The Government has recently made a number of announcements about its future plans for pensions. Most recently, the Queen's Speech on 6 November announced a new Pensions Bill to "place a duty on every employer to contribute to good quality workplace pensions for their employees". This will require employers to enrol their employees automatically into a new system of personal accounts, unless the employer already provides an adequate pension scheme for them. Now that the Conservatives have indicated that they have some concerns with the proposals for personal accounts as they currently stand, we can look forward to some interesting debates in Parliament.
The Pensions Bill will also contain any measures that the Government decides to introduce as the result of the Deregulatory Review. As mentioned in our last Technical Bulletin, Chris Lewin and Ed Sweeney laid their report on deregulation before ministers at the end of July. The Government has now published its response to their report and has decided not to take forward some of the reviewers' recommendations. In particular, it has rejected a suggestion that employers might be able to agree with trustees circumstances in which they could recover a surplus from a scheme that is fully funded on a scheme specific funding basis.
The Government carried out a brief consultation on three areas raised by the deregulatory review. First, it considered reducing the cap on inflation increases on deferred pensions from 5% to 2.5% for benefits accruing in future. However, given the number of schemes that are now closed to future accrual, it is questionable whether this change would make a major difference to the burdens placed on employers (especially given the additional administration costs of having to calculate the rate of increase separately for past and future benefits). Second, it is considering whether any such change should be made overriding so that schemes would be able to take advantage of the change even if their scheme rules did not give them the power to do so. Finally, the Government also consulted on whether there is a need to introduce a new type of risk-sharing scheme that would share risks more equally between employers and members than a conventional defined benefit or defined contribution scheme. The consultation closed on 15 November to allow any changes to be included in the Pensions Bill.
We have also now seen the publication of a National Insurance Contributions Bill. This will give effect to the changes announced to the State Second Pension (S2P) in the Pre-Budget Report of 9 October. The Government is proposing bringing forward the introduction of the Upper Accrual Point from 2012 to 2009 - a move which gave rise to headlines of a "£2 billion raid on pensions". The Upper Accrual Point will be a fixed cap to the highest band of earnings on which S2P is accrued, and its introduction is the first step in the Government's plans to make S2P a flat-rate top-up with effect from around 2030. The change to the timing of the Upper Accrual Point appears to be needed because of the changes announced to the Upper Earnings Limit (UEL) in the last Budget, which would otherwise have had the effect of increasing the amount of S2P payable to higher earners. The Upper Accrual Point will be set at £40,040 per annum.
This change will have implications for both pension schemes and individuals. From 6 April 2009, National Insurance (NI) rebates will only be payable on earnings between the Lower Earnings Limit and the Upper Accrual Point (meaning that full NI contributions will be paid on earnings above the Upper Accrual Point). This will require changes to payroll systems and will reduce the amount of NI rebates being received. There will also be implications for schemes that are integrated with the state pension system. Please contact us for a briefing note covering the changes to S2P in more detail.
Reforms to internal dispute resolution procedures
After years of waiting, it looks as if the over-prescriptive rules for Internal Dispute Resolution (IDR) procedures are finally on their way out. The Government had introduced legislation in the Pensions Act 2004, with the aim of removing the existing cumbersome two-stage process. However, the legislation was faulty and would have meant that most existing IDR procedures would have had to be changed. So, the Government used the Pensions Act 2007 to amend the 2004 Act. Schemes will now be able to choose whether to keep their existing two-stage procedure or to introduce a simplified single stage process. This change will come into force in April 2008.
The DWP has now published draft regulations that will remove the prescriptive requirements for hearing a complaint in the existing regulations. The only requirement now expressed in legislation is that complainants must be informed of the existence of The Pensions Advisory Service and the Pensions Ombudsman. The Pensions Regulator has also published a draft code of practice which sets out its view on reasonable timescales for IDR processes. This indicates that a decision should be made and members informed within four months of the complaint being made. The decision should be notified to the complainant within 15 working days of the decision being made. Where a complainant has left the pension scheme, they will have a six month period from leaving in which to make the complaint.
Developments in age discrimination
It is now nearly a year since the age discrimination legislation first applied to pension schemes on 1 December 2006. Since then, there has been widespread concern that neither the legislation nor the guidance drawn up by the DWP deals adequately with questions of flexible retirement. We had been expecting the DWP to provide us with further guidance in this area. However, the document published by the DWP in October turned out not to be the draft guidance we had been hoping for, but rather a series of questions for consultation.
By flexible retirement, the DWP is referring to situations where a member draws some or all of their pension whilst continuing to work or where a member continues to work after reaching their scheme's normal pension age. It is not clear to what extent failing to offer flexible retirement could be regarded as discrimination on the grounds of age nor what benefits should be offered to members who choose to work beyond their normal pension age. The consultation notes that so far employers have been reluctant to change their rules to allow flexible retirement in case it later turns out that a court views this as giving rise to age discrimination.
Separately, age discrimination has given rise to a couple of high profile legal cases. In one, a former partner at Freshfields, Peter Bloxham, had brought a case to the Employment Tribunal alleging that Freshfields had been guilty of age discrimination in the changes it had made to its retirement scheme. The tribunal found that, whilst there had been age discrimination, it could be objectively justified and was therefore not unlawful. The case therefore provides some reassurance to pension schemes and employers who have relied on objective justification of discriminatory practices.
There has also been an important case in the European Court of Justice (ECJ) which was considering whether the Spanish Government had been right to allow collective schemes to retain a compulsory retirement age of 65. The ECJ concluded that this could be justified, on the grounds that it had a legitimate aim, namely to provide full employment. The organisation Heyday is in the process of bringing a similar case against the UK's default retirement age of 65. Whilst it can be argued that the recent decision is related to the particular circumstances in Spain, this judgment suggests that it may be difficult for Heyday to prove their case.
Other recent developments
Transfer Values: The Government has announced that it will now delay the introduction of the transfer value legislation until October 2008. The existing legislation will continue to apply until then.
Sex Discrimination and Transfers In: A recent ECJ case found that using different factors for men and women when calculating service credits for benefits transferred into a pension scheme constituted sex discrimination. Schemes which accept transfers in may want to consider taking legal advice on the issue.
Myners Principles: The NAPF has published its review of the Myners Principles for institutional investment six years after their introduction. This recommends that the Principles should continue to be voluntary and that responsibility for the Principles should pass to the Pensions Regulator and the pensions industry.
PPF Levy Valuations: The PPF has reminded schemes that it is a legal requirement to supply them with a section 179 (PPF levy) valuation by 31 March 2008. Our December client seminars will focus on 'Managing your PPF Levy'.
Analysis of Recovery Plans: The Pensions Regulator has published an analysis of the recovery plans that it had received up to the end of July 2007. This showed that around 70% of schemes triggered on at least one of the Regulator's triggers. Please contact us if you would like a copy of our briefing note on recovery plans.
Self-Administered Pension Scheme Mortality: The Continuous Mortality Investigation has published further statistics on the mortality experienced by members of pension schemes. This includes a breakdown by the size of the members' pensions and by the industry in which the members work. Please ask jenny.gallagher@puntersouthall.com if you would like a copy of our briefing note on this and other recent developments in mortality.
MiFiD: The Markets in Financial Instruments Directive came into force on 1 November 2007. This should not have any direct impact on the trustees of pension schemes, although they are likely to have had to sign new terms of business with their investment manager.
Extension of Cross-Border Regime: With effect from 26 November, the remit of some of the provisions of the Pensions Act 2004 has been extended from EU member states to the EEA. This means that schemes with members based in Norway, Iceland or Liechtenstein may now find themselves caught by the cross-border regime.
© 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.
To download this technical bulletin as a pdf, please click here.
