After a show of brinksmanship between the House of Commons and House of Lords, the Pensions Bill was enacted on 19 November 2004. But what does this mean for companies with pension schemes?
To paraphrase the Prime Minister, companies can expect regulation, regulation, regulation – if they have a final salary scheme. Companies with money purchase schemes escape largely unscathed. Much of the Pensions Act will not be coming into force until April 2006, but employers need to be getting ready now.
The Government has replaced the minimum funding requirement (MFR) for final salary schemes. Since MFR was greeted with such scepticism by the pensions industry from the outset, and has comprehensively failed to provide members with meaningful security, the only question is why it took so long.
Instead, we now have the Statutory Funding Objective. This objective is to ‘have sufficient and appropriate assets to cover its technical provisions’, and employer contributions will need to be set accordingly. The pensions regulator is going to be given the power to fix contribution rates where there is no agreement between trustees and employers on this.
The biggest idea in the new Act is to strengthen sharply the protections for pension schemes on insolvency. These have been the subject of much controversy. From 6 April 2005, the Government is establishing a Pensions Protection Fund (PPF), under which all final salary schemes will be compelled to mutually insure each other.
Employers cannot walk away from final salary scheme liabilities. If they wind up the scheme, they must fund it to allow all benefits to be secured with annuities. And, if they haven’t got enough money, then the regulator can force shareholders and sister companies to pay this sum.
The Government claimed to have listened to the concerns of investors, but its changes were cosmetic. The only significant change was that directors who do not control the company will not after all be vulnerable to being made liable for the company debt. Shareholders, including shareholders of parent companies, remain firmly in the firing line. Company investors will be unimpressed, and those in charge of benefit design need to know that pension schemes cannot be lightly got rid of.
Some requirements apply to all schemes. Trustees are expected to be ‘conversant’ with scheme documentation and have knowledge and understanding of trust law and investment matters. Companies will need to ensure that pension scheme trustees are adequately trained. The regulator will be issuing further codes of conduct on this in due course. This is an important area to keep an eye on.
The Government has tinkered with the statutory restrictions on the power to amend pension schemes. This has long been a complete legal mess, given the uncertain meaning of “accrued rights”. You could not make up what followed. Instead of one impenetrable section of the 1995 Act, we now have 10 impenetrable sections of the 2004 Act – that is what Government means by simplification. Some of this is to reflect the new Information and Consultation Directive, but some of it is just the Government introducing complexity for its own sake. We shall probably see no amendments of pension schemes to speak of in the near future, which I suppose is one way of solving the problem.
The Pensions Act will also require buyers on a business transfer to make ‘relevant contributions’ on behalf of a member who has a pension scheme provided by the seller. The level of relevant contributions are to be set by regulation, but it is understood that employers will need to match employees’ contributions up to 6 per cent of salary (regardless of the pre-existing pension promise). However, the Government made no attempt to take account of the continuing uncertainty about the extent to which there may be wider obligations on buyers to mirror pension benefits arising out of recent European Court of Justice cases.
There is little that is entirely new in the Pensions Act 2004, but much that employers and HR managers will need to think about. It needs to be factored into pensions thinking, starting now.