Pensions Bill: trouble ahead

If you offer a final salary pension scheme or are thinking about it, the new Pensions Bill no doubt left you wondering “What next?”.

The government claims it will promote “simplicity, security and choice” for pension scheme members. For employers though, the outlook is not so rosy – despite promises £130m will be saved on running costs.

The first step the legislation takes is to provide a safety net for members; and employers will foot the bill. A new organisation called the Pension Protection Fund (PPF) will provide added security for staff who belong to a final salary scheme. If their employer ceases to trade and there are insufficient assets left in the pension scheme then the PPF will cover their benefits in full. In most cases employees will receive their full entitlement.

This is where the employer steps in as they will have to fund the PPF. The cost, or levy, will be calculated by scheme-specific factors, such as membership numbers and funding levels. However, as so many of these elements 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 is the forthcoming change to the law concerning pension rights on business transfers. For many years, the Transfer of Undertakings (Protection of Employment) Regulations 1981 gave buyers in business transfer deals comfort when it came to occupational pension rights, as these didn’t transfer with the employees while other rights, such as the level of salary and healthcare, did.

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

The Pensions Bill will change this. When a company enters into an agreement to purchase a business, it 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 a 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 it could order a scheme to be wound up.

While the specifics of how the proposals will work are to be set out in regulations, the government plans 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.

Graeme Simpson, head of pensions unit, Laytons solicitors, www.laytons.com