2 : 8 - Pensions Law and Regulatory Compliance

Question 1

What did the European Directive 2000/78 EC established a framework for?

Answer 1

Equal treatment in employment and required the governments of member states to implement laws prohibiting discrimination in the workplace.

Question 2

What did the directive make unlawful?

Answer 2

For pension schemes to discriminate against workers or prospective members of a pension scheme on the basis of age

Question 3

How can qualifying periods act as exceptions to age discrimination?

Answer 3

Employers are allowed to operate qualifying periods for occupational schemes before people are permitted to join a scheme and different accrual rates for occupational schemes depending on the length of service.

Question 4

How can age limits act as exceptions to age discrimination?

Answer 4

The employer may set minimum and maximum ages for admission to the scheme, including different ages for admission in respect of different groups and categories of worker.

Question 5

How can the dependent’s age be treated when considering exceptions to age discrimination?

Answer 5

It is allowable to reduce a dependant’s pension where the dependant is more than a specified number of years younger than the member.

Question 6

How can age bands act as exceptions to age discrimination?

Answer 6

The employer is allowed to pay different levels of contributions for different age bands where the intention is to provide comparable benefits for comparable members.

Question 7

What did the Pensions Act 1995 establish?

Answer 7

A new regulator, the Occupational Pensions Regulatory Authority (OPRA).

*(this was taken over by the TPR)

Question 8

What did the Pensions Act 1995 require of trustees?

Answer 8

It required trustees to draw up a Statement of Investment Principles (SIP).

Question 9

What was the Minimum Funding Requirement (MFR)?

Answer 9

This law had the objective of maintaining a DB scheme’s assets at least to the point where they covered 100% of the scheme’s liabilities.

Question 10

What did the Pensions Act 2004 establish?

Answer 10

The Pension Protection Fund (PPF)

Question 11

What does the Pension Protection Fund (PPF) provide?

Answer 11

Compensation if an employer becomes insolvent, and they run a DB pension scheme which is underfunded

Question 12

What did The Pensions Regulator (TPR) replace?

Answer 12

OPRA

Question 13

What are the Principles of The Pensions Regulator (TPR)?

4

Answer 13

• To view risk in a proportionate way.
• To be supportive to trustees, employers and actuaries, and help improvements in practice to develop within the industry.
• To always act in line with the principles of good regulation and taking into account the protection of human rights.
• To mainly give consideration to the outcomes of members rather than process issues

Question 14

What are the Powers of The Pensions Regulator (TPR)?

5

Answer 14

• Prevention – actions by an employer or pension trustees can be stopped where a serious risk presents itself to the benefits of the scheme members.
• Detection – investigating the reasons for a particular pension-related difficulty arising.
• Education – supporting trustees in carrying out their duties, especially if there is a lack of knowledge or understanding.
• Remedying breaches – if members’ benefits have been damaged or reduced due to a breach, ensuring the employer reinstates these.
• Imposing penalties – for breaches, to discourage these in the future and to make clear the importance of protecting members’ benefits

Question 15

Who regulates WPSs?

Answer 15

The FCA and TPR

Question 16

What WPS responsibilities is TPR responsible for?

Answer 16

• registration of schemes
• employer designation
• ensuring compliance of charge-capping for stakeholder schemes.

Question 17

What WPS responsibilities is the FCA responsible for?

Answer 17

• sales, promotion and any marketing of pension plans
• authorisation of investment firms that run the investment plans for pension schemes
• authorisation of advisers that provide advice on pension plans.

Question 18

To be eligible to fall under the PPF remit, the employer must have become insolvent after what date?

Answer 18

5 April 2005

Question 19

The PPF levels of compensation depend on what?

Answer 19

The age of the individual

Question 20

How much of the pension entitlement is due for members over the scheme’s normal retirement date?

Answer 20

100%

Question 21

How much of the pension entitlement is due for members who have not yet reached the scheme’s normal retirement date?

Answer 21

90%

Question 22

What is the age cap?

Answer 22

For 2018–19, this cap at age 65 is £39,006.18, so 90% of that is a maximum payment of £35,105.56 pa.

Question 23

A spouse’s pension of how much of the member’s PPF compensation amount.

Answer 23

50%

Question 24

What is the long service cap?

Answer 24

It came into effect for members who have 21 or more years’ service in their scheme.

For these members, the cap is increased by 3% for each full year of pensionable service above 20 years, up to a maximum of double the standard cap.

Question 25

What is the Financial Assistance Scheme (FAS)?

Answer 25

The FAS offers assistance to people who lost out on their pension because they were a member of an under-funded DB scheme that started to wind up between 1 January 1997 and 5 April 2005.

The scheme closed to new Notifications on 1 September 2016.

Question 26

Can a Company Pension Scheme Run Out of Money?

Answer 26

It is possible for a scheme to run out of money if it is a final salary scheme. It cannot do so if it is a money purchase scheme.

Question 27

How can a Final Salary (or DB) Scheme run out of money?

Answer 27

This type of scheme can run out of money if its total investments (which include all contributions made to date) are less than the amount it has to pay out now or promised to pay out in the future.

Question 28

Why can’t a MP pension run out of money?

Answer 28

Contributions (including those of the employer) are invested on the individual’s behalf by the insurance company or similar. Remember that the eventual pension is unknown in advance because it is relying upon the fund performance. Since the scheme has no set liability, there cannot be a deficit or shortfall as with DB schemes.

Question 29

What Happens if the Company Becomes Insolvent?

Answer 29

If the company becomes insolvent, its pension fund cannot be used to pay the company’s debts, ie, the fund is protected.

However, the company may owe the pension fund money. The pension fund is usually deemed to be an unsecured creditor but can have a higher preferential status with the employer in certain circumstances.

Question 30

What happens if a shortfall in the company’s pension fund is due to fraud or theft?

Answer 30

The PPF may be able to recover some of the money from the Fraud Compensation Fund.

Question 31

To limit future costs, the employer or the trustees can do the following:

(3)

Answer 31

• Close the scheme to new members, ie, existing members can continue to contribute and receive a pension on retirement.
• Freeze the scheme, ie, the scheme is closed to everyone and existing members’ benefits stop building up.
• Wind up a pension scheme at any time. This involves closing down the scheme to everyone and using its assets for the members’ benefit. If the company remains in business, it would have to provide access to a suitable WPS under the auto-enrolment rules.

Question 32

What is The Pensions Ombudsman’s (TPO’s) role?

Answer 32

To investigate (and decide) pension complaints between:

• members of pension schemes (including personal pensions)
• pension scheme beneficiaries
• employers
• trustees
• managers
• scheme administrators.

It is not a regulator, watchdog, consumer champion or trade body.

Question 33

If someone is unhappy with a decision that it makes, and wants to take it further, where do they appeal?

Answer 33

To the High Court in England and Wales, the Court of Session in Scotland or the Court of Appeal in Northern Ireland. Any appeal must be on a point of law.

Question 34

What is The Pensions Advisory Service (TPAS)?

Answer 34

TPAS is an independent voluntary organisation that is grant-aided by the Department for Work and Pensions (DWP). It provides information and guidance to members of the public on all matters pension related.

Question 35

What is the different between a Trust- and Contract-Based Scheme?

Answer 35

A trust-based pension scheme will be governed by a trust deed and have a board of trustees to oversee the scheme.

Whereas a contract-based scheme is used when the employer wants to outsource the pension to a third-party who will manage all aspects of the scheme.

Question 36

How does a trust-based scheme typically operate?

Answer 36

On a ‘net pay’ arrangement which means that an employee has their contribution deducted from their pay before tax is applied, thereby receiving full tax relief immediately.

Question 37

How does a contract-based scheme typically operate?

Answer 37

It must receive contributions from pay after tax and NICs. The contribution is treated as being paid net of basic-rate tax and is grossed up by the scheme. The member must then claim any higher-rate or additional-rate tax they are entitled to via their self-assessment tax return.

Question 38

How does a contract scheme typically operate?

Answer 38

It is less costly and time-consuming for employers compared to a trust-based scheme. Trust-based schemes offer their members protection of the trustees and their expertise in selecting appropriate funds in which to invest their pensions contributions.

Question 39

What is the advantage of a contract scheme?

Answer 39

Whilst this level of protection costs the employer, but may create a better relationship between the employer and the workforce.

Question 40

Which legislation covers the responsibilities for Trustees?

Answer 40

Both the Pensions Act 1995 and the Pensions Act 2004 outline specific responsibilities to trustees

Question 41

What are the specific responsibilities of trustees?

Answer 41

• maintain audited accounts • maintain a schedule of contributions • report obligations to TPR • draw up a statement of investment principles for their investment manager • establish a recovery plan if the valuation shows the scheme is not meeting their funding objectives • hold and invest the assets to achieve the best financial return consistent with security • act within the provisions of the trust deed • act impartially at all times and maintain the scheme in the best interest of members • understand the scheme, it provisions and its backgroun

Question 42

What are the specific responsibilities of scheme administrator?

Answer 42

• registering the scheme with HMRC, reporting events to them and making all returns • operating tax relief via the RAS method • providing information to members and others regarding the LTA, transfers and benefits.

Question 43

The divorce settlement in the court can look at pension rights in the following 3 ways:

Answer 43

• balance the pension rights against another asset, eg, the matrimonial home (known as pension offsetting),
• arrange that when the pension eventually commences paying, a pre-agreed proportion of it will be paid to the other party (known as pension earmarking)
• split the pension at the time of the divorce, thus giving both parties their own pension pot (known as pension sharing).

Question 44

What schemes will the court consider?

Answer 44

The court will include in its considerations pension plans that spouses are currently paying into, plans that have been deferred and plans that are already paying an income.

Question 45

What pension arrangements are considered to be outside the legislation?

Answer 45

• State benefits.
• Equivalent pension benefits (EPBs) earned between 1961 and 1975.
• Pension rights which arise because the person was a widow, widower (before the present marriage) or a dependant

Question 46

How does Pension Offsetting work?

Answer 46

The person who has the pension rights keeps them for themselves and the other spouse is given the ownership of other assets, eg, the right to live in the matrimonial home.

Question 47

What is the challenge with Pension Offsetting?

Answer 47

Obviously it can be quite difficult to achieve a totally fair split of a couple’s assets by offsetting a pension pot against some of the other assets. This can be because the pension fund is the largest asset that they have.

Also it has to be remembered that the value of a pension fund will tend to fluctuate more than, for example, property values.

Question 48

How are FSS pensions treated?

Answer 48

Valuing final salary schemes with complex benefits is not straightforward, and often an actuarial valuation is not sought if the benefit is not considered to be high.

Question 49

How is a pension sharing order issued?

Answer 49

The Pension Credit (the ex-spouse) is based on the scheme member’s cash equivalent transfer value (CETV). The credit is given as a percentage of the CETV, not a fixed sum of money.

Question 50

EG:

Damien and Marisha have been married for some time. Damien works and has a personal pension plan (PPP). Marisha, on the other hand, has no pension scheme as she has been looking after their children so has not been in paid employment. Following the breakdown of their marriage, they are in the process of getting a divorce. Solicitors were instructed in January and the pension provider (of Damien) has provided, at his request, a valuation as at 31 January. This shows that his pension is worth at that date £100,000. Damien and Marisha have agreed that a 50:50 split is the most equitable.

Answer 50

Therefore, the court order states that the pension provider is to give Marisha a Pension Credit of 50% of Damien’s pension. Marisha has calculated that means she will get £50,000 which she can use to start a pension plan for herself. The decree absolute finally comes through in May: on that date a new valuation is obtained which shows that Damien’s pension has gone up in value to £105,000, so Marisha actually gets £52,500 as her share. If his pension had instead gone down in value to £90,000 she would have only received £45,000, as her entitlement is 50% of the value of Damien’s pension at the date of the divorce.

Question 51

Recap:

Define a Final salary (or career average) scheme

Answer 51

This provides benefits based on a fixed formula, which refers to the member’s completed service and earnings, eg, the pension = (service/60) x final salary.

Question 52

Recap:

Define a Money purchase scheme

Answer 52

This provide benefits which are based on the investment performance of the pension pot which comes from contributions paid into the scheme, plus the annuity rates available at retirement when the pot is converted to an annuity.

Question 53

What happens when an individual is declared bankrupt?

Answer 53

They lose control over any assets (property, shares and savings) they may have. The assets will be disposed of to help pay the outstanding debts by the person appointed to manage the bankrupt, the trustee.

Question 54

How is a pension treated during bankruptcy?

Answer 54

Any pension may be classed as an asset, ie, the trustee may claim the pension itself and any benefits or payments to help to pay the bankruptcy debts.

Question 55

What pensions can not be claimed by the trustee?

Answer 55

• state pension
• payments due to you from the SERPS or any similar scheme
• protected rights, ie, the equivalent of SERPS if you contracted out of it.

Question 56

Options to protect the pension, if it is claimed as a bankruptcy asset, are:

(3)

Answer 56

• applying to the court for an exclusion order
• coming to an agreement with the trustee
• buying back the interest in the pension policy from the trustee

Question 57

What is a forfeiture clause?

Answer 57

This clause means that any rights and benefits are automatically lost if an individual is declared bankrupt. If this happens, the trustee cannot make a claim on this pension.