W1S2: Pensions Law & Regulation

Question 1

What does The Pension Regulator cover?

Answer 1

Work based pensions
Inc. DB & DC occupational schemes, auto-enrolment, the large public service schemes and also stakeholder pensions.

Question 2

What are the aims of the pensions regulator?

Answer 2

• protect the members
• ensure good practices
• reduce the risk of failure.
  In particular they aim to avoid pension funds needing to pass into the pension protection fund or financial assistance scheme.

Question 3

What is TPR method of regulation described as?

Answer 3

Risk-based and proportionate

Question 4

In relation to TPR what is a contribution notice?

Answer 4

A requirement set out by TPR for the employer to make good on a statutory debt.

This must be paid to the scheme itself or to the Pension Protection Fund of the scheme has failed.

Question 5

In relation to TPR what are financial support directions?

Answer 5

if TPR believes that the employer lacks sufficient resources to meet its obligations to an underfunded scheme, it can put in place such an order to require further funds be paid.

Question 6

In relation to TPR what are restoration orders?

Answer 6

Restoration order – effectively unwinds a transaction that TPR believes was wrongly transacted for ‘under value’ to the members’ detriment – for example, an asset of the scheme was sold cheaply.

Question 7

TPR has published a checklist of five points for consumers to use in protecting their pension benefits - what are they?

Answer 7

These include:
- being wary of any unsolicited contact
-checking the adviser on the FCA register
-looking at the FCA known scams list -avoiding being rushed into any action

Question 8

What were the 3 independent bodies that moneyhelper replaced?

Answer 8

• Money & Pension Service (MaPS)
• Pension Wise (gives GUIDANCE not advice)
• The Pensions Advisory Service (TPAS)

Question 9

What powers does Moneyhelper have?

Answer 9

It has no binding power and cannot get involved either before local resolution has been attempted, nor after the involvement of an ombudsman.

Question 10

What are the two ombudsman that deal with pensions? How do they differ?

Answer 10

The pensions ombudsman and financial ombudsman service.

The FOS is an independent body set up to handle complaints against firms in respect of regulated activity in sales and marketing of products.

This means the FOS will look at mass of mis-selling and allegations of financial loss arising from practice in relation to products.

The pension ombudsman is there to handle complaints relating to pension administration.

This means, in the main, complaints about the running of schemes, though it can also handle some issues relating to the pension protection fund and financial assistance scheme.

It will not however, look at aspects of the state pension. nor matters, that could be handled by the FOS or another ombudsman.

Question 11

In relation to eligible complainants to the FOS - they are:

(There are 6)

Answer 11

► Individuals (including guarantors)

► Charities with an annual income of under £6.5m

► Trustees of trusts with net assets of under £5m

► A borrower under a consumer buy to let agreement

► Small businesses (known as micro-enterprises) with fewer than 10 staff and a turnover or balance sheet of no more than EUR2m

► Small businesses (not classed as micro) with less than 50 employees, annual turnover less than £6.5m or a balance sheet of less than £5m

Question 12

What are the timescales associated with complaining to the FOS? From a consumer perspective.

Answer 12

In addition, the complainant must have first sought to resolve the matter through local resolution.

This generally means complaining to the body about which the complaint relates and then either waiting until their final response has been received, or a period of 8 weeks has elapsed from the point at which the complaint was made.

Where a final response has been received, in all but exceptional circumstances, the complainant has 6- months to then refer the matter to FOS.

This should also generally be within 6 years of the event about which you are complaining (or 3 years of finding out about the event if this is later).

Question 13

What powers does the FOS have?

Answer 13

FOS has the power to make a binding adjudication on the provider, but the complainant does not have to accept this decision and can go to court instead.

The FOS can also direct the regulated business to ‘do something’ – e.g. pay a claim.

Question 14

What are the max levels of compensation under the FOS?

Answer 14

The maximum limit for compensation under FOS is:

► £415,000 for complaints received after 1st April 23, plus
► Interest, plus
► Costs, plus
► Interest on costs

Any amount in excess of this would be advisory and only binding to the above level.

Question 15

Who are the eligible complainants for the pensions ombudsman?

Answer 15

Eligible complaints are those from members, widow(er)s of deceased members, those entitled to a credit under divorce from a member or someone else nominated by the member / their estate.

It can also help to resolve disputes between schemes and trustees (and administrators of schemes).

Its decisions are binding and final.

Question 16

What the the pension protection fund and how is it funded?

Answer 16

This is a scheme to protect members of failing DB schemes (and the defined benefit element of hybrid schemes – see week three). It is funded by other schemes through a ‘scheme based levy’ and a ‘risk based levy’. Bigger and higher risk schemes make a greater contribution

Question 17

What is the criteria for a scheme to move across to the pension protection fund? (There are 4)

Answer 17

► Employer is insolvent and scheme is underfunded, or

► There has been some fraud or other financial crime resulting in the loss of funds to a scheme

► The scheme must be DB and cannot have commenced wind-up before PPF came into force on 6 April 2005 (though FAS might help here – see below).

► There must be no chance of the employer recovering sufficiently to restore the scheme to health

Question 18

What series of events occur when the PPF is triggered due to a companies insolvency?

Answer 18

The scheme passes into an assessment period which lasts up to two years.

During this time, the scheme is effectively put on hold whilst the PPF looks at the size of the problem.

No new members can join and existing members will accrue no further benefits, but pensioners with pensions in payment will continue to receive payment subject to the PPFs maximum limits.

Transfers will generally be banned, unless they had already been instructed and all relevant paperwork had been completed

The management of the scheme will also be considered, a valuation instructed to establish the size of the shortfall compared to the cost of buying out the PPF level of benefits with an insurance company and consideration will be given to any recent changes to the scheme rules which may worsen the funding position and potentially require unwinding.

For example, an improvement in accrual rate shortly before the scheme passes to the PPF is highly likely to be unwound.

Question 19

Maximum benefits under the pension protection fund?

Answer 19

This can be complex but at a very high
level:

► Pensions in payment (both members and dependents) will be honoured in full

► Other members – 90% of their pension

This was previously subject to a cap of £41,461.07 (therefore £37,314.96 pension) and was reduced if the member took pension earlier than 65.

For those with longer service, since April 2017, the cap was increased by 3% for each year of service in excess of 21 years to a maximum of double the standard cap

The PPF have removed the compensation cap for those members that are already receiving benefits and the cap does not apply to any future retirees.

► Survivors benefits yet to come into payment – 50% if spouse only, 25% per child to a maximum of 50% if in addition to spouse’s pension, 25% per child to a maximum of 100% if no spouse. This is subject to the rules of the scheme including such benefits. A child for this purpose will be under 18 or under 23 if in full time education or disabled.

► Benefits will be revalued in deferment (pre April 2009 benefits CPI to 5%, post April 2009 benefits CPI to 2.5%) and in payment (pre April 1997 benefits no increase, post April 1997 benefits CPI to 2.5%)

► Trivial commutation will be permitted if the member is over 55 but under 75 and has overall benefits valued at less than £30,000.

Question 20

The PPF is only for schemes where the employer becomes insolvent after?

Answer 20

2005

Question 21

What is the eligibility criteria for the Financial Assistance Scheme?

Answer 21

To be eligible for this scheme

• the winding up of the scheme must have begun between 1 January 1997 and the implementation of the PPF on 5 April 2005,
• or the employer must have been insolvent before 5 April 2005.
• Again, the scheme must be underfunded.

You should note that the FAS closed to the notification and qualification of new schemes from 1st September 2016 but those already receiving benefits or with deferred benefits in the scheme are unaffected.
Benefits will be paid to top up any pension payment from the scheme, to a maximum of 90% of the benefits accrued before the scheme began winding up / employer became insolvent. This is subject to an overall maximum cap. Dependents pensions of 50% of the member’s entitlement usually apply.
As with the PPF, pensions in payment will increase with CPI to 2.5% but only in respect of post-April 1997 benefits. Between wind-up and drawing benefits, entitlement will be revalued in line with RPI to 5% between wind-up and 30 March 2011 and CPI to 5% thereafter.
The FAS closed to new notifications in September 2016 and is due to be wound-up soon with its work already having been brought under the control of the P

Question 22

What is an eligible jobholder?

Answer 22

This is broadly any member of staff between the ages of 22 and State Pension age who is earning more than £10,000.

► Eligible jobholders – must be automatically enrolled, must have contributions made on their behalf subject to any opt-out.

Question 23

What constitutes an entitled worker?

Answer 23

If they are outside the age parameters (22-SPA) and earning less than £6,240 they cannot opt-in to the workplace pension but must be given the right to join a pension of some description.

These are known as ‘entitled workers’.

► Entitled workers – must be given information about the scheme of which they can elect to become a member. There is no requirement to make an employer’s contribution for them

Question 24

Non-eligible job holders

Answer 24

Any member of staff outside ages 22-SPA must have the right to opt-in, provided they are earning more than £6,240 (2023/24)

• Not between ages 22-SPA
• Earning £6,240+
• Must have right to opt in

► Non-eligible jobholders – must be given information about the scheme and allowed to opt-in. Must be allowed to opt-out later. Where they do opt-in, the employer must still contribute

Question 25

What are the qualifying earnings / alternative definitions?

Answer 25

► Qualifying earnings – any salary, overtime, commission or other payment such as bonus SSP, SMP etc. which falls in the band between £6,240 and £50,270 (2023/24 rates). The employer will pay 3%, the employee 4% and HMRC 1%.

► Alternative definitions – three different definitions may be used instead; these being designed to allow existing schemes to continue without needing to alter their basis:

Tier one – Overall minimum of 9% of pensionable pay with the employer paying at least 4%.

Tier two – Overall total of pensionable pay is 8% with 3% paid by the employer, but here pensionable pay must cover at least 85% of all earnings.

Tier three – Minimum overall is 7% of all earnings with at least 3% from the employer. Should an employee wish to pay less than the minimum required, they could opt-out and
then re-enrol on the lower contribution level.

NOTE: if a salary sacrifice arrangement is used for a defined contribution pension, the qualifying earnings used for the purpose of minimum contributions is the post-sacrifice salary.

Salary sacrifice if where an individual’s total salary is reduced by the amount of the gross pension contribution – this means that in addition to achieving tax relief, the member and the employer make a NICs saving. The employer can make an additional contribution on the member’s behalf to the value of the employer’s NIC