Select Committee on Delegated Powers and Deregulation Seventeenth Report


Part II - Pensions: General

CLAUSE 9 - MONITORING OF EMPLOYER'S PAYMENTS TO PERSONAL PENSION SCHEMES

57. Clause 9 inserts into the Pension Schemes Act 1993 new section 111A which contains a set of provisions governing the timely payment of contributions by employers into personal pension schemes. These provisions, which are consistent with provisions introduced by the Pensions Act 1995 for occupational pension schemes, require trustees and managers of personal pension schemes to monitor the timeliness of payments by employers. OPRA will be able to impose sanctions on employers who either pay late or do not pay at all.

58. It is important that contributions to occupational and personal pensions are paid on time. The level of detail required to establish monitoring arrangements to achieve this end and thus further safeguard the interests of scheme members makes this, in the Department's view, suitable for secondary legislation. It also follows the precedent set with occupational pensions where detailed arrangements such as these are provided for in regulations. It will also enable the provisions to be adapted or extended to take into account any future changes to pension provision.

59. The new section 111A introduces a requirement that employers must prepare and maintain a record of any direct payment arrangement (i.e. an arrangement under which pension contributions are paid by an employer in respect of an employee towards a personal pension scheme). Subsection (4)(b) of the new section 111A allows for regulations to specify that the record must satisfy certain requirements. It is intended to use the powers to provide that, for example, the record must contain separate entries for the rates and due dates of contributions payable on the employer's own account and on behalf of the employee out of deductions from pay. Regulations 18 and 19 of the Occupational Pension Schemes (Scheme Administration) Regulations 1996 (SI 1996/1715) specify the detail of the information which must be contained in payment schedules in defined contribution occupational pension schemes. It is intended to use the power to introduce similar requirements for personal pensions.

60. Subsection (5) is also concerned with the agreement between the employer and the employee. It provides for regulations to prescribe the time within which the record or agreement is to be sent to the trustees or managers. It is intended to use this power to specify that the record or revised record must reach the trustees or managers no later than the date on which the first payment to which the record refers falls due. Putting these requirements in regulations will provide flexibility should practice or circumstances show change is needed.

61. Subsection (6) requires trustees and managers of personal pension schemes to monitor the timeliness of payments by employers, and where there is late payment or non-payment to report the incident to OPRA. Regulations may prescribe circumstances where no report is required. It is intended that they will exempt trustees and managers from reporting minor or infrequent breaches to OPRA. For example, where the contributions have been paid no more than 10 days late and where the employer has, in the past, usually met the time limit. This is intended to allow for one-off failures arising from unforeseen circumstances such as sudden illness and absence of payroll staff or breakdown of computer systems. It is intended that the time limits within which reports must be submitted will be set out in regulations as 30 days. The intention is that, wherever possible, the rules for personal pensions will reflect those applicable to occupational pensions which are shortly to be amended to introduce the 10 and 30 day limits described above. The relevant provisions covering occupational pensions are regulations 20 and 21 of the Occupational Pension Schemes (Scheme Administration) Regulations 1996 (SI 1996/1715).

62. Subsection (7) requires the trustees or managers of a scheme to send an employee a statement containing the amounts and dates of payments made to the scheme by the employer under the direct payment arrangement. It is intended that regulations made under subsection (7) will specify the intervals within which the statement must be sent. Regulations may also specify the periods to be covered by such statements. It is intended to use the powers to require that the trustees or managers of the scheme must send the employee an annual statement and that the statement is issued to the member within a specified period after the end of the scheme year. It is intended that the timing of the statement will substantially reflect the provisions on timing of statements in occupational pension schemes which are contained in the Occupational Pension Schemes (Disclosure of Information) Regulations 1996 (S.I. No 1996/1655).

63. Subsection (15) defines the expression "due date" (used in subsections (4), (6) and (8)) with respect to contributions paid by the employer and deductions from employees' earnings. It is intended to use the delegated power in subsection (15)(b) to specify that deductions from an employee's pay must reach the pension provider by the 19th day of the month following the month in which the deduction from pay is made. The 19-day time limit is, for practical purposes, in line with time limits for paying tax and National Insurance contributions and is, therefore, a time limit that employers are well used to operating.

64. Subsection (16) provides a power to make regulations modifying the new section 111A where the direct payment arrangements implement an employer's obligation to deduct from pay contributions to a stakeholder pension scheme and to pay them to a third party instead of directly to schemes. This would apply if a clearing house is set up to deal with payments to stakeholder pension schemes. If this happens the obligations on trustees and managers to notify OPRA of non-receipt of payments, or the employee of receipt of payments, will need to be modified, as the payments will not be coming directly to them. It is intended to use the power in subsection (16) in these circumstances to introduce regulations to modify the obligations of trustees and managers.

CLAUSE 10 - LATE PAYMENTS BY EMPLOYERS TO OCCUPATIONAL PENSION SCHEMES

65. Clause 10 replaces subsection (8) of section 49 of the Pensions Act 1995 with new subsections (8) to (13). At present, section 49(8) makes it a criminal offence for an employer to deduct money from employees' salaries as contributions towards an occupational pension scheme and not pay it to the scheme trustees within a prescribed period. The prescribed period is set out in regulations as 19 days from the end of the month in which the money was deducted. See regulation 16 of the Occupational Pension Schemes (Scheme Administration) Regulations 1996 (S.I. No 1996/1715).

66. The amendments to section 49 provided for in clause 10 will enable OPRA to impose a civil sanction for breach of the requirement whilst retaining a criminal sanction where the employer has been convicted of fraudulently evading the obligation to make timely payment. They also ensure that a civil and criminal penalty cannot be imposed for the same offence.

67. The level of detail that will be needed to set out the various rules and the need to allow for future flexibility, should practice or circumstances show that change is needed, mean that, in the Department's view, secondary legislation is the appropriate vehicle for these provisions.

68. The new section 49(8) re-enacts the existing regulation-making power, enabling regulations to be made to set out the time limit for paying employee contributions to the scheme trustees. It is intended to retain the existing time limit of 19 days from the end of the month in which the deductions were made. The matter has been left to delegated legislation in order, as with the original power, to allow for flexibility, should a change be necessary at some point in the future.

69. The new section 49(9)(b) introduces a requirement for trustees or managers to report breaches of the time limit to OPRA. The new provision also enables regulations to be made to set out circumstances in which the trustees or managers are not required to report breaches. The Government intends to use regulations made under this power to set out the types of scheme which will be exempt from the requirement to report breaches. It is intended that the exemptions will apply to schemes where the interests of the members are protected by other means, for example, where the benefits are protected by statute (public service schemes) or where all the members are trustees of the scheme. It is intended that the time limits within which reports must be submitted will be set out in regulations as 30 days.

70. The Government also intends to set out in regulations the detail of easements in reporting minor or infrequent breaches to OPRA. For example, where the contributions have been paid no more than 10 days late and where the employer has, in the past, usually met the time limit. This is intended to allow for one-off failures arising from unforeseen circumstances such as sudden illness and absence of payroll staff or breakdown of computer systems.

CLAUSE 11 - EFFECT OF PERSON'S INSOLVENCY ON HIS PENSION RIGHTS

71. Clause 11 provides that on the bankruptcy of an individual, pension rights under an approved pension arrangement will be excluded from his estate. Subsection (2) lists the types of pension arrangement that come within the meaning of "approved pension arrangement".

72. Pensions, like other financial services, are a rapidly developing field. The Department believes that these provisions are appropriate to secondary legislation because of the need for the flexibility to be able to amend the rules should other schemes be identified or developed in the future.

73. Subsection (2)(h) contains a regulation-making power to allow the Secretary of State to prescribe additional kinds of pension arrangements as approved pension arrangements. A regulation-making power is appropriate to cater for the wide variety of Inland Revenue approved pension arrangements that exist. It is intended to use regulations under this power to specify that the following types of existing pension arrangements are designated as approved:

  • pension rights in superannuation funds set up before 1980 into which contributions cannot be made, but which, subject to certain conditions, enjoy exemptions from income tax (commonly referred to as "old code schemes");
  • single premium payments by employers to purchase annuities for employees about to retire (sometimes referred to as "Hancock annuities"), or for the widow or widower of a member of staff who has just died;
  • pension arrangements set up in the United Kingdom for people working abroad;
  • pension arrangements of people from abroad working in the United Kingdom which are accepted as corresponding to United Kingdom schemes approved by the Inland Revenue for the purposes of tax relief.

74. Before regulations are laid, the Department will consult with the pensions industry and the Inland Revenue to ensure that all appropriate types of arrangement are included.

75. In addition, it is intended to use this regulation-making power to protect new forms of pension arrangement. For example, DSS is currently in discussion with the Inland Revenue as to the exact form of approval that will be required for stakeholder pension schemes.

CLAUSE 12 - EFFECT OF INSOLVENCY ON UNAPPROVED PENSION RIGHTS

76. Clause 12 provides that pension rights in an unapproved pension arrangement may be excluded from a bankrupt's estate where those rights are necessary for the likely needs of the bankrupt and his family. The exclusion will either take the form of a court order or an agreement between the bankrupt and his trustee in bankruptcy. The regulation-making power in subsection (1) provides that the Secretary of State may make regulations to exclude some or all of the unapproved pension rights from the bankrupt's estate. It is intended that regulations will specify the conditions under which pension rights may be excluded from the estate and the time limits for applications under this provision. Further details are set out below.

77. Consultation is proposed with the pensions industry and others on some of the issues to be covered in regulations, including the details of the agreement (see below).

78. Subsection (2)(a)(i) enables regulations made under subsection (1) to provide for rights to be excluded by a court order made on the bankrupt's application by a prescribed court. It is intended that the regulations will specify that the prescribed court is the court dealing with the insolvency.

79. Subsection (2)(a)(ii) enables regulations made under subsection (1) to provide that, as an alternative to a court order, a bankrupt and his trustee in bankruptcy can come to an agreement that the pension rights in an unapproved arrangement are to be excluded from his estate. It is intended that conditions attaching to the agreement will be set out in regulations.

80. Subsection (2)(b) specifies criteria by reference to which a court order for the exclusion of rights under unapproved pension arrangements from the individual's estate on bankruptcy is to be made. It is intended that regulations will provide guidelines for the court's assessment of the likely needs of the bankrupt and his family; and for the court's assessment of the pension benefit likely to be available to the bankrupt for the meeting of any such need.

81. Subsection (2)(c) provides that regulations made under subsection (1) may require prescribed persons to provide information about pension arrangements for the purposes of the making of applications to court or the making of qualifying agreements. It is intended that regulations will set out that the prescribed persons will be the persons responsible for the pension arrangement, usually the trustees or managers.

82. Subsection (3) provides that the qualifying agreement has to meet such requirements as may be prescribed. In addition to the time limits set out below, it is intended that regulations will set out further requirements that the agreement has to meet. The intended regulations would specify that once made, the agreement cannot be revoked by the trustee in bankruptcy, except in very limited circumstances - for example, where full facts have deliberately been withheld. They will also specify what formalities are required.

83. Subsection (3)(b) enables regulations to provide that an unapproved pension arrangement is to be of a prescribed description. It is intended that the types of unapproved arrangements that will be prescribed will be arrangements which vest in the trustee in bankruptcy as a result of subsections (5) or (7) of clause 11; funded unapproved retirement benefit schemes; and unfunded unapproved retirement benefit schemes.

84. In addition to regulations set out above, it is intended that regulations made under the overall power in subsection (1) will specify certain time limits for the making of applications for a court order and agreements. It is intended that the time limits for court orders will be specified in regulations as:

  • three months from the date of the bankruptcy order; or
  • where subsection (5) of clause 11 applies, (tax approval not granted), three months from the date of the event specified under subsection (a) or (b) (whichever is appropriate); or
  • where subsection (7) of clause 11 applies (tax approval withdrawn), three months from the date of the event specified under subsection (a) or (b) (whichever is appropriate).

85. In respect of the qualifying agreement, it is intended that regulations will specify that the agreement will only be valid if it is completed within two months of the events specified above - for example, two months from the date of the bankruptcy order. This lesser time limit is to allow the bankrupt time to make an application to court within the 3 month period should an agreement with the trustee in bankruptcy not prove to be achievable.

86. The Department believes that this provision is appropriate for secondary legislation because (i) the subject matter of the provision - the extent to which likely pension benefit will meet likely needs - is necessarily one which requires flexibility, (ii) within the overall statutory framework it enables the detail of the provisions to be adjusted in the light of consultation with the pensions industry and others, (iii) it follows the approach taken elsewhere in pensions legislation.

CLAUSES 15 AND 16 - EXCESSIVE CONTRIBUTIONS MADE BY PERSONS WHO HAVE BECOME BANKRUPT

87. Clause 15 applies to England and Wales and inserts new sections 342A - C into the Insolvency Act 1986. Clause 16 applies to Scotland and inserts new sections 36A - C into the Bankruptcy (Scotland) Act 1985. Both clauses provide that a court can order that contributions to a pension can be recovered where the court considers they are excessive. References below are to subsections of sections 342A - C; the equivalent subsections in sections 36A - C are numbered in the same sequence.

88. The Department believes that these provisions are appropriate to secondary legislation because of the highly technical nature of the calculation of pension values. Detailed provisions on the calculation of cash equivalents in other areas of pensions law are also contained in secondary legislation.

89. Section 342C(4) enables regulations to provide for the calculation and verification of the value of pension rights. Values are required for the purposes of sections 342B(4)(b) (the value of the bankrupt's pension rights in the scheme) and 342B(6)(a) and (b) (the reduction in the scheme's liabilities following the recovery of excessive contributions).

90. It is proposed that the system presently used for the calculation of transfer values will provide the basis for the methodology and assumptions adopted for the calculation of the value of pension rights. There are already detailed provisions in pensions law for the calculation of cash equivalent transfer values. For example, in the Occupational Pensions Schemes (Transfer Values) Regulation 1996 (S.I. No 1996/1847). Regulations will provide for the calculation of cash equivalents for the purposes of pension sharing (see clause 26), and it is intended that regulations for the calculation of the value of pension rights where there has been a recovery in respect of excessive contributions will closely follow those regulations.

91. Section 342C(5) elaborates on the nature of the regulation-making power. In relation to salary related schemes, it is intended to make provision for cash equivalents to be calculated in a manner approved by a qualified actuary. In the case of public service schemes provision will be made for the manner of calculation to be approved by the Government Actuary. It is also intended to provide that the scheme actuary and the Government Actuary should calculate the cash equivalent in accordance with guidance issued by the Institute of Actuaries and the Faculty of Actuaries. As mentioned above there are already detailed provisions in pensions law for the calculation of cash equivalent transfer values. See the Occupational Pensions Schemes (Transfer Values) Regulation 1996 (S.I. No 1996/1847).

92. The new section 342C(8) reflects the breadth of the provision contained in Rule 12.1(3)(c) and (d) of the Insolvency Rules 1986 (S.I. 1986/1925), concerning the nature and scope of regulations made pursuant to paragraph 1 of that Rule (power of Secretary of State to make regulations with respect to, inter alia, the carrying out of the functions of a trustee of a bankrupt's estate). Subsection (8) similarly makes clear that regulations made under the provisions dealing with the recovery of excessive pension contributions (new sections 342A to 342C) may make different provision within the classes to which the specific regulation-making power relates, and may make incidental or transitional provisions. Similar considerations apply in respect of regulations to be made under the Bankruptcy (Scotland) Act 1985.

CLAUSE 17 - COMPENSATING OCCUPATIONAL PENSION SCHEMES

93. Clause 17 amends one of the eligibility criteria for making a claim under the pensions compensation provisions contained in sections 81 to 85 of the Pensions Act 1995. It also increases the maximum amount of compensation that can be paid under these provisions. A scheme will be eligible for compensation if its assets fall below "the protection level".

94. Subsection (2) of clause 17 provides for the insertion of a new subsection (2A) in section 81 of the 1995 Act; subsection (2A) describes what is meant by "the protection level". It is the total of the amount of the scheme's liabilities in respect of its pensioner members and such other of its members as may be prescribed, plus expenses, plus 90% of the amount of its liabilities in respect of all other scheme members. It is intended that the members to be prescribed under paragraph (a) of the new subsection (2A) will be those who are within 10 years of retirement. This group is already identified in regulation 7 of the Occupational Pension Schemes (Minimum Funding Requirement and Actuarial Valuations) Regulations 1996 ((S.I. 1996/1536) which sets out the method that is to be used for valuing the amount of scheme liabilities for the purposes of the statutory minimum funding requirement (see section 56 of the 1995 Act).

95. Subsection (6) of clause 17 provides for the insertion of a new subsection (4) in section 83 of the 1995 Act; paragraph (a) of subsection (4) contains an equivalent regulation-making power to that contained in the new section 81(2A) (a) which is to be used in calculating the maximum amount of compensation payable under the compensation provisions. It is intended that the members prescribed under this power will be the same as those prescribed under the new section 81(2A)(a).

96. Prescribing this group in regulations will provide the flexibility necessary to ensure that the minimum funding requirement and the compensation provisions continue to be aligned.

SCHEDULE 2 - PENSIONS: MISCELLANEOUS AMENDMENTS

97. Paragraph 5 of Schedule 2 amends section 28 of the Pension Schemes Act 1993 so as to remove a member's right to give effect to protected rights through interim arrangements, except where his personal pension scheme offers such a facility. New subsection (1A) replicates the power in existing subsection (1A) to make regulations prescribing the conditions that must be satisfied by an interim arrangement. Regulation 6 of the Personal and Occupational Pension Schemes (Protected Rights) Regulations (IS 1996/1537) has been made under the power in section 28(1A). It is intended to retain the existing conditions laid down in regulation 6. These provide for:

  • payments to be made at monthly intervals (unless the member elects for less frequent intervals);
  • the right of the member to elect to terminate the arrangement; and
  • in the event of the death of a member, or his or her widow or widower, for the balance of the value of any protected rights to be paid to any person in accordance with the directions of the member, widow or widower, or, where no such directions are given, to his or her estate.

98. These conditions have been provided through delegated legislation to allow the flexibility to make any necessary adjustments in the light of developments in the operation of interim arrangements.

99. When a person leaves a contracted-out salary-related pension scheme with less than 2 years service (or dies having less than 2 years service) the scheme may refund their contributions rather than providing him or her (or his or her surviving spouse) with a pension. Where this happens the trustees pay a Contributions Equivalent Premium (CEP) which restores the leaver's (or widow's rights) in the State Earnings Related Pension Scheme for that short period of service. The policy is that the payment of a CEP should be mandatory where there are state scheme rights to be restored.

100. Paragraph 7(1) of Schedule 2 amends a defect in the Pension Schemes Act 1993 and makes the payment of a CEP mandatory, except in prescribed circumstances. Similar amendments are also made to the to the Pension Schemes (Northern Ireland) Act 1993 in subsection (4)(2).

101. Paragraph 7(1)(c) inserts three regulation-making powers into section 55 of the Pension Schemes Act 1993. The first, in new subsection (2B), allows for the specification of circumstances where a CEP is not payable. The Government intends to use the power to exempt the trustees from paying a premium, where payment would not restore any rights in the State Scheme. For example, trustees would be exempted from paying CEPs in respect of widowers because, under existing legislation, widowers cannot receive a State widower's pension. Therefore, the premium would not be of any benefit.

102. The other two new regulation-making powers are in new subsection (2C). These allow the Secretary of State to require a prescribed person to notify the Inland Revenue that a premium is to be paid within a period and in a manner to be prescribed. The Government intends to use these powers to require trustees to notify the Inland Revenue in writing of their intention to pay a premium. It is intended that the notification will have to be made within 2 years of the winding-up of a scheme or, in any other case, within a period beginning one month and ending 6 months after the date on which the earner's contracted-out employment is terminated.

103. Paragraph 7(2) introduces equivalent powers into the Pension Schemes (Northern Ireland) Act 1993. It is intended to use these powers in the same way as the powers in paragraph 7(1).

104. The powers in paragraph 7 are similar to existing regulation-making powers in the Pensions Schemes Act 1993. The Department believes that secondary legislation is necessary to provide flexibility on this matter of detail so as to enable adjustments to be made in light of the operation of the new approach.

105. Paragraph 14(1) amends section 58(6)(a) of the Pensions Act 1995. Section 58 requires occupational pension schemes to set up a Schedule setting out the rates of contributions due over the next five years. Section 58(6)(a) provides that the rates must be certified by the actuary as adequate to ensure that the scheme meets the statutory minimum funding requirement. At present the procedures are complicated because the actuary has to certify the Schedule by reference to the funding position on the day he signs it. But the contribution rates will have been previously agreed between the trustees and the employer. This means the actuary is required to carry out complicated additional forecasting work. It is intended to use the power in paragraph 14(1)(a) to enable the actuary to certify the contribution rates by reference to the funding position at an earlier date. The Department believes that secondary legislation is necessary to provide flexibility on this matter of detail so as to enable adjustments to be made in light of the operation of the new approach.

106. Paragraph 14(2) amends section 59 of the Pensions Act 1995. Section 59 provides that where there has been a deterioration in a scheme's funding level between one minimum funding evaluation and the next, the trustees must produce a report setting out the reasons. This amendment provides for a time limit to be prescribed within which the trustees must prepare the report. This is consistent with other requirements under the minimum funding requirement provisions (contained in sections 56-61 of the Pensions Act 1995) whereby trustees are obliged to take certain action within a prescribed period. Specifying the period in regulations will, the Department believes, provide flexibility so that adjustments can be made, if appropriate, in the light of experience. It is also consistent with the approach taken in sections 56 to 61 of the Pensions Act 1995 which already provides regulation-making powers concerning the detailed operation of the minimum funding requirement (for example, when a valuation has to be obtained). The Government will be consulting the pensions industry on the most appropriate period. However, a period of three months from the date on which the trustees receive the MFR valuation which triggers the requirement is likely.


 
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