Vol 1 (2004) - Issue 4

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The Pensions Bill: The New Dealbreaker?

The Government has published a further draft of its Pensions Bill, which aims to boost public confidence in pensions whilst making it simpler for employers to put pension schemes in place. Arguably, however, the pursuit of these laudable objectives has blinded the draughtsman to potential side-effects which seem only too apparent to critics of the Bill.
Most controversially, it appears that a company which has a deficit in its defined benefit pension scheme may contaminate a widely defined range of corporates and individuals with whom it comes into contact, making such corporates and individuals jointly and severally liable with that company for the deficit.
The key proposals contained in the Pensions Bill are briefly set out below, together with comments on their potential impact.

Key proposals in brief

Increased protection for defined benefit pension scheme (‘Scheme’) members

Pension Protection Fund

A Pension Protection Fund (PPF) will be set up to pay benefits where an employer becomes insolvent and its Scheme cannot meet its liabilities. Once the employer has become insolvent or has applied for PPF protection, the PPF will have control over the Scheme. Schemes which have already started winding up when the PPF comes into effect will not be eligible.
Funding of the PPF will be achieved by way of the assets of the pension schemes of insolvent employers, together with a levy, to be introduced with effect from April 2006, on all Schemes. The levy will be:

(i) the responsibility of pension scheme trustees or other persons to be defined in regulations;

(ii) a flat rate in the first year;

(iii) calculated, after the first year, on the basis of ‘scheme factors’ including:
- level of membership
- value of liabilities
- ‘risk factors’ (eg. the funding level of the Scheme, the likelihood of insolvency of the employer and the Scheme’s investment strategy). Schemes will be obliged to provide the PPF with actuarial valuations so that the PPF may assess the risk-based element of the levy.

As a further expense, Schemes will also be called upon to make additional payments to cover the administration costs of the PPF and the cost of compensation for fraud.
The ‘protected liabilities’ which the PPF will pay are as follows:

(i) 100% of pensions in payment to existing pensioners who have reached normal retirement date;

(ii) 90% of pensions for deferred pensioners, subject to a cap;

(iii) Increases on post-April 1997 benefits in line with RPI with a cap of 2.5% and increases in deferred pensions in line with RPI with a cap of 5%;

(iv) Survivors’ benefits for spouses and civil partners; and

(v) Commutation of up to 25% of benefits for active and deferred members.

Concern has been voiced by some, most notably the Faculty and Institute of Actuaries, over the ability of the PPF meet its potentially extensive financial obligations as a support system for insolvent schemes. It is felt that, without recourse to government coffers, the PPF may be chronically underfunded.

Scheme-specific funding

The current minimum funding requirement for Schemes will be replaced by the following:

(i) There will be a statutory funding objective (the ‘Objective’) that all Schemes must have sufficient and appropriate assets to cover the amount needed to meet their liabilities.

(ii) Trustees must prepare and agree with the employer:

- a statement of funding principles (‘SFP’) setting out their policy for meeting the Objective;
- a recovery plan if the Objective is not met; and
- a schedule of contributions to be paid by the employer and the Scheme members, which must be certified by the Scheme actuary as consistent with the SFP.