The key objective of this legislation, which has been phased in since April 2005, is greater protection for members of occupational pension schemes.
The Pensions Regulator
The Pensions Regulator replaced OPRA (Occupational Pensions Regulatory Authority) with effect from April 2005. The Regulator is focussed on promoting good practice in the running of schemes, and protecting member benefits. It has powers to intercede to sort out problems within schemes.
The Pension Protection Fund
You may be aware of recent cases where members of under funded occupational pension schemes have lost their pension benefits following the winding up of their pension scheme, usually due to the insolvency of the sponsoring employer.
The Pension Protection Fund (PPF) was established on 6 April 2005 to pay compensation to members whose employer becomes insolvent and the assets remaining in their defined benefit pension scheme are inadequate to pay the PPF level of benefits.
The PPF is funded by a levy on occupational pension schemes, plus the transfer of any assets remaining in schemes that are accepted into the PPF.
What Benefits will be payable from the PPF?
In the event of a claim on the fund;
- Members who have reached Normal Pensionable Age (NPA) and those who have retired on the grounds of ill health will receive their full pension.
- However, those who are below NPA will have their benefits restricted to 90% of those promised under the old scheme, further capped at a maximum of around £27,000 a year (2007/8).
- Spouses and registered civil partners only will receive 50% of the above level of benefits.
- Only service from April 1997 will receive any pension increases and this will be capped at 2.5% per year.
Scheme Funding
Scheme Specific Funding regulations took effect at the end of September 2005. Their aim is to improve scheme funding and so increase the security of members' benefits.
Schemes must be valued at least every three years, with actuarial reports being prepared in the years between formal valuations. This increased monitoring will avoid nasty surprises if a scheme's funding position deteriorates.
Trustees must prepare a Statement of Funding Principles detailing how the Scheme will meet its statutory funding objective. If the Scheme is in deficit, a recovery plan detailing how and by when the shortfall will be paid off, must be lodged with the Pensions Regulator.
Historically, with the exception of transfers from the public sector, pensions have not been covered by TUPE, which was anomalous given that pensions are seen as a component of pay under law.
Since April 2005, transferring employees who had access to an occupational pension scheme with their 'old' employer must be offered access to some form of pension arrangement by their 'new' employer.
This does not need to replicate the old scheme, but must be set to at least a minimum standard. The public sector will, however, retain the right to set its own requirements.
Deferral of State Pensions
From April 2005 improved enhancements have been available to individuals who choose to defer claiming their state pension. This reflects Government's aim to encourage people to work for longer. But will the incentives be enough to persuade you to work into your dotage?
Prior to April 2005, state pension could be deferred for up to five years and was increased at the rate of 7.4% a year to reflect late payment.
Since April 2005, the deferral rate has improved to 10.4% a year and the time limit for deferment has been removed. A new option was introduced: individuals can choose to take a taxable lump sum instead of claiming enhancements to their pension.
Pension Increases
Until April 2005 occupational pension schemes were required to increase pensions built up from April 1997 in line with the Retail Prices Index (RPI) up to a maximum of 5% a year. This is known as Limited Price Indexation (LPI). For pensionable service from April 2005 onwards this LPI requirement was reduced to 2.5%.
However, the SHPS Pensions Committee has opted to continue to pay increases at RPI up to a maximum of 5%. The aim of the Social Housing Pension Scheme is to fully inflation proof pensions in payment, but this is not guaranteed.
Miscellaneous Provisions
In addition to the points outlined above there are a whole host of other changes to legislation. Briefly these include:
- A requirement to consult members and/or their elected representatives on proposed changes to their pension provision.
- A legal requirement that at least one third of trustees are Member Nominated. The Pensions Trust already meets this requirement with half of the directors of the Trustee Board being member nominated.
- Trustees or directors of a trustee body are expected to have sufficient ‘knowledge and understanding’ to be able to properly exercise their role as trustees. Trustees will be expected to be conversant with the Trust Deed and Rules and Statements of Funding & Investment Principles, as well as having a basic understanding of Pensions and Trust law. Your Committee has regular training sessions to ensure it meets this requirement.
- The Government reserves the power to provide financial planning within the work place. Various pilot studies are being initiated to enable the government to decide whether and how to introduce this legislation. Linked to this there may well be a requirement to produce combined occupational and state pension forecasts, enabling people to look at the total level of their forecast pension provision.