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Pensions - All Change (2) - the Pensions Act 2004

David Salter highlights key changes of the Act which comes into force this week


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David Salter, Partner, Addleshaw Goddard

(a) Introduction

The Act received the Royal Assent on 18 November 2004. The current intention is that most of the provisions of the Act will come into force on 6 April 2005. The two subjects covered by the Act which have attracted most media coverage have been the new Pension Protection Fund (PPF) and the Pensions Regulator, who will limit the circumstances in which the PPF is used. Both should help to restore public confidence in the pensions industry. These two subjects are not, however, by any means the only matters covered by the 325 sections and 13 schedules of the Act. This brief overview is intended simply to draw attention to those parts of the Act which may be of the greatest relevance to family lawyers.

(b) Pension Protection Fund ("PPF")

The PPF will act as a form of insurance to ensure the payment of certain defined benefit occupational pension scheme and hybrid scheme benefits up to a certain level if the scheme is of insufficient funds to pay them and the employer is insolvent (where there is no prospect of corporate rescue, or business rescue with pension liabilities attached). The PPF is to be funded initially by a flat-rate levy dependant on the number of scheme members. Further funding will be decided by the Pensions Regulator.

The PPF will be introduced on 6 April 2005. However, eligible schemes whose sponsoring employer entered insolvency proceedings from May 2004 may potentially qualify for compensation from the PPF.

It is envisaged that the PPF will cover 100% of pension benefits in payment for those who have reached normal scheme retirement age (or earlier because of incapacity) and 90% of the accrued pensions for all others with spouses, civil partners or dependants receiving a percentage of the member's PPF benefit. However, the Act contains a provision for a cap on both these amounts set at £25,000 per annum or less if the member retired early (such amount to be increased in line with average earnings). The PPF will deal with increases to pensions in payment in line with RPI or 2.5% per annum, if less. Pensions in deferment will be revalued in line with RPI or 5% per annum, if less.

If an insolvency practitioner is appointed in relation to a scheme sponsoring employer, he must inform the PPF that an insolvency event (voluntary arrangement, appointment of receiver, administration or winding up) has occurred. If the insolvency practitioner concludes that a scheme rescue is not possible, he must so notify the PPF. Further, scheme trustees will face the potentially onerous obligation under the Act of being obliged to notify the PPF if it appears to them that their scheme's employer could become insolvent. Once the PPF steps in to take control of the scheme, all of the scheme's assets transfer to the PPF along with all of the scheme's pension obligations.

The broad regime of the Act is that pension attachment and pension sharing orders made before the PPF assumes responsibility for a scheme will be honoured. However, it will not be possible for new orders to be made once this stage has been reached. The reason for this is that the PPF is not a pension arrangement for the purposes of MCA 1973, s 21(A) (pension sharing) or MCA 1973, ss 25B, 25C or 25D (pension attachment). It is intended that in the assessment period (which will be at least one year) leading up to the assumption of responsibility of a scheme by the PPF, it will be possible for pension attachment and pension sharing orders to be made, even if they will be implemented after the PPF assumes responsibility. The PPF assumes responsibility for a scheme under s 161 of the Act when a transfer notice is given to the trustees or managers under s 160 of the Act. Assumption of responsibility by the PPF will not affect the court's powers to vary a pension sharing or pension attachment order or the powers of an appeal court (MCA 1973, s 25E(7) as inserted). PPF compensation is now included as a matter to which the court must have regard under MCA 1973, s 25(2)(a) or (h) (MCA 1973, s 25E(1) as inserted). Schedule 12, para 3 of the Act inserts s 25E into MCA 1973 and s 220 of the Act enables regulations to be made modifying the Act or WRPA 1999 in relation to pension sharing. Schedule 12, para 4 makes corresponding amendments to the Matrimonial and Family Proceedings Act 1984, Part III.

Reference should also be made to the Civil Partnership Act 2004, Sched 5, Part 7, which provides for assumption of responsibility by the PPF where a pension sharing or pension attachment order has been made and which specifically provides for PPF compensation to be included in the matters to which the court is to have regard.

(c) The Financial Assistance Scheme ("FAS")

The FAS will help some of those who have lost out on their defined benefit occupational schemes between 1 January 1997 and the introduction of the PPF on 6 April 2005 because their scheme has been wound up underfunded and the employer has been unable to make up the deficit.

(d) Combined pensions forecasts

The Act contains a power to require trustees and managers to provide combined (state, occupational and personal) pension forecasts. Will such forecasts help or hinder the family lawyer? The Act also enables the development of a new web-based retirement planner, which will help users to access a range of non-governmental sources of information and advice. The planner, due to be launched in April 2006, will enable individuals to calculate an approximate forecast of their current projected income at retirement from state and private pension provision, estimate the income they might actually need in retirement and consider the choices available to make up any shortfall. The planner will also assist individuals in tracing any "lost" pension entitlements from previous periods of employment;

(e) Early leavers

The Act protects early leavers by introducing new rights for employees who leave occupational pension schemes after a short period. In some schemes, individuals have at present to be a member for at least 2 years ("a vesting period") to be entitled to vested pension benefits. From 6 April 2006, employees who leave after 3 months, but before the end of a vesting period, will have to be offered by pension trustees the choice of a cash transfer sum to another scheme willing to receive a transfer, or a refund of their employee contributions. The option of a cash transfer sum means that, for the first time, this group of early leavers will be able to benefit from the value of their employer's contributions as well as their own.

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