Pensions Act update No.2

United Kingdom
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This is the second update in our series on regulations and codes of practice issued under the Pensions Act 2004. Further explanation of the provisions of the Act can be found in our Plain English Guide to the Pensions Act.  

The Pensions Regulator: notification and clearance

Regulations have been issued which set out the events which employers and trustees have to notify the Regulator of from 6 April 2005 (SI 900/2005). They do not apply to wholly money purchase schemes or schemes in wind up before 6 April 2005.

The Regulations provide that trustees and employers (as appropriate) must notify the Regulator of a wide variety of events including:

  • a decision to take action which may result in a debt to the scheme not being paid in full;
  • 2 or more changes in certain key employer posts or the scheme auditor or actuary within the previous 12 months;
  • a decision to make a transfer out or accept a transfer in which is more than 5% of the scheme assets or £1,500,000;
  • a decision to grant benefits on more favourable terms without either seeking actuarial advice or securing any additional funding advised by the actuary;
  • a decision to grant benefits to a member the cost of which is more than 5% of the scheme assets or £1,500,000;
  • wrongful trading by the employer;
  • breach of a banking covenant by the employer;
  • a change in the employer's credit rating;
  • a change in control of the employer company;
  • the conviction of a director or partner of the employer for an offence involving dishonesty.

Directions to be issued by the Regulator will provide that some of these events do not always need to be notified to the Regulator, depending on factors such as the funding state of the scheme.

Under the Pensions Act 2004, various activities by employers (or their associates or connected persons) which the Regulator perceives as being aimed at avoiding a pensions debt can give rise to onerous obligations to make good the debt in the form of contribution notices or financial support directions. To help decide which transactions might fall foul of these requirements, employers can seek clearance from the Regulator. The Regulator has issued guidance on the circumstances when it would expect clearance to be sought which include:

  • granting of a fixed or floating charge which affects more than 25% of the assets of the employer or group;
  • a return of capital (including dividends, share buy backs and distributions in specie) which over a year is "large or unusual" or leaves the employer with negative distributable reserves;
  • a change in the control group structure of the employer.

The Regulator has also indicated that it expects to be told about such events, whether or not clearance is sought (the notifiable events mentioned above may eventually be expanded to cover these clearance-related events). 

Further information can be found on the Regulator here.

Trustees' knowledge and understanding

The Act will introduce (probably from April 2006) an increased duty of care for trustees, requiring them to have knowledge and understanding of trust and pensions law and pension fund investment and to be conversant with various scheme documents. Draft regulations have been issued which will allow new individual trustees a six month grace period to acquire the relevant knowledge.

A draft code of practice has also been issued which looks at the degree of knowledge and understanding which will be required and what "conversant" with relevant documents means. The draft code provides that:

'The degree of knowledge and understanding required is that which is appropriate for the purposes of enabling individuals properly to exercise the function of trustee of their own schemes… the level of knowledge and understanding will also vary according to the role of trustee and the nature and complexity of the scheme…  At the most basic level, for example, all trustees will need some investment knowledge, even if the decision making power on investments is delegated or if the scheme assets are invested exclusively in the life funds of pension providers. At a more advanced level, where the trustee takes on a specialist role (e.g. chair of an investment sub-committee) there is an expectation that the investment knowledge and understanding for that role is deeper, broader and more technical than that of the trustee of a scheme which invests exclusively in insurance policies. In all instances the trustee needs to know and understand enough to be able to ask challenging questions of their advisers'.

In addition, the Regulator has said that it will ask trustees how they have met the legislative requirements on trustee knowledge and understanding in the scheme return.

Investment

Draft regulations have been issued which will require trustees to carry out at least a triennial review of their statement of investment principles (as opposed to the adhoc approach under the Pensions Act 1995). Borrowing is prohibited except on a temporary basis for liquidity purposes. Minor changes are also made to other provisions relating to investment.

Scheme funding

Draft regulations have been issued which set out how assets and liabilities should be valued for the purposes of scheme specific funding and what the statement of funding principles and statement of contributions should contain. The draft regulations also provide that employer consent to the statement of funding principles, schedule of contributions, recovery plan and calculation of the scheme's "technical provisions" will not be required where scheme rules provide that contribution rates can be set without the agreement of the employer. Instead, trustees of such schemes will need to consult with the employer.

A draft code of practice has also been issued on scheme funding which provides guidance on how trustees should deal with the actuary and the employer and the considerations they should bear in mind when the various documents required under the scheme specific funding arrangements are being prepared. It also looks at the types of recovery plan which might be acceptable to deal with a shortfall. A draft guidance note to assist trustees has also been published. 

PPF

A huge raft of regulations dealing with some of the detailed operational aspects of the PPF have been published.

They confirm that a scheme cannot be eligible for the PPF if it is being wound up before 6 April 2005 (SI 599/2005). Additional information has also been given on compensation payable from the PPF (SI 670/2005) and how scheme assets and liabilities are to be valued for the purposes of the PPF and the risk based levy (SI 672/2005).

If anyone believes that the PPF Board have committed an act of maladministration, Regulations set out how they can go about making a complaint and how the PPF Board must deal with that complaint (SI 650/2005). (Further provisions about the review of PPF Board decisions are set out in SIs 600/2005 and 669/2005)

Finally, whilst an assessment period for a scheme is ongoing (ie while PPF Board is determining whether or not a scheme will benefit from the PPF), the PPF Board may review ill-health pensions which came into payment within certain time limits and if certain conditions are met, may treat a member receiving an ill-health pension as a normal deferred member (SI 652/2005).