Issue 18 - July 2007
The Pensions Regulator indicates its intention to issue its first Financial Support Directions

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When the Pensions Regulator replaced the Occupational Pensions Regulatory Authority (Opra) in April 2005, much was made of the fact that this was a regulator with teeth.Unlike its predecessor, it was given explicit powers to deal with employers who might be trying to avoid their obligations to their pension schemes. Chief among these moral hazard or anti-avoidance powers were Contribution Notices and Financial Support Directions.We have yet to see the first Contribution Notice (a demand for immediate payment where there has been a deliberate attempt to avoid an employer’s obligation to a scheme), but the first Financial Support Directions (FSDs) are now imminent.

On 18 June, the Pensions Regulator published Determination Notices indicating its intention to issue FSDs against Sea Containers Ltd, a passenger transport and marine container leasing company.Assuming that this intention is carried out, Sea Containers Ltd will be required to put in place arrangements to provide financial support to its pension schemes, the Sea Containers 1983 Pension Scheme and the Sea Containers 1990 Scheme. This financial support can take a variety of different forms, but the effect is that Sea Containers Ltd would become subject to an obligation to provide financial backing to the pension schemes. If the company did not comply with the FSDs, the Pensions Regulator would have the power to issue a Contribution Notice, which would require the company to pay a specified sum to the trustees of the pension schemes.

A week after the Determination Notices were published, the Pensions Regulator published the reasons for its decision. Sea Containers Ltd had filed for Chapter 11 bankruptcy protection in the USA last October after failing to meet a bond payment. At that time, the Regulator had issued aWarning Notice to the company regarding the possible issue of an FSD. The company’s two pension schemes are its second largest creditors with an estimated combined buy out deficit at £132.6 million.

Sea Containers Ltd is an offshore company registered in Bermuda. The principal employer of both the Sea Containers pension schemes is a company called Sea Containers Services Ltd based in the UK.The purpose of the FSDs is to require Sea Containers Ltd to stand behind the two pension schemes.The Pensions Regulator argued that it was reasonable to impose FSDs on the company as it had benefited from the services provided by Sea Containers Services Ltd without paying for them.The existence of the service company in the UK also allowed Sea Containers Ltd to maintain its tax-privileged location in Bermuda.

As well as providing a test of the Regulator’s powers against a company based outside the UK, the case also gives us the first demonstration of how the procedure for using these powers works. The evidence is that this is proving to be a complex process.As we have seen, the Regulator first issuedWarning Notices in October 2006 (which were replaced by AmendedWarning Notices in April 2007 following further representations). The Pensions Regulator cannot however use any of its major powers without the agreement of its Determination Panel. This Panel therefore held an oral hearing on 12 and 13 June at which it heard submissions from both the Pensions Regulator and Sea Containers Ltd and as a result issued its Determination Notices. Sea Containers Ltd has now made an appeal to the Pensions Regulator Tribunal and so there will be some delay before the FSDs themselves can be imposed. Even after this appeal to the Pensions Regulator Tribunal, further appeals through the courts are possible.

Draft transfer values regulations published

On 6 July 2007, the Department forWork and Pensions (DWP) published its long awaited draft regulations on transfer values. The content of these is much as expected. FromApril 2008, trustees will become responsible for setting the assumptions on which transfer values are based, having taken actuarial advice. These should be determined on a best estimate basis taking account of the specific circumstances of the scheme. The term ‘best estimate’ is not defined. Transfer values may continue to be reduced where the scheme is underfunded. There will be no requirement to obtain a new reduction report as at April next year.

There will be additional information requirements where members are considering a transfer. Members must be advised of information provided by the Pensions Regulator and the FSA when considering a transfer and, where relevant, should be informed about the protection afforded by the Pension Protection Fund (PPF). In addition, members should be advised to consider obtaining independent financial advice before transferring.

These draft regulations also deal with a problem that has been identified where members with between 3 and 24 months service in a money purchase scheme opt for a cash transfer sum. Previously the transfer value had to be assessed at the date of leaving service, but it will now allow for investment performance until the cash transfer sum is actually paid out.

DWP publishes its response to consultation on personal accounts

On 14 June 2007, the DWP published a response to its consultation on the white paper on personal accounts.This indicated very few changes to the policy it had previously outlined. Employees will be automatically enrolled into personal accounts from 2012 with minimum contributions of 8% on a band of earnings between approximately £5,000 and £33,500 (3% from the employer, 4% from the employee and the remaining 1% from tax relief).

Access to personal accounts must be offered except where the employer provides a pension scheme that is judged to be as good as or better than personal accounts. Employers with occupational pension schemes meeting these criteria will be required to auto-enrol employees into their schemes, although they will be permitted to have a three month waiting period where the scheme is deemed to be ‘high quality’. EU legislation currently prevents employees being automatically enrolled into personal pension arrangements and so the DWP has still to decide how the requirement for auto-enrolment will apply when considering
exemptions for group personal pension schemes.

Probably the most significant change announced in June was to the limit on the maximum annual contribution permitted to personal accounts. Initially this had been set at £5,000, but following representations that this was too high, the DWP has decided to reduce this to £3,600 (based on 2005 earnings levels).This cap will be reviewed in 2017. It was also originally proposed that in the first year of personal accounts it would be possible to pay in up to £10,000 reflecting the fact that individuals may have been building up savings between now and 2012 which they would like to pay into personal accounts.This level is now also being reviewed.

Another interesting development relates to the governance of the personal accounts scheme. It will be run as a trust-based occupational pension scheme with a third of the trustee board
being nominated by a panel of current personal account members (similar to the one-third proportion of membernominated trustees in an ordinary occupational pension scheme).

The Pensions Act 2007, which received Royal Assent on 26 July, contains the provisions to establish the Personal Accounts Delivery Authority and Gordon Brown has confirmed that a further Pensions Bill will follow in the next parliamentary session to legislate for the operation of personal accounts in practice.

Other recent developments

Financial Assistance Scheme:
AndrewYoung of the Government Actuary’s Department has provided an interim report on funding for the Financial Assistance Scheme (FAS). This suggests that more assets may be available in schemes eligible for the FAS than previously thought, although it indicates that there would be serious difficulties in attempting to use unclaimed assets to increase FAS benefits. Following on from this report, the Government has indicated that it will match the additional funds identified by the Young Review with the aim of increasing the benefits from the FAS from 80% to closer to 90% of core benefits.

Thornton Review of Pensions Institutions:
Paul Thornton’s review of Pensions Institutions has recommended that the Pensions Ombudsman should be transferred to form part of the Financial Ombudsman Service. It recommended close cooperation between the PPF and the Pensions Regulator as well as between the Pensions Regulator and the FSA but did not recommend merging any of these organisations.

Member-Nominated Trustees:
Existing employer opt-outs will come to an end at 31 October 2007 if they have not already expired. Trustees should now be starting to implement nomination procedures for member-nominated trustees. Trustees who have not taken any action yet should talk their usual Punter Southall contact.

Transfers to Australian Superannuation Schemes:
Following changes to Australian superannuation schemes coming into effect from 1 July 2007, HM Revenue and Customs have updated the requirements for overseas schemes to which a recognised transfer can be made. The effect is that transfers to Australian schemes may continue to be made as before.

Companies Act 2006:
The Companies Act 2006 allows directors of pension scheme trustee companies to be indemnified against liability arising from the actions of the trustee company, but only so long as the indemnity does not cover fines, regulatory penalties or any liability incurred in defending criminal proceedings leading to conviction. Draft regulations confirm that this will only apply to new indemnities introduced from 1 October 2007, so any existing indemnities that do not explicitly exclude fines or penalties should still continue to be valid.

VAT Exemption on Management Fees:
A recent judgment in the European Court of Justice found that an investment company should be exempt from paying VAT on the management fees charged to it by third parties. This paves
the way for pension schemes to make a similar case that they should also be exempt fromVAT and could in theory lead to significant rebates.

STOP PRESS:
The Deregulatory Review report has now been published.We will be producing a briefing note on its recommendations shortly.

For further information please contact your usual Punter Southall contact.

© 2007 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.