In this month’s Pensions E-Bulletin, we look at the new flexible apportionment arrangements for dealing with employer debt, the extension of small lump sum commutation to personal pensions and the Government’s consultation paper on dealing with small DC pension pots.
Flexible apportionment arrangements introduced from 27 January 2012
In our July E-Bulletin, we reported on the Government’s consultation to introduce greater flexibility into the employer debt regime using a new flexible apportionment arrangement (FAA). The Government has now confirmed its response and introduced regulations which will bring the new FAA regime into force on 27 January 2012.
The FAA regime is based on the existing scheme apportionment arrangement but is intended to give more flexibility, particularly in relation to corporate restructurings where a number of employers withdraw from a scheme at different times. The key features remain as set out in our July E-Bulletin:
- All liabilities of an employer leaving a scheme are apportioned to one or more of the employers remaining in the scheme. A debt would not be treated as becoming due from the exiting employer and it would make a “clean break” from the scheme.
- The scheme trustees must be satisfied that the ‘funding test’ is met i.e. that the remaining employers would be able to continue to fund the scheme and that the FAA would not adversely affect the security of members’ benefits. The FAA regime will allow trustees to carry out the funding test only once where a number of employers leave the scheme at broadly the same time.
- The scheme trustees, the exiting employer and the remaining employers must consent to the FAA in writing.
The regulations also extend the 12 month period of grace, within which an employer can avoid triggering a statutory debt by notifying the trustees that it intends to employ active members (and then does so), to 36 months at the trustees’ discretion. In addition, employers will have two months rather than one month in which to notify the trustees if they wish to rely on a period of grace.
With many commentators suggesting that the employer debt regime restricts corporate activity, the FAA regime and extension of the period of grace are intended to assist in dealing with employer debts on corporate restructurings. Whilst any additional flexibility should be welcomed, the Government has been criticised by some for not going far enough and it is not clear whether the FAA regime will have a significant impact in practice.
Draft regulations extend small lump sum commutation to personal pensions
The Government has announced plans to extend the £2,000 de minimus commutation option to personal pension schemes with effect from 6 April 2012.
At present, funds in a personal pension scheme may only be trivially commuted where the aggregate value of all an individual’s pension savings does not exceed £18,000. That option does not assist individuals who have a very small pension pot in one scheme but another larger pot exceeding the limit elsewhere. Since 1 December 2009, members of occupational pension schemes aged 60 or over have been able to commute their pension savings to a lump sum if it is worth no more than £2,000, even if they have additional pension savings elsewhere.
Under the current proposals, the £2,000 de minimus lump sum option will be extended to personal pension schemes with effect from 6 April 2012. To prevent abuse of the system by setting up lots of small separate personal pension arrangements, individuals will only be able to take this type of lump sum on two occasions.
The harmonisation of the position under occupational and personal pension schemes is welcomed and forms part of the Government’s drive to reduce the regulatory differences between the two types of scheme, particularly in the lead-up to auto-enrolment when an increase in membership of personal pension schemes is likely.
Consultation on small DC pension pots
The DWP has issued a consultation on the future treatment of small defined contribution (DC) pension pots. The Government is concerned that having multiple small pension pots is detrimental to long-term pension saving and the proposals are intended to assist individuals who build up small pension pots as they move between employers. This consultation is particularly relevant given the introduction of auto-enrolment and the anticipated increase in the number of small pension pots.
The DWP is consulting on a range of proposals to reduce the barriers to transfers between pension schemes for small pots and establishing a system for consolidating an employee’s different pension pots. Among the measures proposed are:
- automatic transfers of small pension pots between auto-enrolment schemes as an employee moves between employers;
- an "aggregator" scheme which automatically consolidates all of an individual's small pots; and
- removal of the short-service refunds regime for DC occupational pension schemes (refunds are currently available where a member leaves a scheme after three months but before two years’ service).
Although the consultation is in the early stages, the DWP have made it clear that short-service refunds will be abolished at the earliest opportunity as it believes that these rules jeopardise persistent saving by excluding some individuals from building up a decent pension pot.
The consultation runs until 23 March 2012. We will keep you up to date with developments on this issue once the consultation response has been published.