Select Committee on Delegated Powers and Deregulation Thirteenth Report



PART II

CHAPTER II - OCCUPATIONAL AND PERSONAL PENSION SCHEMES

CLAUSE 50 - INDEXATION

262.  Clause 50 subsection (2) (c) sets out that regulations may prescribe conditions to be satisfied for the investment based annuity products used to satisfy the conditions of section 51A of the Pensions Act 1995. Section 51 (2) of the Pensions Act 1995 requires annual increases in the rate of pension derived from a money purchase occupational pension scheme. Clause 50 modifies the existing requirement to enable the purchase of an investment-linked annuity product as an alternative option to an annuity which guarantees increases in line with inflation, capped at 5% per annum. It is not envisaged that this power will be used in that form. The power is required to allow conditions for investment based annuity products should this prove necessary in the light of experience. This may be necessary to ensure that such products have a reasonable expectation of providing a rising income. Such regulations would only be necessary if investment based products were designed to provide a high starting income with little prospect for future increases.

CLAUSE 51 - INFORMATION FOR MEMBERS OF SCHEMES ETC

263.  Current regulations under section 113(1) of the Pension Schemes Act 1993 provide for members of money purchase schemes to receive an annual benefit statement. These operate in relation to both occupational and personal pensions (the Occupational Pension Schemes (Disclosure of Information) Regulations 1996 and the Personal Pension Schemes (Disclosure of Information) Regulations 1987).

264.  But, the statement only has to provide information about the amount of pension rights already accrued. It does not have to provide projections of future benefits.

265.  To plan for the future, pension scheme members need some indication of the likely benefit they will receive on retirement, and to make meaningful comparisons they need it at today's prices.

266.  This information is already available to members of salary related schemes where projecting the effect of future service is relatively straightforward. It is intended that regulations should be extended to make similar provision for money purchase schemes.

267.  Clause 51(1) amends the existing regulation-making power in section 113 of the Pension Schemes Act 1993 by adding (ca) to subsection (1). Regulations under section 113(1) currently require all money purchase pension schemes (occupational and personal) to provide members with annual benefit statements.

268.  It is intended that this power will be used to add to the existing requirements that are already provided for in regulations under section 113. Annual benefit statements will be required to provide an illustration of the likely value of the pension fund at retirement, and an estimate of the pension it might provide at today's prices.

269.  The requirement will apply to all money purchase pension arrangements, including stakeholder pensions, Additional Voluntary Contributions and Free Standing Additional Voluntary Contributions.

270.  It is intended that regulations will also specify the information that must be included on the statement about the basis of the illustration. For example, it will be made clear that the illustration is based on a number of assumptions and does not constitute a promise or guarantee, and that the illustration has been prepared in accordance with regulations and professional guidance.

271.  Clause 51(2) inserts a new subsection (3A) in section 113. It provides that regulations can require that information to be given is calculated according to professional guidance approved by the Secretary of State. This will be used to sub-delegate responsibility for devising the calculation methods for illustrations of money purchase benefits to a suitable professional body.

272.  It is intended that the prescribed body will be the Faculty and Institute of Actuaries.

273.  The guidance will be issued by the Faculty & Institute of Actuaries as a guidance note for actuaries, although it will also be suitable for use by non-actuaries. It will cover the calculation method for the illustrations, and the assumptions to be used.

274.  Forecasting the future value of investments is a difficult and complex calculation that the Department believes is most appropriate to the actuarial profession. Guidance notes produced by the Faculty & Institute of Actuaries are binding on professional actuaries, and the Department believes they are the most appropriate vehicle for communicating complex technical matters. This is an approach which is taken throughout pensions legislation. For example, the Faculty and Institute of Actuaries already produces guidance notes for the approval of the Secretary of State on other complex pensions calculations, including GN27 on the Minimum Funding Requirement.

275.  Subsection (2) also inserts a new subsection (3B) into section 113 of the Pension Schemes Act 1993 to enable regulations made under that section to allow Opra to extend time limits for compliance with requirements set out in regulations where a scheme is winding-up. It is intended that regulations will introduce flexibility in the timing of provision of information to members and allow Opra to take into account the individual circumstances of the scheme. Regulations will also be able to set out form, manner, content and timing of applications for such extensions. This is likely include information about the scheme's current position in the winding up process and the reason why an extension is being sought. Setting out the detail in regulations will allow flexibility to amend the content and timing of the applications should it be appropriate. For example less detail may be required where a scheme has recently provided a progress report on winding up.

CLAUSE 53: INVESTIGATIONS BY THE OMBUDSMAN

276.  Clause 53 inserts provisions into sections 148, 149 and 151 of the Pension Schemes Act 1993 which relate to the investigative procedures of the Pensions Ombudsman. These provisions require the Pensions Ombudsman to give all those whose interests may be affected by the substance of the dispute or complaint the opportunity to comment either personally or via a representative and, provide for all those persons to be bound by his determination. They also allow the Pensions Ombudsman to make an order that the costs of legal representation are to be met from the resources of the scheme.

277.  The procedures under which the Pensions Ombudsman operates are set out in the Personal and Occupational Pension Schemes (Pensions Ombudsman) (Procedure) Rules 1995 (SI 1995/1053). These rules specify, amongst other things, requirements as to the manner in which a complaint or reference is be made; the process for responding; the disclosure of documents; and the conduct of oral hearings. They are the working framework for the Pensions Ombudsman.

278.  Clause 53(4) inserts a new paragraph into s149(3) to allow rules to specify who can be considered a representative of those whose interests may be affected by a complaint or dispute and how that person is to be appointed. It is intended to use the rules to specify, for example:

  • the procedure as to how a representative should be appointed and any criteria that an individual would be required to meet, for example, demonstration that they can represent the views of all those they are being considered to represent;
  • the time limits within which a representative had to be appointed. It is anticipated that these will be consistent with the twenty-one day period that is allowed for responses to a complaint.

279.  Clause 53(5) adds an additional item to the list of items that can be included in the rules. This additional item enables the Pensions Ombudsman to order that legal expenses of a party can be met from the resources of the scheme. It is intended to use the rules to specify, for example:

  • what will constitute a recoverable legal expense for the purposes of such an order for example, expenses incurred directly by an instructed solicitor or by third parties, such as an actuary, following instructions from that solicitor;
  • how and when a party can make a claim for the legal expenses to be met from the resources of the scheme. For example, that a claim should be made at the start of an investigation and would have to contain an explanation as to why such an order is needed;
  • the circumstances under which an order to this effect can be made. These would cover, for example, the factors the Pensions Ombudsman would have to take into account before granting such an order, such as, the scheme's ability to pay;
  • the conditions that may be attached to such an order, for example, placing a limit on the amount to be claimed.

280.  The Department intends to consult on these additions to the procedure rules to ensure that those involved in the operation of Pensions Ombudsman's investigations have the opportunity to comment on the proposed procedural changes.

281.  The content of the new material it is intended to include in the rules relates to the manner in which the Pensions Ombudsman conducts his investigations; the existing content of the rules is of this nature. Given this, the Department believes that it is more appropriate for these matters to be included in secondary legislation. In addition, regulations allow flexibility for these procedural details to be amended following the outcome of consultation and to be adjusted in the light of operational experience.

CLAUSE 55: SCHEDULE 5, PARAGRAPH 12

282.  Paragraph 12 of Schedule 5 makes amendments to sections 41, 49 and 88 of the Pensions Act 1995. Paragraph 12(1) of Schedule 5 amends section 41 of the Pensions Act 1995 to replace section 41(5) of that Act. Paragraph 12(2) of Schedule 5 amends section 49(9) of the Pensions Act 1995 (as inserted by section 10 of the Welfare Reform and Pensions Act 1999) to insert a new subsection (9)(c). Paragraph 12(4) of Schedule 5 amends section 88 of the Pensions Act 1995 to insert a new section 88(5).

CLAUSE 55: SCHEDULE 5, PARAGRAPH 12(1)

283.  Section 47 of the Pensions Act 1995 imposes a duty on the trustees or managers of every occupational pension scheme, to which that section applies, to appoint a scheme auditor and a scheme actuary. The trustees or managers of such schemes are also under a duty to obtain from those persons, the documents referred to in section 41(2) of that Act. This includes the auditor's statement about contributions under the scheme. At present, the trustees or managers of ear marked schemes, which are insured money purchase schemes where the individual members are named on the policies or contracts of insurance, must appoint a scheme auditor but only for the purpose of obtaining an auditor's statement about contributions.

284.  The existing section 41(5) of the Pensions Act 1995 provides for regulations to prescribe persons who may act as auditors or actuaries for the purposes of section 41(2) of the Act.

285.  The new section 41(5) contains two regulation-making powers, the first of which, in 41(5)(a), provides for regulations to be made permitting schemes, such as ear marked schemes, to obtain a statement about contributions from a prescribed person or body other than a scheme auditor. This will save the scheme the expense of appointing a scheme auditor, just for that purpose. It is intended that this power will be used to specify that a statement about contributions can be made by insurance companies who are best placed to know whether contributions have been paid on time. In future, new types of organisation or investment products may be approved for the purposes of providing similar types of pension arrangements. In which case, where one member's accrued investment is separately identifiable from that of the other members of the scheme and the investment product offers an equivalent level of security to members as an insurance policy, regulations would be used to include such schemes within the provision.

286.  It is intended that the persons or bodies specified under the delegated power in 41(5)(a) will, when such an arrangement is agreed between the person and the trustees, be professional advisers of the scheme appointed by the trustees or managers, in the same way as, for example, legal advisers, fund managers or custodians, in accordance with the requirements of regulation 4 of the Occupational Pension Schemes (Scheme Administration) Regulations 1996. Schemes entering into such an arrangement will be exempt from the requirement to appoint a scheme auditor under section 47(1) of the Pensions Act 1995.

287.  The new section 41(5)(b) re-enacts the regulation-making power in the existing section 41(5) of the Pensions Act 1995. The power in this section has been used, for example, to insert paragraph 7 into Schedule 5 of the Occupational Pension Schemes (Minimum Funding Requirement and Actuarial Valuations) Regulations 1996. This is to allow for circumstances where a scheme which is subject to the Minimum Funding Requirement was, nevertheless, exempt from the requirement to appoint a scheme actuary under section 47(1).

288.  The new section 41(5A) provides for regulations to require the trustees or managers of schemes entering into such arrangements to make all relevant information and documents available to the person or body providing the statement about contributions. This mirrors a similar provision in section 47(9)(b) of the Pensions Act 1995 in respect of information to be provided or made available to auditors or actuaries appointed under section 47(1) of the Act. It is intended that this power will be used to specify the information and documents that must be provided, for example, payroll information and information about changes concerning members of the scheme, to ensure that the person making the statement has access to all the relevant information. The Department considers that secondary legislation is necessary and appropriate to allow for the amount of detail required and to ensure future flexibility in this area should experience show that other information or documents are required.

CLAUSE 55: SCHEDULE 5, PARAGRAPH 12(2)

289.  Paragraph 12(2) of Schedule 5 amends section 49(9) of the Pensions Act 1995 (as inserted by section 10 of the Welfare Reform and Pensions Act 1999) to insert a new subsection (9)(c).

290.  Section 49 of the Pensions Act 1995 makes further provision in respect of the responsibilities of the trustees or managers of, and employers in relation to occupational pension schemes. Subsection (8) of that section imposes a duty on employers to make timely payment of scheme contributions to the trustees or managers of a scheme and subsection (9) of that section imposes a civil penalty in respect of any failure by employers to comply with the requirement of subsection (8).

291.  The new section 49(9)(c) imposes a requirement on the person or body, appointed under the new section 41(5), to prepare a statement about contributions and to inform the Regulatory Authority of any failure to comply with the time limit imposed on any person for paying employee contributions to the scheme. The time limit on any person or body so appointed for reporting the late payment of contributions will be prescribed in regulations, after consultation with the pensions industry. The intention, subject to consultation, is to have a time limit of 30 days from the date on which the statement about contributions has been prepared. The Department considers that the need to allow for flexibility in the event that circumstances arising show that change to the time limit is needed makes secondary legislation the appropriate vehicle for these provisions.

292.  The duty to report the late payment of contributions imposed by the new section 49(9)(c) of the Pensions Act 1995 on persons or bodies appointed to act as scheme auditors for the purposes of preparing a statement about contributions is consistent with the requirements of the statutory duty to "blow the whistle" which is currently imposed on scheme auditors by section 48 of the Act. Section 48 of the Pensions Act 1995 requires that, when preparing a statement about contributions, the scheme auditor must consider whether any late payment of contributions is likely to be of material significance to the Regulatory Authority, in the exercise of its functions, and whether or not to make a report pursuant to the whistle blowing provisions. However, the new requirement under section 49(9)(c) of the Act to report any late payment of contributions to the Regulatory Authority does not allow for any discretion in whether or not to report. The new section 49(9)(c) therefore provides for regulations to prescribe circumstances where a report need not be made. It is envisaged that this power will only be used if in future, the Department considers that a report is not appropriate. For example, if experience shows that large numbers of reports are for minor or trivial breaches, which are not considered to merit action, then regulations will remove the requirement in respect of those specific circumstances.

CLAUSE 55: SCHEDULE 5

293.  Section 88 of the Pensions Act 1995 makes provision in respect of the duties on the trustees or managers of occupational pension schemes, which are required by section 87 of the Act to have a schedule of payments, to give notice to the Regulatory Authority and to scheme members, within a prescribed period, of the fact that amounts have not been paid to the scheme in accordance with the schedule of payments on or before the due date.

294.  The new section 88(5) of the Pensions Act imposes on persons or bodies appointed to act instead of scheme auditors under section 41(5) of the Act, a duty to report to the Regulatory Authority the late payment of employee contributions to the scheme. The delegated powers in the new section 88(5) to prescribe time limits for making reports to Opra and to prescribe circumstances where a report need not be made will be used to provide the same time limits and exemptions as those to be prescribed under the new section 49(9)(c) of the Pensions Act as introduced by Schedule 5 paragraph 12(2). The Department considers that the need to allow for future flexibility in the event that circumstances arising show that change is needed makes secondary legislation the appropriate vehicle for these provisions.

295.  The alternative anti-franking rules in paragraphs 14 to 17 in Part II of Schedule 5 to the Bill are designed to replace the existing anti-franking legislation in sections 87 to 92 of the Pension Schemes Act (PSA) 1993, for most occupational pension schemes paying Guaranteed Minimum Pensions. The legislation creates a new minimum benefits test, and this provides the statutory framework on which schemes will base their own benefit formulae. Essentially, the new provisions introduce a reference benefit derived from the aggregate of an individual's pension rights, in the scheme, calculated in accordance with the rules set out in paragraph 15 of Schedule 5 to the Bill.

296.  The minimum benefit rules protect the individual scheme member by requiring the scheme to put into payment a pension not lower than the reference benefit. The provisions contain 3 regulation-making powers and 1 general modification power. The intention is to consult scheme professionals on the draft secondary legislation and supporting technical guidance as soon as practicable after the Bill receives Royal Assent.

297.  The intention is that the alternative anti-franking rules will underpin the calculation of an individual's pension entitlement (or that of their surviving spouse), where that person leaves pensionable service (or dies) after the coming into force of the legislation. However, during the consultation exercise some scheme professionals wanted the opportunity to operate the new provisions to calculate the deferred pensions for those who had left (or died) before the coming into force of the legislation. The provisions in paragraph 14(3)(c) enable the scheme trustees/managers to choose between using the new rules and remaining subject to existing legislation.

298.  To exercise this choice they will be required to make an election. Paragraph 14(3)(c) provides the power to specify in regulations the manner in which this election is to be made. This is consistent with other provisions relating to elections elsewhere within the body of pension legislation. For example, section 11(5) of the PSA 1993 enables regulations to prescribe the manner in which an employer elects for a contracting-out certificate. Regulation 2 of the Contracting-out Regulations 1996, made under this power, contains the detailed requirements.

299.  It is intended that regulations made under this power will require trustees/managers of schemes to make an election, in writing, if they wish to apply the alternative anti-franking rules to deferred pensions, and the associated survivors' pensions, for those who had left the scheme or died before the coming into force of the legislation. Regulations under section 113 of the PSA 1993 will require that copies of the election documentation are made available, on request, to all scheme members for inspection. This provision would be complemented by an additional requirement (made under existing powers in section 113 of the PSA 1993) that the scheme managers/trustees take reasonable steps to draw all members' attention to the existence of such documentation.

300.  Paragraph 14(4) contains 2 regulation-making powers. The first enables the Secretary of State to exclude schemes of a prescribed description from the requirement to operate the new anti-franking provisions unless the scheme trustees/managers elect to do so. The second is similar to the power in paragraph 14(3)(c) and prescribes the manner in which the trustees /managers of those schemes make an election to operate the new rules.

301.  The intention is to enable schemes that guarantee full price increases on the whole of their pensions (most of which are public sector schemes) to choose between operating the new anti-franking provisions and remaining subject to the existing anti-franking arrangements. In the Department's view, it is preferable to define schemes falling into this prescribed category in subordinate legislation because this procedure allows for more scope to formulate and consult on a definition which encapsulates all schemes that fully price inflation-proof their pensions. Generally, the approach in pensions legislation, is that the high level policy intention is expressed in primary legislation, and the detailed requirements and technical descriptions in regulations. This arrangement operates elsewhere, for example, the policy intention in section 9(2B)(d) of the PSA 1993 is that schemes of a certain category cannot contract-out. Regulation 29 of the Contracting-out Regulations defines those schemes falling into that category, and these are schemes which do not have tax approval.

302.  Returning to the election process in the alternative anti-franking rules, this will be set out in secondary legislation and it more or less follows the procedures in paragraph 14(3)(c). It is proposed that if the scheme trustees/managers choose to operate the alternative anti-franking rules they will be required to make an election to do so in writing. Regulations under section 113 of the PSA 1993 will require copies of the election documentation to be made available, on request, to all scheme members for inspection. This provision would be complemented by an additional requirement (made under existing powers in section 113 of the PSA 1993) that the scheme managers/trustees take reasonable steps to draw all members' attention to the existence of such documentation.

303.  Paragraph 17(6) contains a general power that enables the Secretary of State to modify paragraphs 14 to 16 of Schedule 5 by Order. The intention is to make 3 modifications using this power. The Secretary of State will by order modify paragraph 15:

  • for schemes that take advantage of the Inland Revenue flexible retirement arrangements;
  • for schemes that operate integrated arrangements; and
  • to cater for schemes with atypical benefits structures.

INLAND REVENUE FLEXIBLE ARRANGEMENTS

304.  The Inland Revenue proposes to introduce flexible arrangements to enable a member of an occupational pension scheme to receive part of his/her pension at any age between 50 and 75, irrespective of whether he/she has retired. Thus, an individual could stay on in pensionable employment; receive part payment of their pension; and continue to built up a further pension entitlement that would become payable once they retired and their service in the scheme was terminated. The anti-franking provisions are triggered once a member leaves pensionable service. The modification power in paragraph 17(6) enables the calculations in paragraph 15 to be modified in secondary legislation. The intention is that this power will be used to assist schemes that operate the Inland Revenue flexible retirement arrangements by enabling them to adjust an individual's pension entitlement without contravening the alternative anti-franking rules.

305.  The Department believes that it is appropriate to make the modifications in subordinate legislation as the precise details of how the Inland Revenue proposals will work in practice are still under consideration. In addition, putting the detail into secondary legislation provides the necessary flexibility to take account of any policy changes and allows for consultation with the Pensions Industry to ensure that the legislation is broadly in step with current administrative practice.

306.  It is intended that provisions, in secondary legislation, will permit schemes to adjust the level of the pension otherwise required by the minimum benefits test. The intention is that when a person retires and leaves pensionable service, the total scheme pension would be calculated as if the member had not taken any part of it early. This total would be tested against the anti-franking minimum and then the scheme could reduce the amount payable to take account of any earlier payments under the Inland Revenue arrangements.

INTEGRATED PENSION SCHEMES

307.  When National Insurance Contributions and State Retirement Pensions were introduced in 1948, a number of employers who operated occupational pension schemes felt that there was some duplication between the two types of provision. In order to ensure that they and their employees did not have to increase their contributions to the scheme, some employers providing salary-related pension schemes took account of a percentage of the State Retirement Pension when calculating the occupational pension payable. This procedure is known as "integration". The alternative anti-franking rules set a minimum benefits test and do not permit schemes to reduce the total scheme pension to take account of the State Retirement Pension. The intention is to use the modification power in paragraph 17(6) to modify the calculations in paragraph 15 so that schemes with integrated arrangements can make the appropriate deductions from an individual's pension. This approach mirrors the existing arrangements, whereby, regulation 3 of the Contracting-out (Protection of Pensions) Regulations 1991 (SI 1991/166) modifies the current anti-franking minimum in section 87 of the PSA 1993.

SCHEMES WITH ATYPICAL BENEFIT STRUCTURES

308.  The alternative anti-franking rules create a minimum benefit test based on an aggregate of an individual's pension rights in the scheme. In order to operate the legislation, administrators will be required to identify and calculate separately that part of the overall scheme pension derived from rights built up before 6 April 1997 and those attributable to service after that date. The rules provide schemes with a mechanism to determine the proportion of the pre-1997 pension that relates to the Guaranteed Minimum Pension (GMP) and any benefits in excess. They also make sure that the value of benefits in excess of the GMP keeps pace with increases in the individual's earnings/salary. However, some defined benefit schemes do not base their pension calculations on earnings or salary and some have changed the pattern of pensionable earnings from 6 April 1997.

309.  It is intended that an Order will modify paragraph 15 to take account of schemes with atypical benefits structures. Any modifications are likely to be fairly technical and detailed and in the Department's view are more suited to secondary legislation. There are a variety of scheme designs and it is likely to prove difficult to capture all of these in one provision. In addition, secondary legislation would enable further changes to be made if other schemes meriting this easement come to light. An example of how this modification power will be used, would be to ensure that rights derived from pensionable service prior 6 April are calculated in such a way that they form a fair proportion of an individual's overall pension entitlement. In providing for this a balance needs to be struck between protecting the member's pension and not increasing the scheme's liability.

310.  To illustrate, using the case of a hypothetical public sector scheme: assume that prior to 6 April 1997 the London Weighting Allowance was not pensionable and formed 25% of the total pay package. However, from 6 April the London Allowance is consolidated and now forms part of the pensionable pay. Using this illustration: prior to 6 April the member's pension would have been based on 75% of his/her total earnings and the pre-April 1997 benefits in excess of the GMP (for the purpose of this example) would form 10% of the pensionable earnings. The occupational scheme then changes its benefit structure by consolidating the London Allowance. Under the alternative anti-franking rules it would have to pay a higher pension derived from the pre-April 1997 rights, because the minimum benefits test links the calculation of pre-April 1997 benefits in excess of the GMP to the member's final pensionable salary which is now equivalent to his/her total earnings. Provisions in secondary legislation would modify this calculation, for the purposes of the minimum benefits test, so that schemes falling into this category would be treated as having the same pattern of pensionable pay both pre- and post- April 1997.


 
previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries index

© Parliamentary copyright 2000