Pensions Bill delivers member protection - but at what cost?

The Pensions Bill* has been published, providing clarity on some, but not all, of the proposals mooted by the government in its various papers on pension reform (See Green paper, Action plan and Helping members decide ). The provisions, which relate largely to defined-benefit schemes, are designed to improve member protection, simplify procedures for those who run schemes, improve the promotion of pensions and give greater rewards to people who defer taking their state pension.

Pension protection

One of the hottest topics covered by the Bill is the introduction of the Pension Protection Fund (PPF), which will provide "core" benefits for members of underfunded defined-benefit and hybrid schemes where the sponsoring employer has become insolvent. The compensation fund will cover 100% of benefits for members who have reached the scheme's pension age and 90% for people below that age, subject to an overall cap.

The PPF will be funded by a three-pronged levy: "pension protection", administration and fraud compensation. The pension protection charge will comprise of two elements - one based on scheme-specific factors, such as the number of members, and the other based on risk-related factors, such as funding levels. However, the government has stated that there will be a delay of a year before the risk-based element is introduced.

Wide range of measures

One of the main changes is that the minimum funding requirement is to be replaced with a scheme-specific arrangement. Trustees will be required to agree a strategy with the sponsoring employer to fund the pension commitments and for correcting any funding deficits, and this will be set out in a "statement of funding principles". More details will be available in Regulations.

A minimum level of pension provision will need to be offered to employees involved in TUPE transfers where an occupational pension scheme was previously on offer. New employers must provide either a defined-benefit scheme with a benefit structure at least equivalent to that required to contract out, or a defined-contribution scheme or stakeholder pension with matching contributions up to 6%.

Other key provisions are:

  • a new pensions regulator - with additional, more stringent powers - will take over from the Occupational Pensions Regulatory Authority. It will focus primarily on protecting the benefits of pension scheme members;

  • the cap on limited price indexation is to be reduced from 5% to 2.5%, applicable only to increases on pensions accrued after April 2005;

  • at least one-third of the members of a trustee board must be nominated and selected by members - employers no longer have the right to opt out of this requirement; and

  • trustees will be under a statutory duty to obtain a defined level of knowledge and understanding about their own scheme and about pensions and investments in general.

    Timing and response

    With a Second Reading set for early March and Royal Assent in the autumn, the government is hopeful that a majority of the measures in the Bill will be in force by April 2005.

    The Association of Consulting Actuaries (ACA) fears that the Bill will not encourage greater employer pension provision, particularly as it sees no signs that it will reduce costs for schemes. Instead, it believes it will add "a whole raft of new extra costs". The delay in introducing the risk-based element into the PPF levy has caused considerable concern at the Confederation of British Industry, which warns ministers that taking no account of the risk of company insolvency for at least a year could "undermine the credibility of the fund". The ACA is also concerned about the "moral hazards" raised by the delay.

    * The Pensions Bill and its Explanatory Notes are available on the parliament website ( www.publications.parliament.uk/pa/cm200304/cmbills/057/2004057.htm).