House of Lords - Explanatory Note
      
House of Lords
Session 2003 - 04
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Pensions Bill


 

These notes refer to the Pensions Bill
as brought from the House of Commons on 21st May 2004 [HL Bill 73]

PENSIONS BILL


EXPLANATORY NOTES

INTRODUCTION

1.     These explanatory notes relate to the Pensions Bill as brought from the House of Commons on 21st May 2004. They have been prepared by the Department for Work and Pensions in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament.

2.     The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given.

CONTENTS

Summary and Background

The Bill

Territorial Extent

Commentary on Clauses

Part 1 - The Pensions Regulator

Part 2 - The Board of the Pension Protection Fund

  •      Chapter 1 - The Board

  •      Chapter 2 - Information relating to employer's insolvency etc.

  •      Chapter 3 - Pension Protection

  •      Chapter 4 - Fraud Compensation

  •      Chapter 5 - Gathering information

  •      Chapter 6 - Reviews, Appeals and Maladministration

  •      Chapter 7 - Miscellaneous

Part 3 - Scheme Funding

Part 4 - Financial Planning for Retirement

Part 5 - Occupational and Personal Pension Schemes: Miscellaneous Provisions

Part 6 - Financial Assistance Scheme for members of certain pension schemes

Part 7 - Cross-border activities within European Union

Part 8 - State Pensions

Part 9 - Miscellaneous and Supplementary

European Convention on Human Rights

Public Sector Financial Cost

Public Service Manpower Effects

Summary of the Regulatory Impact Assessment

Commencement

Glossary of Selected Terms

Annex - illustrating Bill amendments to existing legislation

SUMMARY AND BACKGROUND

3.     In Spring 2002 the then Secretary of State for Social Security asked Alan Pickering to look at how the administration of occupational pension schemes could be simplified. Ron Sandler was jointly commissioned by the Chancellor of the Exchequer and the Secretary of State to review retail savings in the same period. A Quinquennial review of the Occupational Pensions Regulatory Authority (Opra) and an NAO Value for Money study into how Opra worked took place during 2002. The outcomes of all these separate reviews showed that major themes for pension reform were emerging.

4.     In December 2002 the Government published a Green Paper entitled Simplicity Security and choice: Working and saving for retirement [Cm 5677], and its proposals for simplification of the tax treatment of occupational and personal pensions. In response to the ensuing consultation, in June 2003 the Secretary of State for Work and Pensions published Working and saving for retirement: Action on occupational pensions [Cm 5835], which focussed increasingly on the need for member protection to rank alongside the other themes. It presaged primary legislation across the areas consulted, including a Pension Protection Fund to compensate members of defined benefit and hybrid schemes whose employers become insolvent leaving the pensions scheme unable to meet its liabilities. The European Directive on the Activities and Supervision of Institutions for Occupational Retirement Provision was adopted in September 2003 for implementation by September 2005. In February 2004 the Secretary of State for Work and Pensions carried broader policy on financial retirement planning forward in Simplicity, security and choice: Informed choices for working and saving [Cm 6111]. These various strands of development have come together in this Pensions Bill. Its main provisions are as follows.

5.     Part 1 establishes a new Non-Departmental Public Body (NDPB), The Pensions Regulator, to replace Opra. This will take over Opra's responsibility for regulation of occupational pensions, and specific functions of personal pensions and stakeholder pensions. Like Opra, The Pensions Regulator will be funded by a levy on schemes. Through this Bill the new Regulator will assume a number of new functions. A new tribunal - The Pensions Regulator Tribunal- will be established to handle references from determinations made by the Regulator. There will be a new criminal offence for failing to attend on a witness summons before the Pensions Regulator Tribunal.

6.     The Bill also establishes in Part 2 a second new NDPB, the Pension Protection Fund (PPF); to provide compensation for members of defined benefit (normally final salary) and hybrid occupational pension schemes in the event of the scheme's sponsoring employer going insolvent, leaving the pension scheme with insufficient funds to pay its members the pensions they were expecting. The PPF will be funded by a levy on relevant schemes, to be set by its Board subject to parameters on the level and structure set by Parliament, and also by taking in any of the sponsoring employer's remaining assets on insolvency. The external appeals body for the PPF will be the PPF Ombudsman, with further challenges being referred to the High Court. The PPF will subsume the functions of the Pensions Compensation Board.

7.     Part 3 replaces the Minimum Funding Requirement for defined benefit occupational schemes with scheme-specific funding requirements allowing schemes greater flexibility in developing funding strategies appropriate to their circumstances.

8.     Part 4 introduces a new, explicit function of the Secretary of State to promote and facilitate financial retirement planning. It provides for reserve powers to require employers to provide their employees with access to pensions planning information and advice in the workplace and to compel occupational or personal pension schemes to provide combined pension forecasts incorporating state pensions data.

9.     Part 5 deals with a number of matters relating to administration of occupational and personal pension schemes. Amongst these it changes the rules on limited price indexation for occupational and personal pensions, reducing the cap from five per cent to 2.5 per cent. It introduces a minimum level of pension protection for employees involved in TUPE transfers where they had access to an occupational pension scheme pre-transfer. It introduces a requirement for trustees to have appropriate knowledge for the performance of their duties, in response to the recommendations from the Myners Report on institutional investment.

10.     Part 6 provides for financial assistance to be given to members of certain pension schemes. Part 7 provides for cross-border activities within the European Union. Part 8 improves the position of pensioners who defer taking their State Retirement Pension by bringing forward an increase in increments originally planned for 2010. This will provide a higher weekly income on retirement. A new option, a lump sum, will be introduced as an alternative to increments.

11.     There are a number of measures providing greater flexibility and simplification in pension scheme administration. Throughout parts 5 and 8 there are a number of provisions clarifying existing pensions law.

12.     The measures set out in these notes have been prepared in the light of the European Directive on the Activities and Supervision of Institutions for Occupational Retirement Provision 2003/41/EC (IORP Directive) and are consistent with that Directive.

THE BILL

13.     The Bill consists of nine parts, as follows:

  • Part 1 - The Pensions Regulator;

  •      Part 2 - The Board of the Pension Protection Fund;

  •      Part 3 - Scheme Funding;

  •      Part 4 - Financial Planning for Retirement;

  •      Part 5 - Occupational and Personal Pension Schemes: Miscellaneous Provisions;

  •      Part 6 - Financial Assistance Scheme for members of certain pension schemes;

  •      Part 7 - Cross-border activities within European Union;

  •      Part 8 - State Pensions;

  •      Part 9 - Miscellaneous and Supplementary.

TERRITORIAL EXTENT

14.     The Bill extends to England and Wales and to Scotland with the exception of clause 100 (legal assistance scheme). The following provisions of the Bill also extend to Northern Ireland:

  •      In Part 1: clause 1 (The Pensions Regulator); 2 (Membership of the Regulator); 4 (Regulator's functions) (other than subsection (2)(b)); 8 (The Non-Executive Committee); 9 (Functions exercisable by the Non-Executive Committee); 10 (The Determinations Panel); 12 (Annual Reports to Secretary of State); 53 (Register of occupational and personal pension schemes) 96 (The Pensions Regulator Tribunal); 100 (Legal assistance scheme), in Schedule 1 paragraphs 1 to 19 [Terms of appointment and tenure of members, Remuneration etc of members, The staff of the Regulator, The Chief Executive of the Regulator, Other employees, Additional staff etc. Appointment of the chairman of the Panel, Terms of appointment and tenure of members of the Panel, Remuneration etc of members of the Panel, Committees, Procedure), paragraph 20(1) to (3) and (7), paragraph 21 (other than paragraph (b)) (Delegation), paragraphs 22 to 25 (Application of seal and proof of instruments, Funding), 27 to 35 (Accounts, Other expenses, Status, Validity, Disqualification, The Parliamentary Commissioner for Administration, The Superannuation Act 1972, Exemption from liability in damages), section 3 so far as it relates to those provisions, and Schedule 4.

  •      In Part 2: clauses 101 (The Board of the Pension Protection Fund); 102 (Membership of the Board); 103 (Further provision about the Board); 104(1) and (3) (Board's Functions); 106 (The Non-Executive Committee); 107 (Investment of funds); 108 (Investment Principles); 109 (Borrowing); 112 (Administration levy); 113 (Annual reports to Secretary of State); and 152(2)(a),(3),(5) and (6) (Effect of Board assuming responsibility for a scheme); 164 (Pension Protection Fund); 179 (Fraud Compensation Fund); 200 (The Ombudsman for the Board of the Pension Protection Fund); 201 (Deputy PPF Ombudsman); 203 (Annual reports to Secretary of State); clause 105 so far as that provision has effect in relation to functions of the Board conferred by any provision of, or made under, this Bill which extends to Northern Ireland; Schedule 5 (other than paragraph 18) (The Board of the Pension Protection Fund) and Schedule 6 (other than paragraph 7).

  •      In Part 4: clause 224 (Promoting and facilitating financial planning for retirement); and clause 225 (supply of information for purposes of section 224); and paragraph 2 of Schedule 10 (Use and supply of information) and clause 226 so far as it relates to that paragraph.

  •      In Part 5: clause 262 (The Pensions Ombudsman and Deputy Pensions Ombudsmen) and clause 265(2)(b) (Amendments relating to the Pensions Compensation Board).

  •      In Part 8: clause 285 (Claims for certain benefits following termination of reciprocal agreement with Australia).

  •      In Part 9 clauses 286 (Dissolution of Opra); 287 (Transfer of employees from Opra to The Pensions Regulator), 288 (Dissolution of the Pensions Compensation Board); 295 (Admissibility of statements); clause 308 (Extent); 306 (Amendments relating to the Pensions Compensation Board); 307 (Commencement); 309 (Northern Ireland), 310 (Short Title); and, in so far as the following clauses have effect for the purposes of provisions which themselves extend to Northern Ireland, clauses 289 (Service of notifications and other documents), 290 (Notification of documents in electronic form), 291 (Timing and location of things done electronically), 294 (Offences by bodies corporate and partnerships), clause 298 (Crown application), 300 (Subordinate legislation general provisions), 301 (Parliamentary control of orders and regulations) and 303 (General interpretation).

COMMENTARY ON CLAUSES

PART 1 - THE PENSIONS REGULATOR

Summary

15.     The Occupational Pensions Regulatory Authority (Opra) will be replaced by a new Non-Departmental Public Body (NDPB), The Pensions Regulator.

16.     Opra's existing powers will be carried forward to the Pensions Regulator. In addition the new regulatory body will have statutory objectives and functions that provide a framework for its activity.

17.     The Pensions Regulator will operate a targeted and proportionate regulatory regime, applying greater regulatory scrutiny where it deems members benefits are most at risk. This approach will be supported by increased powers to gather, retain and share information. The information gathered will be subject to analysis to help identify those schemes where members' benefits are more likely to be at risk.

18.     The Bill will introduce a range of new powers including:

  •      issuing improvement notices or third party notices to remedy breaches;

  •      the ability to freeze a scheme whilst investigations take place to protect members benefits or scheme assets;

  •      power to issue a contribution notice, financial support directions and to make orders in respect of transactions at an undervalue;

  •      increased powers covering the suspension and removal of trustees;

  •      increased whistleblowing responsibilities and duties to report certain events.

19.     The Regulator will also be able to issue codes of practice. This will provide those involved in pensions, with practical guidance in relation to their duties and responsibilities under pensions legislation, thus assisting schemes in improving compliance and encouraging best practice. In certain areas the Regulator will be legally obliged to provide codes of practice, for example, on disclosure of information to scheme members.

20.     The Bill establishes a new tribunal - The Pensions Regulator Tribunal - to hear references from the Regulator's determinations.

21.     The provisions in this Part of the Bill are compliant with the provisions of the European Directive on the Activities and Supervision of Institutions for Occupational Retirement Provision 2003/41/EC (IORP) Directive.

ECHR Considerations

22.     Decisions of the Regulator will often involve the determination of civil rights and obligations within the meaning of ECHR Article 6. The procedures set out in the Bill will ensure that disputes relating to such decisions will be determined by an Article 6 compliant process.

23.     Proceedings under which a financial penalty may be imposed under section 10 of the Pensions Act 1995 or section 168 of the Pension Schemes Act 1993 will involve the determination of a criminal charge within the meaning of Article 6. The procedures set out in the Bill which will apply where a section 10 penalty might be imposed will satisfy the relevant requirements of Article 6.

24.     The exercise of the new powers given to the Regulator could be an interference with Convention rights, particularly Article 8 and Article 1 of Protocol 1. It is considered that there are sufficient safeguards in the Bill to ensure that the exercise of any power which interferes with Convention rights will be justified and proportionate.

25.     The Bill imposes more onerous duties on trustees, managers and other persons involved with pension schemes to provide information to the Regulator. Depending on the circumstances of any particular case, these provisions could constitute an interference with the rights protected by Article 8. However, the provisions are considered to be justified under Article 8(2), being for the protection of the rights and freedoms of others, the economic well-being of the country and the prevention of disorder and crime. Any interference with Article 8 rights are also considered to be proportionate.

Establishment

Clause 1 - The Pensions Regulator

26.     This clause establishes the new Pensions Regulator (which is referred to as "the Regulator" throughout the Bill).

Clauses 2 and 3 - Membership of the Regulator; Further provision about the Regulator

27.     This clause deals with membership of the Regulator. The Regulator will consist of: a chairman (who will be appointed by the Secretary of State); a Chief Executive; and at least five other members appointed by the Secretary of State, having regard to any recommendations made to him by the chairman although not bound by them (subsection (1)(c)). The chairman must not be appointed from the staff of the Regulator (as defined in paragraph 7 of Schedule 1) or be the chairman of the Pension Protection Fund. By virtue of subsection (3) at least two of the members of the Regulator appointed under subsection (1)(c) are to be appointed from staff of the Regulator.

28.     The inclusion of executive members on the Board implements a recommendation of Derek Higgs' Review for the Chancellor of the Exchequer and the Secretary of State for Trade and Industry of the role and effectiveness of non-executive directors (January 2003) which states:

The Board should include a balance of executive and non executive directors (including independent non-executives) such that no individual or small group of individuals can dominate the board's decision taking. (Annex A, item 3 - Board Balance and Independence).

29.     The executive members of the Regulator are to be the Chief Executive and two or more members appointed from the staff of the Regulator under subsection (1)(c). All other members of the Regulator will be non-executive members. This clause further provides at subsection (4) that in appointing members under subsection (1)(c) the Secretary of State must ensure that the majority of members of the Regulator are non-executive members. No member of the staff of the Pension Protection Fund is eligible for appointment as a member of the Regulator. Further provision about the Regulator is contained in clause 3 and Schedule 1.

General provisions about functions

Clause 4 - Regulator's functions

30.     The Regulator has both the functions which are transferred to it from Opra (also see clause 7 for detail on the transfer of Opra's powers) and other functions conferred on to it by the Bill and any other enactments.

31.     This clause sets out further detail on how the new Regulator will discharge its functions. The Bill reserves the discharge of certain functions of the Regulator to a non-executive committee (the non-executive functions). It also reserves the discharge of certain of the Regulator's regulatory functions to a special committee called the Determinations Panel. The Regulator's general powers to delegate certain functions is subject to the Secretary of State's power to make regulations (see Schedule 1).

32.     The Regulator will also be able to act, as Opra does now, as a prosecutor. No specific legislative provision is required to permit this.

Clause 5 - Regulator's objectives

33.     The main objectives of the Regulator in discharging its functions are to protect the benefits of members (i.e. members who are employees in respect of whom direct payment arrangements exist and, in cases where the scheme is a stakeholder pension scheme, any other members) of work-based pensions (i.e. all occupational and certain personal pension schemes) to reduce the risk of situations arising which may lead to calls for compensation from the Pension Protection Fund, and, to promote the good administration of the schemes it regulates.

Clause 6 -Supplementary powers

34.     The Regulator may do anything (except borrow money) which is calculated to aid the discharge of its functions, or is incidental or conducive to their discharge. This power enables the Regulator to, for example, lease office space, print stationery, etc.

Clause 7 - Transfer of OPRA's functions to the Regulator

35.     The functions of Opra in the Pension Schemes Act 1993, Pensions Act 1995, and Welfare Reform and Pensions Act 1999 are transferred to the Regulator, with definitions amended accordingly.

The Non-Executive Committee and the Determinations Panel

Clause 8 -The Non-Executive Committee

36.     This clause establishes the Non-Executive Committee comprising the chairman and other non-executive members of the Regulator. The Regulator must "establish and maintain" the Non-Executive Committee, which is to be chaired by the chairman of the Regulator. The functions listed in Schedule 2 are the "non-executive functions", which must be exercised on behalf of the Regulator by the Non-Executive Committee. The establishment of the Non-Executive Committee is to implement Higgs' recommendation in Appendix A 1.5 which says:

The non executive directors should meet regularly as a group without the executives present and at least once a year without the chairman present. The meetings should be led by the senior independent director. There should be a statement in the annual report on whether the non-executive directors have met without the chairman or the executives present.

37.     The clause provides that the Non-Executive Committee will contribute to the Regulator's annual report to the Secretary of State (see clause 12) by producing a report on the discharge of the non-executive functions. The Non-Executive Committee can delegate any of its functions to its subcommittees. Subsection (8) further provides that the Non-Executive Committee, or any of its subcommittees can be authorised to carry out further functions of the Regulator, under paragraph 20(1) of Schedule 1. This clause is subject to any regulations made by the Secretary of State by virtue of paragraph 21 of Schedule 1 (which concerns the power to limit or permit delegation of functions).

Clause 9 - Functions exercisable by the Non-Executive Committee

38.     The functions which must be discharged by the Non-Executive Committee are: to keep under review the strategic direction of the Regulator; to scrutinise the performance of the Chief Executive in securing that the functions of the Regulator are exercised efficiently and effectively; to monitor the extent to which the Regulator is meeting its objectives and targets; to monitor the Regulator's reporting to the Secretary of State; to keep under review the Regulator's internal financial controls to ensure they secure proper control of its finances; and to determine the remuneration of the Chief Executive (with reference to paragraph 8(4)(b) of Schedule 1) which is subject to the approval of the Secretary of State. Any of these functions can be discharged to sub-committees of the Non-Executive Committee. The Regulator can authorise the Non-Executive Committee to carry out more functions as defined under paragraph 20(1) of Schedule 1.

39.     These are the key elements of the non-executive directors' role as identified in Higgs report Annex C.

40.     The Non-Executive Committee has to create a report on the discharge of its functions which is to be included in the Regulator's annual report.

Clause 10 - The Determinations Panel

41.     This clause provides for the Regulator to establish and maintain a committee known as the Determinations Panel which is to consist of a chairman and at least six other members. The Regulator must appoint as the chairman of the Determinations Panel the person nominated in accordance with paragraphs 11 and 21 of Schedule 1 which requires the Chairman of the Regulator to set up a committee to recommend for appointment a person for chairman of the Determinations Panel.

42.     The chairman of the Determinations Panel will decide the actual size of the Determinations Panel and nominate suitable people. The Regulator will then appoint these nominees as other members of the Determinations Panel. Any member of the Regulator, any member of staff of the Regulator and any member of the Board of the Pension Protection Fund will not be eligible for appointment to the Determinations Panel.

43.     Schedule 2 lists the functions of the Regulator which are exercisable on its behalf only by the Determinations Panel. By virtue of paragraph 20(4) of Schedule 1 the Panel can be authorised to exercise further functions of the Regulator. This section is subject to any regulations made by the Secretary of State under paragraph 21 of Schedule 1 (which concerns the power to limit or permit delegation of functions).

 
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