Explanatory Notes

Welfare Reform and Pensions Act 1999

1999 CHAPTER 30

11 November 1999

Commentary on Sections

Commentary

Part II: Pensions: General
Schedule 2: Miscellaneous amendments
Paragraphs 1 and 2: Income payments orders against pension payments

These paragraphs provide that income payments orders can still be made despite anything in sections 11 and 12, by amending section 32(2) of the Bankruptcy (Scotland) Act 1985 and section 310(7) of the Insolvency Act 1986.

The revised wording makes it clear that pension “rights” in approved schemes, and in those unapproved schemes that would be protected on bankruptcy, do not extend to pension “income”. This ensures that income payments orders can still be made in respect of pension income.

Paragraph 3: Extended meaning of “personal pension scheme”

The current definition of a personal pension in section 1 of the Pension Schemes Act 1993 is couched in terms of a scheme capable of providing benefits on death or retirement in respect of employed earners. This definition could exclude a scheme (including a stakeholder pension scheme – see commentary on Part I) set up exclusively for a group of self-employed earners. That would leave some self-employed earners with less statutory protection than that enjoyed by employed earners. This amendment addresses that.

As a result of the amendment, parts of sections 73, 96 and 181 of the Pensions Schemes Act 1993, and part of section 126 of the Scotland Act 1998, are repealed by Part I of Schedule 13 (introduced by section 88).

Paragraph 4 : Revaluation of earnings factors: meaning of “relevant year”

In order to protect the pension position of individuals who leave their pension schemes before state pension age, the Pension Schemes Act 1993 requires schemes to revalue Guaranteed Minimum Pension (GMP) rights in line with certain prescribed percentages to keep pace with inflation. The provisions governing one particular method of revaluation, known as fixed rate revaluation, do not allow a GMP to be revalued after April 1997.

This paragraph removes that restriction. It provides for a Guaranteed Minimum Pension to be revalued by the prescribed percentage for each year in the period between the earner’s leaving the scheme and reaching state pension age (currently 65 for men and 60 for women).

Paragraph 5 : Interim arrangements

Section 28 of the Pension Schemes Act 1993 gives holders of personal pensions the right to an interim arrangement in respect of protected rights when their pensions mature.

Interim arrangements for non-protected rights are permitted by section 58 of and Schedule 11 to the Finance Act 1995. Under an interim arrangement, instead of immediately using the accumulated fund to buy an annuity, the pension holder may withdraw an income from the fund, within specified maximum and minimum limits, and defer the purchase of an annuity. When the member reaches the age of 75, the remainder of the fund must be used to buy an annuity. However, unless the fund is sufficiently large (at least £100,000-£200,000) an interim arrangement could deplete the fund to a point where there was insufficient remaining to buy an annuity that would provide a reasonable level of income from age 75 onwards.

There is a power (section 145 of the Pensions Act 1995) to extend the availability of interim arrangements to cover protected rights in occupational schemes, but at present such an extension would create a requirement on schemes to offer such arrangements. For this reason the power to extend the availability of interim arrangements in this way has not been used.

This paragraph amends section 28 of the Pension Schemes Act 1993 to allow the providers to decide whether or not to supply interim arrangements. It is intended that the power to extend the availability of interim arrangements to protected rights in occupational schemes will then be used.

Paragraph 6: Effect of certain orders on guaranteed minimum pensions

This paragraph amends section 47 of the Pension Schemes Act 1993. Section 47 contains provisions in relation to pensions that are contracted out of SERPS. Broadly, the position is that where a person is entitled to a Guaranteed Minimum Pension (GMP) from an occupational pension scheme, his/her SERPS entitlement is reduced by the amount of GMP. That prevents double provision.

The paragraph provides that where an order has been made to recover excessive pension contributions (see commentary on sections 15 and 16), the full value of the GMP will be assumed to be retained for the purposes of the SERPS calculation. Hence SERPS would still be reduced by the full amount, and the state will be prevented from making up any shortfall in the occupational pension which has occurred as a result of the recovery of excessive contributions.

Paragraph 7 : Mandatory payment of contribution equivalent premium

Paragraph 7(1)

When a person leaves an occupational salary-related scheme with less than two years’ service (or dies having less than two years’ service) the scheme may refund his or her contributions rather than providing him or her (or his or her widow or widower) with a pension. Where this happens the scheme trustees pay a “contributions equivalent premium” (CEP) which restores the leaver’s (or widow’s or widower’s) rights in the state earnings-related scheme (SERPS) for that short period of service. The policy is that payment of a CEP should be mandatory where there are state scheme rights to be restored.

The Pensions Act 1995 introduced new rules for contracted-out schemes, and also amended the legislation dealing with CEPs to take account of those new rules. Section 55 of the Pension Schemes Act 1993, as amended by the 1995 Act, now deals with the payment of CEPs. However, that section does not provide for the mandatory payment of CEPs in certain circumstances.

Paragraph 7(1) amends section 55 of the 1993 Act to make such provision. This paragraph also provides that the Inland Revenue must be notified by the prescribed person where a CEP is required to be paid, and introduces a power to set out how and when such notification must be made.

Paragraph 7(2)

The Northern Ireland Act 1998 excepts certain matters from the legislative and executive powers of the Northern Ireland Assembly, including matters relating to the payment of CEPs. Accordingly, paragraph 7(2) makes amendments to the Pension Schemes (Northern Ireland) Act 1993 equivalent to those made by paragraph 7(1) to the Pension Schemes Act 1993.

Paragraph 8: Payment by Secretary of State of unpaid pension contributions

The Secretary of State can make payments from the National Insurance Fund in respect of contributions to occupational pension schemes that an employer, who has become insolvent, was responsible for but failed to pay. There are provisions to recover these payments from the assets of the insolvent employer. However, these were not amended to reflect the new provisions for contracting out that came into effect from April 1997.

This paragraph amends Schedule 4 to the Pensions Schemes Act 1993 to ensure that certain payments will continue to be recoverable from the insolvent employer’s assets as a priority debt where the employer has become insolvent.

Paragraphs 9 to 11: Supervision by the Occupational Pensions Regulatory Authority
Paragraph 9

This paragraph amends section 3 of the Pensions Act 1995. It widens the scope of section 3(2)(b) of the Pensions Act 1995 so that it can apply to, for example, the stakeholder pension schemes provided for in this Act. At present section 3 refers only to Part I of the 1995 Act. The paragraph extends the reference to cover all of that Act and any other Act (including this one).

Paragraph 10

Section 8(4) of the Pensions Act 1995 currently allows OPRA to appoint someone with full powers to act as a trustee, and at the same time order that the other trustees on the board cannot exercise any of their powers. It also allows OPRA to appoint trustees who have restricted powers.

However, the legislation does not make it clear that OPRA can appoint a trustee who has restricted powers and at the same time prevent the other trustees from exercising their powers only in the areas of those restricted powers. For example OPRA may wish to appoint a trustee who, because of the inexperience of the other trustees, would be solely responsible for decisions relating to the scheme’s investment strategy. Other day to day administration of the scheme could be left to the remaining trustees.

Paragraph 10 clarifies the situation. It allows OPRA to appoint a trustee with restricted powers and to order that those powers may be exercised to the exclusion of the other trustees on the board.

Paragraph 11

OPRA has the power, under section 10 of the Pensions Act 1995, to impose fines for certain breaches of the legislation. It also has the power to recover the penalty. However, if someone refused to pay, and OPRA had to enforce the penalty through the courts, it would currently have to take out a debt action in the courts.

To avoid having to take out a debt action, in England and Wales the County Court rules provide a fast-track system, which the amendment will allow OPRA to use. This means that to enforce an unpaid penalty OPRA will only have to certify the amount of the unpaid penalty to the County Court and file a copy of the penalty. The Court could then issue a court order to allow the penalty to be enforced. In Scotland, OPRA’s order will have the same effect as a sheriff’s decree.

Paragraph 12: Occupational pension schemes: institutions who may hold money deposited by trustees etc.

To ensure that pension schemes do not keep money in an employer’s bank account, which might put members’ funds at risk, section 49(1) of the Pensions Act 1995 requires trustees to keep pension fund money in a separate account at an institution authorised under the Banking Act 1987.

Similarly, where an employer acts as paying agent for the trustees, section 49(5) requires the employer to keep such money in a separate account at an authorised institution.

Reference to the Banking Act 1987 has the effect of preventing money from being kept in building societies because they are exempt from the requirement to apply for authorisation under the Banking Act 1987.

This paragraph amends section 49(1) and (5) of the Pensions Act 1995 to include building societies and European authorised institutions as institutions in which pension fund money may be held.

Paragraph 13: Annual increase in rate of pension

Once occupational pensions become payable, schemes are required to increase them annually. This applies to all pension rights which have accrued on or after 6 April 1997, and to certain rights accruing on or after 5 April 1988. The existing legislation requires an occupational scheme to apply the annual increase by reference to a Revaluation Order which is published each year, based on the published Retail Price Index percentage for the month of September. The Order is not published until the following January. A procedure to advise any scheme which needs to make an increase before the order is published has been in operation.

This paragraph amends section 54 of the Pensions Act 1995 to make it clear that the reference period to be used by schemes to determine the percentage rate of annual increases to occupational pensions in payment is the period covered by the most recently published Revaluation Order.

Paragraph 14: Occupational pension schemes: certificates etc. relating to minimum funding requirement

Paragraph 14(1)

The Minimum Funding Requirement (MFR) sets a benchmark funding level that salary related schemes are required by law to attain. These schemes are required to have regular MFR valuations. Following each valuation, the rates of contributions payable over the next five years are set out in a Schedule of contributions. The rates must be certified by the scheme’s actuary as adequate to ensure that funding will meet the MFR provisions. At present this has to be done by reference to the funding level on the date the actuary certifies the Schedule. This requires some complicated calculations because the rates have to be agreed before the actuary can certify them. This change will simplify the procedures by enabling the actuary to certify the contributions by reference to the funding level at an earlier date. The power to prescribe the appropriate date allows flexibility to adjust it if there are further operational difficulties.

Paragraph 14(2)

Where there has been a deterioration in the funding level of a salary related scheme and it is below the MFR, the trustees must prepare a report setting out the reasons for the deterioration. This amendment introduces powers for regulations to set out the time limit within which the trustees must prepare that report. This is consistent with many other provisions in the Pensions Act 1995 relating to time limits for compliance, enabling the period to be adjusted in the light of practical experience. The Government intends to consult with the pensions industry on what the period should be, but it is expected to be three months.

Paragraph 15: Excess assets of wound up schemes

Section 77 of the Pensions Act 1995 sets out the rules as to how excess assets are to be distributed where a scheme is winding up and where there is a scheme rule prohibiting the distribution of assets to the employer. Trustees are required to use any excess assets to enhance members’ benefits up to certain limits. Any assets left over after this may then be distributed to the employer, even though the scheme rules would normally prevent this.

Where trustees fail to comply with these requirements, OPRA can prohibit the trustees from being trustees of the scheme but cannot impose a civil penalty. The amendment inserts a reference to section 10 of the Pensions Act 1995 (the power allowing OPRA to impose civil penalties) into section 77(5). This means that where a trustee of an occupational pension scheme fails to follow the rules for distribution of excess assets, and where he makes a payment to the employer in contravention of the section, OPRA will be able to impose a penalty on him.

Paragraph 16: Pensions Compensation Board

The Pensions Compensation Board (PCB) is the body that administers the occupational pensions compensation provisions. It is required to produce an annual report and annual accounts. Currently these two documents do not cover the same annual period. The annual report covers a 12 month cycle which started from 1 August, the date the PCB was formed. The accounts cover the financial year cycle, ending on 31 March.

This paragraph amends section 79(1) of the Pensions Act 1995 to bring the annual report into the same cycle as the accounts, and allows for the first annual report after the change to cover a shorter period to enable the two cycles to coincide.

Paragraph 17: Diligence against pensions: Scotland

For the purposes of debt recovery, it is intended that occupational pensions should be treated as earnings. Hence there is special provision in the Pensions Act 1995 to allow attachment of earnings orders against occupational pensions. This paragraph now allows occupational pensions to be subject to arrestments of earnings (the Scottish equivalent of attachment of earnings orders).

Paragraph 18: Pensionable service

This paragraph amends section 124(3) of the Pensions Act 1995 to allow occupational pension schemes to round the length of pensionable service (for example, to round two weeks of pension up to a month when calculating the final pension). The pension based on these rights would then be increased annually by the published Retail Price Index. This will prevent occupational pension schemes having to identify any rounded rights separately and exclude them from the annual increase.

Paragraph 19: Occupational pension schemes: rights of an employee who is director of a corporate trustee

This paragraph amends sections 46, 58 and 102 of the Employment Rights Act 1996, which provides for paid time off for performance of trustee duties and for training, and for the rights not to suffer detriment in employment or be unfairly dismissed. It ensures that the rights in those sections apply to employees who are directors of a trust company in the same way as they do to employees who are individual trustees.