Pensions Bill: Trouble Ahead

The new Pensions Bill was introduced to the House of Commons last month with the aim of protecting your staff. Graeme Simpson, of solicitors Laytons explains why it means yet more strife

The new Pensions Bill was introduced to the House of Commons last month with the aim of protecting your staff. Graeme Simpson, of solicitors Laytons explains why it means yet more strife

If you offer a final salary pension scheme or are thinking about it, the new Pensions Bill no doubt elicited raised eyebrows, and left you wondering “What next?”. Hailed by Westminster as promoting “simplicity, security and choice’ it aims to deliver on these three counts for pension scheme members. For you though, the outlook is not so rosy – despite promises to employers that £130m can be saved on running costs.

The first step the Bill takes is to provide a safety net for members and you’ll be footing the bill. A new organisation called the Pension Protection Fund (“PPF”) will provide added security for those employees who are members of final salary schemes where their employer ceases to trade and there are insufficient assets left in the pension scheme to cover their benefits in full. The PPF will step in where this happens in future and in most cases employees will receive their full entitlement.

This is where the employer steps in as it is you who will have to fund the PPF. The cost or “levy” will be calculated by scheme specific factors, such as membership numbers and funding levels, but as so many of these factors require data gathering, a flat fee will be payable for the first year only. The Government will offer no underwriting of the PPF and only the levy will be used to finance compensation payments.

Of further note for you is the forthcoming change to the law to pension rights on business transfers. For many years the Transfer of Undertakings (Protection of Employment) Regulations 1981 gave sellers in business transfer deals comfort when it came to occupational pension rights as these did not transfer with the employees while other rights such as level of salary, healthcare etc, did.

However, over the last two years this exemption has been eroded by two European law cases – Beckmann and Martin. These cases, although related to the NHS pension scheme highlighted holes in what had been seen as a blanket exemption related solely to those rights under a pension scheme which could be seen as ‘old age’ benefits. What was once certain is currently no longer so.

The Pensions Bill will change this. Where a company enters into an agreement to purchase a business they will now be required to offer the employees some form of pensions arrangement if one is currently in place. The choices involve either providing a final salary scheme, an occupational money purchase scheme or Stakeholder arrangement with contributions matching the employee rate up to 6% depending on what pension scheme the employees currently have.

A new Pensions Regulator will replace the existing Occupational Pensions Regulatory Authority (“OPRA”) from April 2005. It will carry forward OPRA’s existing powers but with a particular focus on fraud, bad governance and poor administration. It will encourage best practice through an increased education and guidance role. The new regulator will be given the power to issue pension scheme ‘improvement notices’ or ‘third-party notices’ giving fixed timescales for trustees, employers or administrators to take remedial action on problem issues. The regulator will also have the power to ‘freeze’ pension schemes while it conducts investigations. In some circumstances the regulator could order a scheme to be wound up.

While the specifics of how the new proposals will work will be set out in regulations, which are soon to come, the Government’s plan is to have the majority of these changes in place by April 2005. However, the claim that businesses will save £130m each year in running costs and how this figure has been reached is not explained.

Certainly with the introduction of the PPF, the widening of employment rights on business transfers and a new more proactive regulator, you might ask “why bother?” when looking at continuing to run your pension scheme or considering setting one up. These new proposals, designed to promote the security of pension schemes, may have just the opposite effect.