRA will be replaced by a new regulator with wider powers and more
staff (and a bigger budget to be paid for by levies on pension schemes) and is
likely to be more proactive than OPRA.
The regulator’s aims are to protect members’ interests and reduce the
risk of claims on the PPF. The so called
“moral hazard” provisions, give the regulator powers in respect of final salary
schemes (1) to require persons to pay a contribution to the scheme if they were
party to an act or deliberate failure to act for the purpose of avoiding or
minimising liability for a debt on the employer and (2) to make other companies
in the same group liable to support a pension scheme if the scheme’s employer
is insufficiently resourced (see my article on the Pensions Bill on
www.law-office.co.uk). Even with the
clearance procedures and other safeguards introduced by the government late in
the Bill’s progress, corporate reconstructions and disposals are being
inhibited by these provisions.
Pensions Protection Fund (PPF) (April 2005)
The PPF will provide pensions in the case of final salary schemes
being wound up if their employers are insolvent. It will be funded in part by the transfer of
assets from the schemes being wound up and whose liabilities are to be adopted
and partly by a levy on continuing final salary pension schemes. Some commentators doubt whether the PPF can
be financially viable without government support.
minimum funding requirement (MFR) (September 2005)
The MFR is to be abolished and replaced by a scheme specific
“statutory funding objective”. In view
of the new regulator’s twin duties to protect pension scheme members and the
PPF, it is likely that the new requirement will be more stringent than the MFR.
trustees (April 2006)
The present ability to opt-out of the requirement for member
nominated trustees will cease, and all schemes will have to secure that at
least one third of the trustees are member nominated (likely to be 50% from
2007). Trustees will be expected to be
conversant with the scheme’s rules and other provisions and have a sufficient
knowledge and understanding of the law (as if trust law does not already
Transfer of Undertakings (Protections of Employment) Regulations
(TUPE) (April 2005)
Where the transferor provided an occupational scheme for the
employees who are transferred, the transferee will be required to provide a
pension. If the transferor's scheme is
money purchase the transferee must either:
provide an occupational scheme and pay to it “relevant
contributions”, ie contributions of such amounts and for such period as are to
be set out in regulations (draft regulations say matching employees’
contributions up to a maximum of 6% of pay); or
pay relevant contributions to a stakeholder scheme of which the
employee is a member.
If the transferor’s scheme is final salary, the transferee’s scheme
satisfy the "statutory standard" referred to in the
Pension Schemes Act 1993, ie to provide a pension broadly equivalent to or better than the pension
which would be provided under the reference scheme test used to contract out of the State
second scheme (a pension at age 65 of 1/80th of pensionable salary,
ie 90% of earnings between lower and upper earnings limits (for 2004/5 £4,108
and £31,720) for each year of service); or
comply with such other requirement as are to be set out in
consultation (April 2006)
Employers will be required to consult with members and others about
decisions to be made about pensions, although precisely who is to be consulted
about what decisions is not yet known and will be in regulations.
Although the stated aim of the legislation is to protect members
and their pensions, the likely result is that the present pressure on employers
to close their final salary pension schemes will continue to increase. This too has its hazards (see my article
“Closing Pension Schemes – Some Hazards” also on www.law-office.co.uk). It is increasingly clear that there are cases
where either closing a company’s pension scheme is not appropriate or closing it
is appropriate but can result in higher costs than had been expected.
NB This note is no more than
my selection of topics restricted to two pages and does not deal many other
important but relatively technical provisions.
For a comprehensive review of the Pensions Act 2004, visit the sites of
any of the major “City” firms of solicitors.
For the Act itself go to www.legislation.hmso.gov.uk/acts.htm
copyright Roderick Ramage
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