Bridge regulations laid – money purchase benefits redefined
The Department for Work and Pensions has laid important regulations that complete the journey of the narrowing of the definition of money purchase benefits that began with the promise to legislate in response to the July 2011 Supreme Court judgment in the Bridge case.
The hope is that although these regulations are retrospective, indeed they go right back to 1 January 1997 in a number of cases, there are sufficient transitional provisions within these complex and lengthy regulations so that decisions taken in the past will not need to be revisited.
The Pensions Act 2011 (Transitional, Consequential and Supplementary Provisions) Regulations 2014 have been presented in draft form to Parliament. The intention is that the final regulations will come into force in early July 2014.
This development is analysed further in a special News Alert.
Employer override – draft regulations published
In what is a significant development in the legislation surrounding the end of contracting out, the Department for Work and Pensions (DWP) has published a consultation on draft regulations designed to fill in some important detail on the operation of the employer override power set out in Clause 24 and Schedule 14 of the Pensions Bill.
The employer override is a unique power which enables employers with defined benefit and hybrid schemes to amend scheme rules to offset the increased national insurance contributions (NICs) they will have to pay from 6 April 2016 as a result of their being forced to contract back in their workforce. They can either increase member contributions, or reduce benefit accrual, or both, but only so long as an actuary can certify that the value of the worsening for members is not more than the value of the increased employer NICs.
The draft regulations define the appropriate terms before focussing in on the work that the actuary needs to undertake. For the first time it has become clear that value must be measured over a one year period from a “calculation date”, using data as at that date and assumptions set out in the scheme’s Statement of Funding Principles valid at that date (with market conditions updated to that date where relevant). Significantly, the employer can instruct the actuary to remove any scheme funding margins for prudence (which would validate a greater worsening for members than otherwise) – it is the DWP’s intention that, in order to minimise cost, employers should not require new actuarial advice on what basis to use.
There is considerable freedom as to when the calculation is carried out – any calculation date (set by the employer) from 31 December 2011 will do – but the actual adjustment to the scheme can only take effect from 6 April 2016. The reason for this freedom is so that data supplied for a completed scheme funding valuation can be used to minimise the cost involved.
Although not specified in the regulations, the DWP’s intention is that the actuary should be appointed by the employer, who may also be the scheme actuary with the agreement of scheme trustees. However, under current professional guidance, there is a presumption against the scheme actuary from being able to advise the employer on such a matter.
To guard against unwarranted discrimination, schemes with different rules for different members must have each section tested separately. Other than this, employers are free to determine how future benefit accrual and/or member contributions are to be altered. This could result in a certain level of cross-subsidy – for example, a proposal to increase an offset to reflect the higher new State Pension that will accrue from April 2016 will bear down disproportionately on the lower paid and could be indirectly sex discriminatory.
Clearly, the only way to avoid any taint of discrimination (and for the actuary not to be required to do any sums) is to simply pass the increased employer NICs (in 2014/15 terms, 3.4% of annual earnings between £7,956 and £40,040) on to the members by means of a straight addition to their current contribution structure. But it is likely that employers will rule this out on a number of grounds. The DWP is consulting on possible ways to help prevent deliberate cross-subsidies.
The legislation puts the onus on the actuary to act as gatekeeper. Unlike other transformation of benefit situations where the actuary is required to give a certificate but the trustees must also consider their general trust law responsibilities before going ahead, once the actuary has certified there is nothing to stop the adjustments taking effect. However, in framing its proposals the employer will be subject to a “duty of good faith” in relation to the pension scheme and a “duty of trust and confidence” to its employees, both of which have been brought into focus recently by the IBM case (see Pensions Bulletin 2014/15).
The draft regulations also:
- Confirm which protected persons from ex-public sector schemes will not be subject to the employer override, following the Government’s announcement in February (see Pensions Bulletin 2014/06)
- Set out restrictions on the use of the power by shared cost schemes
- Set out the calculation requirements if the amendment power is to be used more than once
- Describe the provision of information between trustees and the employer; and
- Explain how the power operates for different types of multi-employer schemes
Separately, the consultation covers other draft regulations that set out replacement provisions for the Occupational Pension Schemes (Contracting-out) Regulations 1996 which will be repealed. These regulations will be analysed in next week’s Pensions Bulletin.
Consultation closes on 2 July 2014. There is no news as to when the regulations will be finalised.
Comment
Although clearly important for those few contracted-out schemes where employers do not have the power to alter future benefits or member contributions, the override power is likely to also be influential, as a measure of what can reasonably be achieved, by those employers that are not so constrained.
The Government has been thinking about this power since at least late 2011, but its complexity has resulted in this consultation being put back time and time again. It is now most important that the regulations are finalised as soon as possible and put on the statute book – hopefully by this October.
Master trusts quality assurance framework published – but will it be enough?
Following consultation (see Pensions Bulletin 2013/43), the Institute of Chartered Accountants in England and Wales has published its finalised voluntary assurance framework for trustees of master trusts. It is hoped that this initiative will provide comfort to employers that auto-enrol their workforce into such pension arrangements as well as meeting an expectation of the Pensions Regulator.
The Pensions Regulator defines a master trust as an occupational trust-based scheme which is being promoted to unconnected employers and where each employer group is not included in a separate section with its own trustees.
Auto-enrolment has seen a dramatic rise in the number of employees joining such schemes with NEST being the leading player. However, there are few regulatory barriers to such trusts being set up resulting in concerns that some may found to be not properly operating – a fear that is coming into focus as medium to smaller employers start to auto-enrol their workforces.
The assurance framework works by mapping 28 of the 31 defined contribution (DC) quality features published by the Pensions Regulator in its DC code of practice (see Pensions Bulletin 2013/30) on to 38 control objectives. This reformulation of the DC quality features then enables the scheme’s trustees to assess whether their scheme is up to the mark by producing a report that describes how control procedures relating to the objectives operated over a stated period. The trustees then give an “assertion” that the report fairly describes the control procedures, that they were suitably designed and that they operated with sufficient effectiveness. Finally, a practitioner (typically a chartered accountant) undertakes an appropriate amount of due diligence to back up the trustees’ assertion in the form of an independent assurance report.
Whilst this assurance framework is not mandatory, the Pensions Regulator expects master trusts to publish their report and obtain the independent assurance for periods ending in the financial year 2014/15, and annually thereafter. The Pensions Regulator intends to establish and maintain a publicly available list of master trusts that have obtained independent assurance.
The assurance framework brings forward, and is expected to be compatible with, the Government’s proposed quality standards for master trusts published earlier this year as part of its proposals for delivering value for money in workplace schemes expected to be in place in 2015 (see Pensions Bulletin 2014/13).
Although this framework has been developed for master trusts, the Pensions Regulator has recommended that other larger DC schemes may want to adopt this framework as best practice.
Comment
There has been a mixed response to this initiative with some arguing that as it is not a mandatory requirement it will simply load costs on to the well-established master trusts whilst some start-ups may ignore it. Some go further by saying that it is just an expensive paper chase. What is clear is that an initiative of some sort is needed in this sector given that the barriers to entry are so low. For example, a potential master trust operator does not need to be either licensed or authorised in order to operate and there are no capital adequacy rules.
The Pensions Regulator will want to ensure that there is a high take up of this framework and armed with information about which schemes are used as auto-enrolment vehicles (as each employer stages) along with its general enforcement powers is likely to put pressure on all market participants to deliver its current regulatory expectations. If this fails then it is inevitable that a more stringent regime will follow. One must just hope that there is not a succession of provider scandals before what is seen as an inevitable market consolidation.
PPF assumptions changed as advertised
The Pension Protection Fund (PPF) has issued revised guidance on the assumptions used for PPF levy (known as section 179) and PPF entry (section 143) valuations. The changes are exactly as proposed in the recent consultation (see Pensions Bulletin 2014/09).
The adjusted guidance, which is intended to more closely resemble insurers’ annuity pricing, applies for valuations with an effective date on or after 1 May 2014.
Comment
There is likely to be a small increase in assessed liabilities as a result of these changes, particularly for those with a high proportion of pensions accrued before 6 April 1997. However, most schemes’ PPF levies will not be unduly affected, given that as their section 179 liabilities generally rise, in theory the levy scaling factors should fall.
The forthcoming consultation on the levy formulae for the next three years will have a considerably greater bearing on schemes’ future levies.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
