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New Government Policy
Barnett Waddingham considers the Government's future pensions policy initiatives.
The Government today published a number of documents setting out its future pensions policy.
The main document, called "Action on occupational pensions", sets out the Government's response to the Green Paper of December 2002 entitled "Security, simplicity and choice".
A range of issues has been tackled in detail, of which the four main ones are probably the following:
First, the Government plans to introduce a "Pensions Protection Fund", a new compensation scheme to help members who lose benefits on scheme insolvencies, and funded by means of a levy on employers with defined benefit schemes.
Second, the statutory priority order on winding-up will be changed in future regulations (as yet unpublished in draft) to ensure that where schemes have a deficit, assets are "shared out as fairly as possible between active and pensioner members". (The position of deferred members - no longer contributing members of the scheme but not retired either - is not made clear.)
Third, and perhaps most significantly, the Government will oblige sponsoring employers to secure in full all liabilities of schemes when they wind up. In other words, to calculate the debt payable by the employer, trustees will have to assess the cost of buying annuities for all members and the expenses involved in doing so. Although the draft regulations also issued today clearly suggest that this will apply to schemes which begin winding-up on or after 11 June 2003, there is a comment in the Government's response document which suggests that trustees might be able to use the new regulation in relation to schemes already winding-up on 11 June 2003; this is ambiguous, although our view is that the new regulations probably apply only to schemes commencing winding-up on or after 11 June 2003.
Fourth, the requirement for LPI increases to pensions in payment will be changed so that the maximum required increase is 2.5 per cent each year instead of the current 5 per cent for pension earned in future.
Other measures announced (but in less detail) include the introduction of a new pensions regulator, extension of TUPE protection for transferring members, options for leavers with less than two years' service, the replacement of the MFR and improved flexibility to restructure past service benefits.
The Government also stated its intention to retain a State Pension Age of 65 (although a minimum early retirement age of 55 is still planned by 2010), and its reluctance to introduce any further compulsory provision into the system.
Barnett Waddingham's view on these proposals is that the Government has not "listened to the pension scheme members, employers and the pensions industry" as it promised. Rather than "reducing the burden on companies who run schemes", running a compensation scheme will clearly add to employer costs (and which the Government are not prepared to stand behind), while the most significant proposal - forcing employers to fund annuity premiums for schemes in winding-up - represents a potentially huge increase in employers' liability towards their schemes. It would have been more helpful to employers to remove the requirement for LPI increases in payment altogether.
It is similarly difficult to believe that "today's package will radically simplify pensions legislation and reduce costs on pension schemes." For the Government to suggest that employers will actually save money thanks to the new proposals seems disingenuous at best.
Barnett Waddingham, June 2003.