Issue 11 May 2006
Age discrimination regulations made

Final age discrimination regulations have now been made and will come into force on 1 October 2006. These regulations are the final stage in the UK Government’s implementation of the European Employment Directive, which has already given rise to legislation against discrimination on the grounds of disability, religion and sexual orientation.

From 1 October 2006, it will be unlawful for trustees of occupational schemes to discriminate against members or prospective members on the basis of age. It will also be unlawful for employers to discriminate against their employees in relation to pensions on the basis of age. However, discrimination will not be unlawful where the trustees or employer can argue that it is objectively justified. This involves both showing that the discrimination pursues a legitimate aim and that it is a proportionate means of pursuing that aim.

The legislation overrides any discriminatory practices that already exist in scheme rules, and gives trustees the power to amend their scheme rules to remove discrimination where they
do not otherwise have the power to do so.

In addition to the general power to make an objective justification of a discriminatory practice (which applies across the whole workplace environment, not just pensions), there are also a number of specific practices in pension schemes which are exempted. The original draft of these regulations was criticised because the exemptions went beyond the scope of
the EU Directive, and so, in the final version, the exemptions have been more tightly worded. However, this means that trustees cannot now assume that their scheme will automatically be exempt from the age discrimination legislation in all cases.

The key exemptions permit minimum and maximum ages for admission to a scheme and for the payment of benefits. Age-related contributions are permitted so long as the aim is to make the amount of benefit more equal in a defined contribution scheme and to reflect the cost of providing the benefits in a defined benefit scheme. It is also still possible for a dependant’s pension to be reduced where the dependant is significantly younger than the member and for schemes to be closed to new joiners.

The DTI has produced a helpful guidance document on the impact of the regulations on occupational pension schemes. They advise that trustees check their scheme documentation for discriminatory practices and work out whether these are covered by the specific exemptions for pension schemes or can be objectively justified.Where neither applies, the scheme rules will need to be changed.

The guidance provides examples where the exemptions will not protect occupational pension schemes from discrimination. One is where a defined contribution scheme provides a matching contribution of 1:1 for members under age 45 and 2:1 for members over that age. Another is where a scheme has not amended its rules to allow people to continue accruing benefits if they carry on working after they have started to draw pension under the new A-Day rules. These practices will be discriminatory, unless objective justification can be provided. These examples show how easily a scheme might fall foul of the discrimination rules, and highlight the need for trustees to take legal advice.

There are also limited exemptions for employer contributions to personal pension schemes. Age-related contributions to make benefits more equal will be permitted. However, there are no exemptions for minimum ages for admission or the payment of benefits as for occupational schemes.

Final regulations and code of practice on Member-Nominated Trustees (MNTs)

From April 2006, schemes must have at least one-third MNTs. Where the scheme had opted out of MNT requirements prior April 2006, the opt-out may continue to run until the earlier the expiry date and 31 October 2007. The code of practice sets out the Regulator’s expectations of how the nomination and selection process should work. The requirements are very similar to the draft published last year. One of the main changes is that, where there are insufficient nominations, the process need not be rerun for three years (previously it was one year).

The Pensions Regulator publishes its statement on regulating scheme funding

On 4 May 2006, the Pensions Regulator published its final statement on how it will regulate the funding of defined benefit pension schemes. The statement contains some changes in emphasis from the draft issued at the end of October 2005. However, the Regulator still intends to decide which schemes to focus its attention on by looking at two triggers – one based on a scheme’s ‘technical provisions’ (liabilities) and the other based on the scheme’s ‘recovery period’ (the period over which any deficit will be made good). The Regulator has emphasised that these are only ‘triggers’ to enable it to identify those schemes which present the greatest risk and are not ‘targets’ which a scheme must abide by. Nevertheless, trustees and employers are likely to have these triggers in mind when reaching agreement on scheme funding.

The Regulator will assess the adequacy of a scheme’s technical provisions by comparing them with a scheme’s liabilities on a range between the FRS17 and s179 bases (s179 liability is the cost of providing benefits from the Pension Protection Fund on a prescribed basis). The suggestion in the first draft that a trigger of 70-80% of the liabilities on a buy-out basis should be used has been withdrawn.

The trigger for recovery periods remains periods in excess of ten years. The Regulator has indicated that it will not focus on schemes with shorter recovery periods, unless the scheme
comes to their attention for other reasons. In general, the Regulator sees the technical provisions trigger as the primary focus and says that it will be more flexible when considering the appropriateness of the recovery period. Where a scheme does trigger, the Regulator will carry out a further assessment to determine whether they need to intervene in the scheme or not.

The Pensions Regulator has also recently published a strategy paper, in which it sets itself three key goals for the next three years: to strengthen the funding of defined benefit pension schemes, to improve the governance of work-based pension schemes, and to reduce the risks faced by members of defined contribution (money purchase) schemes.

Other recent developments

Parliamentary Ombudsman’s report
Ann Abraham, the Parliamentary Ombudsman, has published a highly critical report into the Government’s involvement in the wind-up of a number of defined benefit schemes with insufficient funds to secure members’ benefits. She found that the Government was guilty of maladministration in the information it provided to members about the Minimum Funding Requirement and recommended that the Government consider restoring members’ benefits in full. The Government has rejected all but one of her findings.

Final Pensions Commission report
The Pensions Commission (chaired by Adair Turner) published its final report on 4 April. In it, they repeat their view that their proposals need to be considered as an integrated package and argue that their model for the NPSS is better than the alternative models proposed by the NAPF and ABI.

Government to consult on transfer values
The Department for Work and Pensions has announced that they will be consulting on new legislation on transfer values. This follows considerable debate within the actuarial profession on the appropriate way to calculate transfer values. The Government will now set down the underlying principles in legislation.

Disclosure requirements
The Government has announced that the regulations on the disclosure of information will now be delayed until October. In a separate announcement, they revealed that the requirement for defined benefit schemes to provide annual benefit statements to members will now only apply to active members, and not to deferred members.

And finally A-Day…
It cannot have escaped your notice that a new pensions taxation regime came into force on 6 April. March was a hectic month with a near constant stream of regulations, draft legislation for the 2006 Finance Bill and revised guidance coming out at the last minute.We now wait to see how the new regime beds down in practice.

For further information please contact your usual Punter Southall contact.