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Section 67 of the UK Pensions Act 1995

Danny Wilding tells the story so far: how one part of the UK Pensions Act has caused a major headache for UK pension scheme actuaries.

Background

Section 67 of the UK Pensions Act 1995 requires the Scheme Actuary to certify that modifications made to the pension scheme are not detrimental to members' benefits. The kind of statement required is as follows:

"I have been informed by the scheme managers that they intend to exercise their power to modify the pension scheme and I certify that, in my opinion, the modification would not adversely affect any member of the scheme (without his consent) in respect of his entitlement, or accrued rights, acquired before the modification."

Without an actuary's statement, pension scheme trustees must obtain members' consent to any proposed scheme changes.

This has caused actuaries a few headaches since Section 67 came into force on 5 April 1997. In particular, what exactly does the legislation mean by "modification", "adversely", "entitlement", "accrued right" and "acquired before"? In certain circumstances the meanings are not obvious (at least not to a simple actuary!).

The actuarial profession discussed these interpretation problems with the UK Department of Social Security and the British Association of Pension Lawyers in 1997. As a result, a guidance paper was issued to all actuaries on 23 September 1997. Although not formal guidance (meaning that compliance with the guidelines was not compulsory), it was intended to offer some helpful hints to practising actuaries, such as:

  • Section 67 is only concerned with the amount of benefits promised, not the security of those benefits; and
  • A member's transfer value is an indication of the value of the member's accrued rights.

However, it soon became apparent that the guidelines were not complete, as actuaries found new grey areas where they were asked for Section 67 opinions but the guidance paper did not help. Furthermore, the guidelines themselves were not always totally unambiguous.

The profession decided it needed further help and took the unprecedented step of enlisting the help of Queen's Counsel (a senior barrister). An detailed opinion was received from Nicholas Warren QC and Paul Newman on 19 April 2000. Unfortunately for the profession, the opinion confirmed that many of the grey areas identified were indeed ambiguous, and that there was no unique interpretation under English law. Much had been left to individual actuaries' judgement and, worst of all, the guidance paper issued in 1997 could not be relied upon as definitive either.

Essentially, Counsel's opinion was "we can't help - it is up to the actuaries themselves". In consequence, the profession are unable to issue guidance and individuals are left to fend for themselves. There is concern both within and outside the profession that actuaries, left bemused by the guidance process (or rather the lack of it), are unable to fulfil their duties to pension scheme trustees considering changes to schemes.

Barnett Waddingham's view on Section 67

This issue has been debated internally within Barnett Waddingham for some time. We are more positive about Section 67 than many other firms, and we believe that actuaries can continue to provide sensible, valuable advice to pension scheme managers on the subject of potential scheme changes.

We set out below some of our views. These are all general principles - in practice these principles would have to be refined in the light of a particular pension scheme's circumstances and the trust deed and rules governing that scheme.

  1. An enhancement to one member's benefits can be to the detriment of another member. Consequently enhancements to benefits may fall foul of Section 67 - but only if they create or worsen an MFR (Minimum Funding Requirement) deficit. This is consistent with Professor Goode's original thinking in his report which preceded the Pensions Act 1995. Barnett Waddingham's view is as follows: if, as a result of any amendment to the scheme, a member's benefits change from being funded to being only an employer debt, then the actuary should take the view that that member's benefits could potentially end up being reduced and should not sign. Furthermore, transfer values may be reduced for a scheme with an MFR deficit.
  2. "Accrued rights" for active members means two things. The first right is the right to a pension equal to a particular accrued percentage of a particular definition of earnings if their pensionable service continues. This is not a guarantee of an absolute pension amount because active members should be aware that if their earnings fall (or fail to keep pace with inflation) then their accrued pension will lose value. The second right is to a particular deferred pension if their pensionable service were to terminate (immediately). As long as any amendment preserves these two things then a certificate may be signed. An amendment does not need to guarantee the absolute deferred pension amount if pensionable service continues.
  3. Any benefit which depends upon future pensionable service is not normally an accrued right (assuming the employer has the power to terminate pensionable service at any time). For example: non-vested members' accrued rights are usually only a refund of employee contributions; employees in scheme waiting periods have no accrued rights; and death benefits are only accrued rights to the extent that deferred pensioners receive them too.
  4. Commutation (or early/late deferred pension payment) factors that have been publicised to members cannot normally be reduced (except for future service). These factors are not usually market-related and are therefore not expected to change frequently anyway. Factors that are not publicised anywhere (such as transfer value, augmentation and AVC purchase factors) can be different in each case. These factors are market-related and therefore should change as market conditions change. Don't ever publicise them!
  5. An actuary cannot sign where a detrimental effect on benefits is possible under foreseeable economic circumstances. For example, fixed 5% pension increases should not be replaced with inflation-related increases, and fixed 3% increases should not be replaced with 5%LPI - except with member consents.
  6. One cannot change the dependant to whom a reversionary benefit is paid without the member's consent. For this purpose a new expression of wish form may be taken as consent. This does not apply if the dependant beneficiary has always been unspecified (and has clearly been left to the trustees' discretion).
  7. Introducing a forfeiture clause, equalising GMPs and pension sharing or splitting on divorce could all fall foul of the above Section 67 rules. Overriding regulations may come in to play, but trustees should get their lawyer to reassure them that Section 67 doesn't apply. For example, a divorce court order may not be good enough on its own to reduce a member's benefits without his consent.
  8. Section 67 does not apply to consolidations or changes to scheme management, administration or procedures that can not directly affect benefits. In particular, members do not have an accrued right to the discretions of any given set of trustees.
  9. In a scheme which has become share-of-fund, benefits are defined by reference to assets and a reduction in assets is a reduction in accrued rights. This will cover some small self-administered schemes, some other occupational pension schemes in wind-up, and some closed schemes - all of which might sometimes require trustees to spend all available funds on members. In these circumstances, therefore, Section 67 may preclude refunds to employers, the introduction of new beneficiaries or mergers with less well funded schemes (without the members' consent).

The above views all deal with restrictions on modification of schemes, which may suggest that scheme modification has become practically impossible. However, by forming views on the impact of Section 67 such as those above, the Scheme Actuary can in many situations make an informed decision about potential modifications.

Conclusion

We hope the reader is reassured that much of Section 67 can be tackled by the application of good actuarial common sense. Although there are some genuinely murky waters to be navigated, things are not as bleak as many currently seem to think following Counsel's candid acknowledgement that the law is not black and white on this subject.

For more information on Section 67 please contact any of the pensions partners or your usual contact at Barnett Waddingham.

Danny Wilding, July 2000.