The Occupational Pension Schemes (Pensions Compensation Provisions) Regulations 1997

Statutory Instruments

1997 No. 665

PENSIONS

The Occupational Pension Schemes (Pensions Compensation Provisions) Regulations 1997

Made

6th March 1997

Laid before Parliament

13th March 1997

Coming into force

6th April 1997

The Secretary of State for Social Security, in exercise of the powers conferred upon him by sections 56(3), 81(1)(c), (2) and (7), 82(1), 83(2) and (3)(a), 84(1)(b) to (3), 86, 124(1), 125(2) and 174(2) and (3) of the Pensions Act 1995M1 , and of all other powers enabling him in that behalf, having consulted such persons as he considers appropriateM2 , by this instrument, hereby makes the following Regulations:—

Modifications etc. (not altering text)

C1 Instrument applied in part (1.10.2000) by The Stakeholder Pension Schemes Regulations 2000 (S.I. 2000/1403), regs. 1(2), 32, Sch. 2

Marginal Citations

M1 1995 c.26. Section 124(1) is cited because of the meaning ascribed to “prescribed" and “regulations".

M2 See section 120(1) of the Pensions Act 1995.

Citation, commencement and interpretation E+W+S

1.—(1) These Regulations may be cited as the Occupational Pension Schemes (Pensions Compensation Provisions) Regulations 1997 and shall come into force on 6th April 1997.

(2) In these Regulations, unless the context otherwise requires—

• “the audited accounts" means the accounts prepared by the auditor;

• “the 1988 Act" means the Income and Corporation Taxes Act 1988 M3 ;

• “the 1993 Act" means the Pension Schemes Act 1993 M4 ;

• “approved scheme" means a scheme which is approved or was formerly approved under section 590 or 591 of the 1988 Act, or in respect of which an application for such approval has been duly made which has not been determined;

• “the auditor" means an individual or a firm appointed by the trustees as auditor of the scheme;

• “base rate" means the rate for the time being quoted by the reference banks as applicable to sterling deposits or, where there is for the time being more than one such base rate, the rate which, when the base rate quoted by each bank is ranked in a descending sequence of four, is first in the sequence;

• “beneficiary" means a person, other than a member of the scheme, who is entitled to the payment of benefits under the scheme;

• “Board" means the Pensions Compensation Board M5 ;

• “compensation provisions" has the meaning given by section 81(3);

• “ear-marked scheme" means an occupational pension scheme which is a money purchase scheme under which all the benefits are secured by one or more policies of insurance or annuity contracts and such policies or contracts are specifically allocated to the provision of benefits for individual members or any other person who has a right to benefits under the scheme;

• “guaranteed minimum pension" has the meaning given in section 8(2) of the 1993 Act;

• “the loss" means the reduction falling within section 81(1)(c);

• “money purchase benefits" has the meaning given in section 181(1) of the 1993 Act;

• “money purchase scheme" means an occupational pension scheme under which all the benefits that may be provided other than death benefits are money purchase benefits;

• “normal pension age" has the meaning given by section 180 of the 1993 Act;

• [F1 “reference banks” means the four largest persons for the time being who—

  (a)

  have permission under Part 4 of the Financial Services and Markets Act 2000 to accept deposits,

  (b)

  are incorporated in the United Kingdom and carrying on there a regulated activity of accepting deposits, and

  (c)

  quote a base rate applicable to sterling deposits;]

• “relevant insurer" means, in relation to an annuity contract or policy of insurance under which scheme benefits are or were secured, the person with whom the contract is made;

• “scheme" means an occupational pension scheme which is a trust scheme;

• “unallocated assets" means any assets of a money purchase scheme which have not been specifically allocated for the provision of benefits to or in respect of members (whether generally or individually).

[F2 (2A) The definition of “reference banks” in paragraph (2) must be read with—

(a) section 22 of the Financial Services and Markets Act 2000;

(b) any relevant order under that section; and

(c) Schedule 2 to that Act.]

(3) Unless the context otherwise requires, any reference in these Regulations to a numbered section is to the section of the Pensions Act 1995 bearing that number.

Textual Amendments

F1 Words in reg. 1(2) substituted (1.12.2001) by The Financial Services and Markets Act 2000 (Consequential Amendments and Repeals) Order 2001 (S.I. 2001/3649), arts. 1, 552(1)

F2 Reg. 1(2A) inserted (1.12.2001) by The Financial Services and Markets Act 2000 (Consequential Amendments and Repeals) Order 2001 (S.I. 2001/3649), arts. 1, 552(2)

Marginal Citations

M3 1988 c.1.

M4 1993 c.48.

M5 The Pensions Compensation Board is established under section 78(1) of the Pensions Act 1995.

Schemes to which the compensation provisions and these Regulations do not apply E+W+S

2.—(1) The compensation provisions and these Regulations shall not apply to—

(a) a scheme which has fewer than two members and no beneficiaries;

(b) a scheme the only benefits provided by which are death benefits and under the provisions of which no member has accrued rights;

(c) a scheme which provides relevant benefits, but is neither an approved scheme nor a relevant statutory scheme;

(d) a scheme whose members are fewer than 12, all of whom are trustees and under the rules of which all trustee decisions must be made by unanimous agreement, save that the non-participation of a pensioneer trustee in any such decision shall be disregarded;

(e) a public service pension scheme;

(f) a relevant lump sum retirement benefits scheme;

(g) a scheme in respect of which any Minister of the Crown has given a guarantee or made any other arrangements for the purpose of securing that the assets of the scheme are sufficient to meets its liabilities;

(h) a section 615(6) scheme.

(2) In this regulation—

• “lump sum benefits" does not include benefits paid by way of commuted retirement pension;

• “pensioneer trustee" has the meaning given in regulation 2(1) of the Retirement Benefits Schemes (Restriction on Discretion to Approve) (Small Self-administered Schemes) Regulations 1991 M6 ;

• “public service pension scheme" has the meaning given by section 1 of the 1993 Act;

• “relevant benefits" has the meaning given in section 612(1) of the 1988 Act;

• “relevant lump sum retirement benefits scheme" means an approved scheme—

  (a)

  which has been categorised by the Board of Inland Revenue for the purposes of its approval as a centralised scheme for non-associated employers;

  (b)

  which is not contracted-out; and

  (c)

  under the provisions of which the only benefits which may be provided on or after retirement (other than money purchase benefits derived from the payment of additional contributions by any person) are lump sum benefits which are not calculated by reference to any member’s salary;

• “relevant statutory scheme" has the meaning given in section 611A of the 1988 Act M7 ;

• “section 615(6) scheme" means a scheme with such a superannuation fund as is mentioned in section 615(6) of the 1988 Act.

Marginal Citations

M6 S.I. 1991/1614.

M7 Section 611A was inserted by section 75 of and Schedule 6, Part I, paragraphs 1, 15 and 18(1) to the Finance Act 1989 (c.26).

Relevant offences E+W+S

3.  For the purposes of section 81(1)(c) (cases where compensation provisions apply: reduction to be attributable to prescribed offence), the prescribed offence is any offence involving dishonesty, and for the avoidance of doubt dishonesty shall include an intent to defraud.

[F3 Protected liabilities—prescribed class of members E+W+S

F4 3A.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .]

Textual Amendments

F3 Reg. 3A inserted (23.4.2001) by The Occupational Pension Schemes (Pensions Compensation Provisions) Amendment Regulations 2001 (S.I. 2001/1218), regs. 1, 2(2)

F4 Reg. 3A omitted (16.12.2004) by virtue of The Pensions Act 2004 (Commencement No. 1 and Consequential and Transitional Provisions) Order 2004 (S.I. 2004/3350), art. 3(3)

Applications for compensation E+W+S

4.  An application for compensation under section 82 in respect of a scheme may only be made by—

(a) the trustees of a scheme, or their representative;

(b) a person concerned with the administration of, or the provision of benefits under, the scheme, or his representative; or

(c) a member of, or beneficiary under, the scheme, or his representative.

Amount of compensation E+W+S

5.—(1) If the Board decide to make a payment or payments to the trustees in accordance with section 83, the amount of any such payment or (if there is more than one) the aggregate must be determined in accordance with paragraph (2).

(2) [F5 The amount or, as the case may be, the aggregate, shall not exceed the aggregate specified in section 83(3)], less the amount of any payment already made under section 84 (payments made in anticipation), except to the extent that any such payment has been recovered by the Board.

(3) For the purposes of section 83(3)(a) (compensation not to exceed F6 ... the shortfall at the application date), and subject to paragraph (4), the amount of the shortfall at the application date shall be calculated in accordance with the formula—

where—

(a)P is

(i)the value of the assets as stated in the audited accounts which most immediately precede the loss, adjusted by the auditor so as to take into account subsequent alterations in their value (if any) which occur prior to the application date, but disregarding the alteration in their value attributable to the loss itself, or

(ii)if there are no such audited accounts, the value of the assets on such date as immediately precedes the loss, as reported by the auditor, adjusted in the same manner as for the calculation under head (i), and

(b)Q is the value of the assets immediately before the application date, as reported by the auditor;and the same principles are used to value the assets for the purposes of P and Q.

(4) In the case of an ear-marked scheme, the amount of the shortfall at the application date for the purposes of section 83(3)(a), shall be calculated in accordance with the formula—

where—

(a)P is the value of the assets on such date as immediately precedes the loss, adjusted so as to take into account the loss and other alterations in their value (if any) between that date and the application date, as certified by the relevant insurer,

(b)R is the value of the assets constituting the loss on such date as immediately precedes its occurrence adjusted so as to reflect any alteration in the value of those assets which would have occurred had they remained in the scheme until immediately before the application date, or certified by the relevant insurer,

(c)Q is the value of the assets immediately before the application date, as certified by the relevant insurer,and the same principles are used to value the assets for the purposes of P, R and Q.

F7 (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(6) For the purposes of [F8 section 83(3)(b)] —

[F9 (a) the prescribed rate of interest shall be the base rate plus 2 per cent.;]

(b) the prescribed period by reference to which the rate of interest specified in sub-paragraph (a) is calculated shall commence on the application date and end on the settlement date.

Textual Amendments

F5 Words in reg. 5(2) substituted (16.12.2004) by The Pensions Act 2004 (Commencement No. 1 and Consequential and Transitional Provisions) Order 2004 (S.I. 2004/3350), art. 3(2)(a)

F6 Words in reg. 5(3) omitted (23.4.2001) by virtue of The Occupational Pension Schemes (Pensions Compensation Provisions) Amendment Regulations 2001 (S.I. 2001/1218), regs. 1, 2(3)(a)

F7 Reg. 5(5) omitted (16.12.2004) by virtue of The Pensions Act 2004 (Commencement No. 1 and Consequential and Transitional Provisions) Order 2004 (S.I. 2004/3350), art. 3(2)(b)

F8 Words in reg. 5(6) substituted (16.12.2004) by The Pensions Act 2004 (Commencement No. 1 and Consequential and Transitional Provisions) Order 2004 (S.I. 2004/3350), art. 3(2)(c)

F9 Reg. 5(6)(a) substituted (23.4.2001) by The Occupational Pension Schemes (Pensions Compensation Provisions) Amendment Regulations 2001 (S.I. 2001/1218), regs. 1, 2(3)(c)

Payments made in anticipation E+W+S

6.—(1) The prescribed class of liabilities referred to in section 84(1)(b) (liabilities the trustees would not otherwise be able to meet) are—

(a) any liability for payment of pensions which has arisen at the application date;

(b) any liability which arises between the application date and the settlement date for payment of—

(i) guaranteed minimum pensions,

(ii) pensions, other than guaranteed minimum pensions, payable to persons reaching normal pension age,

(iii) pensions payable to beneficiaries,

(iv) ill-health retirement pensions;

(c) in the case of a scheme where some or all of the benefits that may be provided are money purchase benefits, any liability such as is specified in paragraph (2).

(2) The liability referred to in paragraph (1)(c) is the approximate amount of any monthly pension that would have been payable in respect of money purchase benefits prior to the settlement date but for the loss.

(3) Except where any liability for payment of a pension arises in connection with terminal illness, such liability shall not for the purposes of this regulation include any liability for payment of a lump sum, whether or not deriving from the commutation of pension rights.

(4) For the purposes of paragraph (3), a person shall be regarded as terminally ill where his expectation of life is less than one year, and the expression terminal illness shall be construed accordingly.

(5) Payments made in anticipation shall be calculated—

(a) so that, so far as the Board is reasonably able to achieve, the extent to which liabilities specified in paragraph (1) are satisfied after the Board has made a payment under section 83, is undiminished;

(b) so as to counter-balance any payments in anticipation made previously which were too great or too small;

(c) so as not to exceed the amount required to enable the trustees of the scheme, prior to the settlement date, to meet such liabilities as are specified in paragraph (1); and

F10 (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(6) For the purposes of section 84(3), the prescribed circumstances in which any payment made under section 84(1) may not be recovered, in whole or in part, are where such recovery would cause pensions in payment to be reduced.

Textual Amendments

F10 Reg. 6(5)(d) omitted (16.12.2004) by virtue of The Pensions Act 2004 (Commencement No. 1 and Consequential and Transitional Provisions) Order 2004 (S.I. 2004/3350), art. 3(3)

Mixed benefit schemes E+W+S

F11 7.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F11 Reg. 7 omitted (16.12.2004) by virtue of The Pensions Act 2004 (Commencement No. 1 and Consequential and Transitional Provisions) Order 2004 (S.I. 2004/3350), art. 3(3)

Multi-employer schemes E+W+S

8.—(1) Where a scheme applies to earners in employments under different employers—

(a) section 81(1)(b) shall have effect as if the words “the employers are insolvent" were substituted for the words “the employer is insolvent"; and

(b) section 81(3)(c) shall have effect as if the words “the last employer became insolvent" were substituted for the words “the employer became insolvent".

(2) Where a scheme in relation to which there is more than one employer is divided into two or more sections and the provisions of the scheme are such that—

(a) different sections of the scheme apply to different employers or groups of employers (whether or not more than one section applies to any particular employer or groups including any particular employer);

(b) contributions payable to the scheme by an employer, or by a member in employment under that employer, are allocated to that employer’s section (or, if more than one section applies to the employer, the section which is appropriate in respect of the employment in question); and

(c) a specified part or proportion of the assets of the scheme is attributable to each section and cannot be used for the purposes of any other section;

or where—

(d) a scheme which has been such a scheme as is mentioned in sub-paragraphs (a) to (c) is divided into two or more sections some or all of which apply only to members who are not in pensionable service under the section;

(e) the provisions of the scheme have not been amended so as to prevent the conditions mentioned in sub-paragraphs (a) to (c) being satisfied in relation to two or more sections; but

(f) those conditions have ceased to be satisified in relation to one or more sections by reason only of there being no members in pensionable service under the section and no contributions which are to be allocated to it,

the compensation provisions and these Regulations shall apply as if each section of the scheme were a separate scheme.

(3) For the purposes of paragraph (2), there shall be disregarded any provisions of the scheme by virtue of which contributions or transfers of assets may be made to make provision for death benefits; and where that paragraph applies and contributions or transfers so made to a section (“the death benefits section"), the assets of which may only be applied for the provision of death benefits, the death benefits section shall also be treated as if it were a separate scheme for the purposes of the compensation provisions and these Regulations.

(4) For the purposes of paragraphs (2) and (3) there shall be disregarded any provisions of the scheme by virtue of which, on the winding up of the scheme or a section, assets attributable to one section may be used for the purposes of another section.

Partially approved schemes E+W+S

9.  Where a scheme is not an approved scheme but contains a section which, by virtue of section 611(3) of the 1988 Act, is treated by the Board of Inland Revenue as an approved scheme, the compensation provisions and these Regulations shall apply to that section as if it were a separate scheme.

Modifications for money purchase schemes E+W+S

F12 10.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F12 Reg. 10 omitted (16.12.2004) by virtue of The Pensions Act 2004 (Commencement No. 1 and Consequential and Transitional Provisions) Order 2004 (S.I. 2004/3350), art. 3(3)

Signed by authority of the Secretary of State for Social Security.

Oliver Heald

Parliamentary Under-Secretary of State,

Department of Social Security

Explanatory Note

(This note is not part of the Regulations)

These Regulations relate to the payment of compensation to occupational pension schemes by the Pensions Compensation Board (“the Board"), as provided for under sections 81 to 85 (“the compensation provisions") of the Pensions Act 1995 (“the Act").

Regulation 1 provides for the citation, commencement and interpretation of the Regulations.

Regulation 2 provides for exemptions to the compensation provisions.

Section 81(1) of the Act specifies the conditions which must be met for a scheme to establish eligibility for compensation. Section 81(1)(c) of the Act provides that the value of the scheme assets must have been reduced and that there must be reasonable grounds for believing that the reduction is attributable to an act or omission constituting a prescribed offence. Regulation 3 provides that the prescribed offence is one involving dishonesty.

Regulation 4 sets out who may make an application for compensation.

Section 83(3) of the Act provides that the amount of compensation must not exceed, first, 90 per cent. of the reduction falling within section 81(1)(c) of the Act at the application date (“the shortfall") together with interest on the shortfall at the prescribed rate for the prescribed period, and secondly, in the case of a salary-related scheme, the amount required to restore the scheme to a funding level of 90 per cent. at the date after which the Board determine further recoveries of value are unlikely to be made without disproportionate cost or within a reasonable time. Regulation 5 provides that the total amount of compensation paid shall equal whichever is the lower of those amounts, and makes provision as to the manner in which such amounts are to be calculated.

Regulation 6 concerns payments made in anticipation of a final payment of compensation. It specifies the liabilities which a scheme must be unable to meet, either fully or in part, before anticipatory payments can be made; lays down criteria by reference to which such payments are to be calculated; and prescribes the circumstances in which such payments may not be recovered.

Regulations 7, 8, 9 and 10 provide for modification of the compensation provisions, where some but not all the benefits that a scheme provides are money purchase benefits (regulation 7), where a scheme applies to earners in employments under different employers (regulation 8), where only part of a scheme is approved for tax exemption purposes (regulation 9), and where all the benefits that a scheme provides (other than death benefits) are money purchase benefits (regulation 10).

An assessment of the compliance cost for employers of the measures arising from the Pensions Act 1995, including these Regulations, has been placed in the libraries of both Houses of Parliament. Copies can be obtained by post from the Department of Social Security, Pensions and National Insurance Directorate, The Adelphi, 1—11 John Adam Street, London WC2N 6HT.