Pension consultation Regulations: an overview

This week, Steven Lorber of Lewis Silkin begins a series of articles on the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006 with an overview of the legislation.

The Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006, which came into force in April 2006, were introduced under the Pensions Act 2004, sections 259-261. The Regulations require employers to inform and consult on proposals to make 'listed changes' to:

  • occupational pension schemes (final salary and money purchase); and

  • personal pension schemes, such as group personal pension plans and stakeholder pensions, that provide for contributions by the employer in respect of at least one member.

    The Regulations apply only to changes that are notified on or after 6 April 2006. They do not apply to any proposals announced before that date, even if the changes are to take place later.

    Implementation and coverage

    Implementation of the Regulations is phased: businesses with 150 or more employees have been affected since April 2006; those with 100 or more employees will be covered from April 2007; and those with 50 or more employees from April 2008. Employers with fewer than 50 employees will not be affected by the Regulations. The number of employees is determined by taking the average over the 12 months preceding the date of the proposal to change pension arrangements.

    In a group company situation, the number of employees is calculated by reference to each individual employer and is not amalgamated across the group. It is important to note that it is the number of employees, rather than the number of members of the pension scheme, that is relevant.

    Some schemes are exempt from the Regulations, including:

  • public service pension schemes (such as the Local Government Pension Scheme);

  • various small occupational pension schemes (for example, those with fewer than 12 members all of whom are also trustees and those with only one member);

  • certain pension schemes that are not registered with the Inland Revenue; and

  • personal pension schemes where the employer makes no contributions.

    It will generally be the employer of the affected members that proposes the change. However, changes can also be proposed by a parent company or pension trustees. In these circumstances, the employer must inform and consult, and then report the outcome of the consultation to the parent company or the pension trustees proposing the change. The parent company or the trustees must ensure that the consultation has been carried out properly.

    'Prospective' members

    The Regulations cover pension scheme changes that affect 'prospective' as well as actual members. A prospective member of an occupational pension scheme, defined in regulation 2, is any person who, under the terms of his or her contract of service or the rules of the scheme:

  • can choose to become a member of the scheme;

  • will be able to choose to become a member if he or she continues in the same employment for a sufficiently long period;

  • will be admitted to the scheme automatically unless he or she decides not to become a member; or

  • may be admitted to it subject to the consent of the employer.

    A prospective member of a personal pension scheme, also defined in regulation 2, is any person who, under the terms of his or her contract of service, would be eligible to have employer contributions to be paid in respect of him or her on becoming a member of the scheme.

    Listed changes

    The Regulations cover most changes that may be to the detriment of members and prospective members of occupational or personal pension schemes.

    In respect of occupational pension schemes (both final salary and money purchase), the changes covered are:

  • increasing the normal pension age (ie the earliest age at which members can start to draw a pension);

  • preventing new members from being admitted to the scheme;

  • preventing the future accrual of benefits under the scheme;

  • removing the liability to make employer contributions;

  • introducing member contributions when they were not previously payable; and

  • increasing member contributions.

    In respect of money purchase schemes, one further change is covered: reducing employer contributions.

    In respect of non-money purchase schemes (such as final salary schemes), three further changes are covered:

  • changing to a money purchase scheme;

  • changing the basis for future accrual (for example, from final salary to career average accrual); and

  • reducing the rate of future accrual of benefits.

    In respect of personal pension schemes, two changes are covered:

  • ceasing or reducing employer contributions; and

  • increasing member contributions.

    Exclusions

    In certain circumstances, the Regulations do not apply even though a listed change is proposed.This would be the case where a change is made for the purposes of complying with a statutory provision or a determination by the Pensions Regulator or where a listed change has no lasting effect on a person's right to be admitted to a scheme or on the benefits to be provided under it.

    Changes are also excluded if they fall within the scope of the 'subsisting rights provisions', whereby a different regime applies. Under these provisions, a member's subsisting pension rights can be modified either by the member giving consent or by the member's existing rights being replaced with rights of actuarially equivalent value. However, members must be consulted about any such change, trustees must approve the change and the actuarial value of each member's rights must be maintained.

    Next week's article will look at the information and consultation obligations imposed by the Regulations.

    Steven Lorber is a partner in the employment team at Lewis Silkin (steven.lorber@lewissilkin.com ).

    Further information on Lewis Silkin can be accessed at www.lewissilkin.com