Issue 13 - September 2006
The Pensions Regulator Issues Guidance on Member-Nominated Trustees and Directors

The Pensions Regulator issued guidance on member-nominated trustees (MNTs) and member-nominated directors (MNDs) on its website on 15 August 2006. This complements the Code of Practice on ‘Member-nominated trustees and directors – putting arrangements in place’ which was laid before parliament in July and which covers the new requirements for trustee bodies to consist of at least one third MNTs/MNDs. The guidance covers three main areas: exemptions from the requirements, transitional provisions for existing schemes and practical guidance on implementing MNT/MND arrangements.

Trustees have to decide whether their scheme is subject to the MNT and MND requirements.Whilst there is a long list of exemptions, in practice the vast majority of occupational pension schemes will be subject to the requirements. Even if the scheme is exempt, the trustees should keep the exemption under review over time and check that the list of exemptions has not been amended.

Assuming the scheme is not exempt, the ‘commencement date’ of the new regulations will depend on the current circumstances of the scheme. Trustees must put arrangements in place for the nomination and selection of MNTs/MNDs within 6 months of the commencement date.Where the scheme is a new scheme set up after 6 April 2006, this is the date on which the scheme comes into existence.

Where the scheme currently has an ‘employer opt-out’ from the MNT/MND requirements, the commencement date will be the earlier of the date on which the current opt-out ends and 31 October 2007. Trustees can bring the opt-out to an end early where there is a bulk transfer of a group of members (without consent), where an employer ceases to be the employer for the
scheme or where the principal employer is taken over by an employer unconnected to the pension scheme. Any trustees appointed under the terms of the opt-out can continue to serve
until the end of their term of office; however they cannot count towards the total of one-third MNTs/MNDs (even if they are in fact members and/or nominated by members) – only trustees
appointed under the terms of the Pensions Act 1995 count as MNTs/MNDs.

Where the scheme already has MNTs/MNDs appointed under the terms of the Pensions Act 1995, the commencement date is 6 April 2006 and trustees should therefore put arrangements in place by 5 October 2006. However, this only means that schemes should have a procedure for nominating and selecting MNTs; existing MNTs can continue in force until the expiry of their term of office.

MNTs appointed under the terms of the Pensions Act 1995 will count towards the total of one-third MNTs under the new regime. The arrangements put in place must abide by the legal requirements, and any additional requirements in the scheme rules (e.g. as to the term of office for trustees). They should also follow the recommendations in the Code of Practice. In addition, trustees may want to review the arrangements they had in place before 6 April 2006 and consider whether parts of the existing procedures can be incorporated in the new requirements.

Delay to the age discrimination regulations
The DWP has recently announced that the pensions aspects of the Age Discrimination regulations will now be delayed until 1 December 2006. This follows substantial feedback from trustees, employers and the pensions industry in general that the previous 1 October deadline gave insufficient time for schemes to carry out an audit of their scheme rules, especially as the precise scope of many of the exemptions set out in the legislation is unclear. See Technical Bulletin 11 for a summary of the main implications for pension schemes. The DWP is now expected to launch a consultation on possible changes to the legislation, which should clarify some of the problem areas.

The two month extension gives trustees and employers a little more time to review their scheme rules and identify any potentially discriminatory practices that are not covered by an exemption.Where there is no exemption, trustees and employers need to decide whether to provide objective justification for the rule or practice or to remove it altogether. Please email jenny.gallagher@puntersouthall.com or your usual Punter Southall contact if you would be interested in attending a round-table on age discrimination in October to review the latest state of play on the legislation.

Further developments from HM Revenue and Customs
It has been a busy couple of months for HM Revenue and Customs (HMRC). In July, the Finance Act 2006 came into force. This makes a number of changes to the post A-Day taxation regime. Most of these changes were announced several months earlier. Among the most important was the restriction of investment opportunities for Self-Invested Personal Pensions (SIPPs). The initial intention was that such schemes would be able to invest in a much wider range of assets including residential property, yachts or works of art. Any such investment will now be subject to penal tax charges. Another potential loophole was closed when members were prevented from using their tax-free cash from a scheme to make a pension contribution and receive tax-relief on it (a practice known as ‘recycling’). A more welcome change was to allow members with enhanced or primary protection to protect their death benefits at A-Day in the event these are higher than their retirement benefits.

HMRC followed up the Finance Act with a further 8 sets of regulations which flesh out some of the detail of the changes, taking the total number of regulations needed to implement the post A-Day regime to 55.

The number of changes brought about by the Finance Act 2006 as well as the need for some corrections and clarifications led HMRC to issue a new version of the Registered Pension Scheme Manual at the end of August – there are almost 1,000 changes to the manual so it is likely to keep the pensions industry occupied for some time.

We can now hope that the pace of change will slow down and the new regime will finally be given time to bed down. However, there have already been a number of indications that the Treasury is no longer happy with the idea of individuals using Alternatively Secured Pensions (a form of income drawdown over age 75) as a way of transferring wealth between generations. The Finance Act 2006 made such transfers subject to inheritance tax, but we wait to see whether further restrictions will be introduced, perhaps to restrict Alternatively Secured Pensions to those with a principled objection to annuities (such as Plymouth Brethren).

Disclosure Regulations
New regulations on the disclosure of information by pension schemes were due to come into force in October this year. They have now been shelved as a result of the deregulatory review announced in the White Paper to avoid introducing legislation which might have to be amended soon afterwards. Instead, the old disclosure requirements will continue to apply. The new regulations would have introduced a requirement for active members of defined benefit schemes to be sent annual benefit statements and replaced the various time limits specified in legislation with a ‘reasonable period’, where that reasonable period would be explained in a code of practice from the Pensions Regulator.

Codes of Practice
7 codes are now in force (reporting breaches, notifiable events, funding defined benefits, early leavers, late payments to money purchase schemes, late payments to personal pension schemes and trustee knowledge and understanding), with a further 2 laid before parliament (MNTs and internal controls) and a further code on scheme modifications still not yet issued in final form. The codes on internal dispute resolution and disclosure of information have both been dropped following the DWP’s decision not to proceed with regulations in this area.

PPF Invoices and Consultation Paper
The Pension Protection Fund (PPF) has announced that it will start to issue invoices from September 2006 onwards. Schemes will have 28 days from the date of the invoice to pay the levy. The PPF has also published a list of FAQs on its website, including details of how to appeal the invoice if the trustees disagree with it. In addition, the PPF has issued a consultation paper on some amendments to the way the levy will be calculated in 2007/8. One of the most welcome changes is that it will work with Dun & Bradstreet to review the appropriateness of their methodology, and in particular the weighting given to County Court Judgments in their assessment of insolvency risk.

Withdrawal Arrangements
In its Annual Report published at the end of July, the Pensions Regulator indicated that it had received 61 applications for withdrawal arrangements. From September 2005, when a participating employer ceases to participate in a scheme, it becomes liable to a debt assessed at the full buy-out cost. Ceasing to employ any active members of the scheme would count as ceasing to participate and trigger a debt. A withdrawal arrangement is an agreement approved by the Pensions Regulator for the withdrawing employer to pay a lower debt than the full buy-out cost in return for guarantees being put in place.

OECD Guidance on Funding and Benefit Security
The OECD has published best practice guidelines on how defined benefit schemes should be funded. These include a recommendation that prudent assumptions should be used in valuing liabilities and that the sponsor covenant should be taken into account. The guidelines are open for consultation until 15 September 2006, but would be unlikely to lead to any significant changes in UK pensions, as these principles are already enshrined in the new scheme funding regime introduced by the Pensions Act 2004.

For further information please contact your usual Punter Southall contact.

© 2006 Punter Southall Group Ltd. All rights reserved. This bulletin is intended to provide a brief summary of current issues and action should not be taken as a result of this bulletin alone.