Establishing the Pensions Regulator

The Pensions Regulator will inherit OPRA’s current powers and have a range of new or increased powers to help fulfil objective of protecting members’ benefits. The objective of the Regulator is to protect the benefits held under occupational and personal pension schemes, to reduce the risk of situations arising which may lead to compensation being paid from the Pension Protection Fund and to promote and improve understanding of the good administration of work based pension schemes.

Establishing the Pension Protection Fund (PPF)

The Pension Protection Fund will protect members’ pensions in private sector defined benefit and hybrid schemes, where the employer becomes insolvent and the scheme is under funded. It will provide 100% protection for members who have attained normal retirement age, or who have retired early due to ill health and 90% protection for any other member, subject to an overall benefit cap calculated using a mixture of the schemes individual rates and standardised rules, linked to earnings.

The PPF will be funded by a levy charged to all private sector defined-benefit or hybrid occupational pension schemes and will be collected by The Pension Regulator. The levy will be split into three parts with the Pension Protection levy being based on scheme factors such as number of members and the balance between active and retired members and also based on risk factors. The risk based element will constitute at least 50% of the total charge. The second part will be the Administration Levy covering the set-up and on-going costs of the PPF and the third part will be the Fraud Compensation Levy which replaces the existing Pensions Compensation Board levy to be paid by both defined benefit and defined contribution schemes if and when a case of fraud occurs.

Proposals To Help Firms Run Schemes

The Regulator proposed to concentrate on schemes that pose a high risk due to poor administration or where there is a high risk of fraud. This will reduce the compliance burden on well run schemes.

Changes To The Rules On Limited Price Indexation (LPI)

The changes will mean that it will be capped at 2.5% rather than 5%. The change to LPI will apply to pensions accruing after A-Day.

Amendments To The Rules For Benefits Derived From Contracting-Out Of The State Second Pension.

The Bill proposes changes to the Pension Schemes Act to permit the communitation of GMP and protected rights. It is proposed that commutation will be allowed at retirement in line with other pension rights and also on grounds of triviality and serious ill health. The Bill also permits protected rights to be vested at the same time as non-protected rights.

The Bill includes details regarding replacing the minimum funding requirement (MFR) with a scheme specific funding requirement. A number of key elements includes:

• trustees will have to draw up a Statement of Funding Principles
• a full actuarial valuation will be required at intervals of no more than one year or, if the trustees obtain actuarial reports for the intervening years, at intervals of not more than three years.
• a Schedule of Contributions will have to be put in place following a valuation and must be certified by the actuary.

Pension Protection On Transfer of Employment

The Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) will be extended so that a new employer will be required to provide pension benefits for eligible employees. Benefits can be provided under a Final Salary Scheme or alternatively via a money purchase scheme, or stakeholder/personal pension scheme.

Measures to Encourage a delay in taking the State Pension

1. Improved enhancements to the pension where it is deferred.
   People can receive a larger weekly pension. Currently they will receive approximately 7.5% extra for every year that they delay and this will increase to approximately 10.4% from 2010. It is proposed that the increased rate is brought forward from 2010 to 2005. If people decide to take an extra weekly amount on their pension, the extra money will be liable for tax and will be taken into account for Pension Credit, Housing Benefit and Council Tax Benefit.
2. Introduction of a Lump Sum Option
   People can receive a lump sum. They will have to delay for at least a year to qualify for the lump sum and will receive all the State Pension due, plus extra interest. They will then get the normal weekly State Pension entitlement. If people decide to take the lump sum instead of the extra weekly amount on their pension it will be liable to tax.

Other Measures

1. The introduction of an on-line retirement planner to allow individuals to establish what action they must take to ensure an adequate income in their retirement.
2. The introduction of a requirement to issue combined pension forecasts.
3. A requirement for employers to provide access to information and advice in the workplace if this helps people to make better choices about their retirement planning.
4. Ensuring schemes have at least one third of scheme trustees as member Nominated Trustees and that the trustees have knowledge about the issues they deal with.
5. Clarifying definitions with respect to stakeholder pensions.
6. Safeguarding the accrual of pension rights during periods of paid statutory paternity and adoption leave.
7. Clarifying the ways in which revaluation of accrued pension rights can be calculated.