In this month's Pensions E-Bulletin, we look at the proposed changes to the employer debt regime, the further clarification from the Government on the impact of the CPI change, a Pensions Ombudsman case emphasising the importance of effective member communication and how the threat of a Financial Support Direction forced agreement from employers on a comprehensive scheme funding package.
Consultation on flexible apportionment arrangements and period of grace
The Department for Work and Pensions has issued a consultation on draft regulations which aim to introduce greater flexibility into the employer debt regime, whilst at the same time maintaining member protection.
Flexible apportionment arrangements: A new "flexible apportionment arrangement"
(FAA) will be introduced which will allow the liabilities (rather than the debt) of an employer exiting a multi-employer scheme to be reapportioned to one or more of the employers remaining in the scheme if the following conditions are satisfied:
- the funding test is met – this means that the scheme trustees are satisfied that the remaining employers will be able to continue to fund the scheme and that the FAA will not adversely affect the security of members' benefits;
- all of the pension liabilities of the exiting employer are reapportioned to another employer or employers remaining in the scheme;
- the trustees and the employers who are parties to the FAA must consent in writing;
- where an employment-cessation event has already occurred, no part of the debt triggered must have been paid;
- the scheme must not be in a Pension Protection Fund assessment period or be likely to enter such a period in the next 12 months.
One criticism of the draft regulations is the requirement for the employer to whom the liabilities are apportioned to be a participating employer in the scheme. The strongest employers within a group may not necessarily be scheme employers and it would potentially be beneficial for schemes to have the option to apportion liabilities to such employers where they are in a stronger position than the employers actually participating in the scheme.
Extension of period of grace: Normally, an employer debt is triggered when a scheme employer ceases to employ active scheme members. The period of grace allows an employer who temporarily ceases to employ active members to avoid triggering a statutory debt if he notifies the trustees that he intends to employ an active member within the next 12 months and then does so. The consultation proposes to give trustees a discretionary power to extend the period of grace from 12 months up to a maximum of three years. The time period for the employer to notify trustees to seek permission to use the period of grace is also proposed to be extended from one to two months.
The consultation runs until 10 August 2011 and we will keep you up to date with developments on this issue once the consultation response has been published.
Further clarity on CPI/RPI
In our February 2011 E-Bulletin, we reported on the Government's consultation on the impact of using CPI (rather than RPI) as the inflation measure used for the revaluation of deferred pensions and the indexation of pensions in payment. The Government has now issued its response to the consultation and this confirms the following.
- Employers will be required to consult members where a change to the revaluation/indexation provisions of scheme rules are proposed – this is likely only to apply where the change would be less generous.
- There will be no statutory override to impose CPI on schemes and no modification power making it easier for schemes to change their rules to substitute CPI for RPI.
- For schemes applying RPI increases to pensions in payment, there will generally be no CPI underpin. The CPI underpin exemption did not extend to revaluation but, in response to concerns expressed as part of the consultation, the draft legislation has been amended to ensure CPI does not act as an underpin for schemes that revalue deferred pensions by reference to RPI.
Ombudsman highlights importance of communicating scheme changes
A recent Pensions Ombudsman case has highlighted the importance of keeping members up to date with pension scheme changes. The Disclosure Regulations require trustees to provide members with certain basic information about the scheme and their benefit entitlement, and require trustees to notify all members and beneficiaries within three months of any change resulting in a material alteration in that basic information.
This case concerned an amendment to the Local Government Pension Scheme Rules which permitted payment of pension on the death of a member to a nominated cohabiting partner. The deceased member had not been advised of the requirement to nominate her partner in order for him to qualify to receive this benefit. Although the Council had gone to considerable effort to advise members of the change with member notices, workshops and intranet updates, the information had not reached the member in question as she was on long term sick. Hertfordshire County Council was therefore ordered to pay the partner's pension on the grounds that the obligation to disclose information to the member had not been met. The Ombudsman found that "the statutory obligation is not to make reasonable efforts to provide the information, it is actually to provide it". Trustees should bear this case in mind when scheme changes take place and ensure that all members and beneficiaries receive clear notice of scheme changes.
Threat of Financial Support Direction forces settlement
The threat of a Pensions Regulator imposed Financial Support Direction (FSD) has resulted in the agreement of a comprehensive funding package, including a £60 million payment into the Great Lakes UK Limited Pension Scheme. At the end of last year, the Regulator issued a warning notice on scheme sponsor, Chemtura Manufacturing UK Limited, and its US parent that it may issue a FSD against the companies. The Regulator considers that "this is another example of the use (or potential use) of the FSD power assisting in securing additional financial support for a UK scheme from an overseas parent company".