Transition to a new Pensions Regulator

As preparations for the introduction of the new Pensions Regulator reach their final stages, Opra has included important details about transitional arrangements and the implementation of the codes of practice in its latest Bulletinonline. Occupational Pensions examines the main points made by Opra about the new regulator's approach.

Regulations are being laid providing for the dissolution of the Occupational Pensions Regulatory Authority (Opra) and the transfer of its liabilities and rights to the new Pensions Regulator. Any matters being dealt with by Opra as at 5 April 2005 will pass to the regulator.

In what is presumably its final Bulletin¹, Opra provides information on the preparations it has made towards its transformation into the new proactive regulator and details of how it will handle certain issues, particularly the move to a new scheme funding standard and the regulation of small schemes. Because pension scheme regulation is in a transitional phase, Opra notes that the Bulletin has only been made available online to reduce costs.

Codes of practice

Part of the regulator's role includes issuing codes of practice for those involved in the running of pension schemes and their advisers. A standard procedure is followed in respect of each code. Opra describes the three phases in its approach to consultation on the codes.

After the last stage, the approved version of the code of practice will be published. The Bulletinonline contains a table, which is reproduced in the box. As can be seen, the table gives a brief description of the scope of each code and the expected timetable for its implementation. At present the regulator intends to have all the codes effective by April 2006.

Subsequent to the publication of the Bulletinonline, the whistleblowing code has completed the development and consultation process, and the final version is available from the Pensions Regulator's website (www.thepensionsregulator.gov.uk). Although the Bulletinonline states that as far as possible each code should be a standalone document, it adds that further guidance may be issued in certain circumstances. It seems likely that this will be the case with the whistleblowing code.

As well as providing information on the codes of practice, the Pensions Regulator's website, which was launched after the Bulletinonline was prepared, contains leaflets aimed at those involved with pensions. These include explanations of the regulator's role and advice on the action required to be taken by trustees and employers to prepare for the new regulatory regime.

Scheme-specific funding

Opra has also used the medium of its online publication to set out details of the arrangements that will apply in respect of the introduction of scheme-specific funding (see Full buyout terms on winding up and Pensions Act 2004 (Part1)). It warns that schemes will not be able to avoid the new funding provisions by commissioning out-of-cycle minimum funding requirement (MFR) actuarial valuations before the new requirements take effect.

The Pensions Act 2004 contains measures to replace MFR with a statutory funding objective. This states that a defined-benefit scheme must have sufficient appropriate assets to cover the amount required by actuarial calculation to make provision for the scheme's liabilities. Trustees must choose the actuarial method and assumptions used in the valuation with the agreement of the sponsoring employer. If the scheme is found to be in deficit, the trustees must put in place an appropriate and time-limited recovery plan to eliminate the deficit.

As yet, the effective date of the introduction of the new funding requirement has not been formally announced and no draft Regulations have been published. However, the Department for Work and Pensions (DWP) has advised the Pensions Board of the Faculty and Institute of Actuaries that it is using 23 September 2005 as its "working date".

Tough line on avoidance

The Bulletinonline sets out details of the transitional arrangements that will apply in the meantime. The DWP originally proposed that where a scheme's valuation date fell between the date of the Act receiving royal assent and the effective date of the introduction of the new funding provision, its trustees should be able to postpone the date of its next valuation by up to 12 months (OP, October 2004). That proposal has now been dropped and Opra makes it clear that schemes should follow their normal valuation cycle. Any valuations that fall due before the commencement date must be carried out on the MFR basis even if it cannot be completed before that date.

Opra also warns that the Pensions Regulator will take an extremely tough line with trustees who try to bring their scheme valuations forward in order to carry them out on the MFR basis, even if such a change is made in good faith. The authority advises that any actuary who receives a request to undertake an out-of-cycle valuation should consider whistleblowing. It adds that trustees who commission such valuations may be considered "not fit and proper" for their office and be removed by the regulator.

Disclosure requirements

Although it will not be possible for trustees to request an out-of-cycle valuation on the MFR basis, they may bring forward a valuation on the scheme-specific funding basis once the provisions take effect. Opra states that it is mindful of the cost of valuations and suggests that if trustees have concerns about scheme funding, they may wish to "encourage" employers to fund the scheme at a higher level than under MFR requirements, instead of bringing forward the first valuation under the new requirements.

One potential problem is that, under the Pensions Act, trustees are required to give members an annual statement providing information about the scheme's funding level and solvency position. Opra says that the first such statement may need to be issued before a valuation on the new basis has been carried out. Mercer Human Resource Consulting suggests that if a statement has to be issued before a scheme-specific valuation has been undertaken, it will presumably be satisfactory to use the scheme's last valuation under the current requirements to comment on its funding position.

In any case it is not clear whether the statement has to be included in the scheme's first annual report after the implementation date or whether schemes can wait until the first full scheme year after the commencement date to issue the statement.

Small schemes significant

The Bulletinonline also summarises the findings of a survey of small defined-contribution (DC) schemes to determine the appropriate risk-based approach that the new Pensions Regulator should take towards their regulation. Opra wanted to collate the characteristics of small schemes in order to assess the risk to members' benefits in terms of the probability of risks occurring and their potential impact. Its research concentrated on DC arrangements as these form the majority of small schemes.

More than 80% of live pension schemes in the UK have fewer than 12 members. However, the membership of such schemes only accounts for just over 1% of the total number of scheme members. Opra found that 60% of these schemes have only two or three members. In the majority of them (81%) all the members are either directors of the company or trustees. In addition, more than 40% of two-member schemes are fully insured and a further 60% of the remainder state that they are small self-administered arrangements.

Only 20% of small schemes have between five and 11 members. However, these schemes are much more likely to be the main company plan and contain a higher proportion of members who have no control over the pension arrangement.

Lack of understanding is a concern

It is intended to use the information obtained about small schemes to develop an understanding of how they are managed. It is likely that the Pensions Regulator will distinguish between the two- and three-member arrangements where all the members are key decision-makers and the slightly larger plans. In the former case, it may apply a "lighter regulatory touch" so that the regulator can focus on the latter schemes where there is a greater potential risk to members' benefits.

One worrying finding for Opra is that the respondents - many of whom describe themselves as "trustees or administrators" - do not seem to understand two important points. First, they did not know the correct terminology to describe their scheme - for example whether it was an occupational scheme or a group personal pension. Second, they could not identify the type of benefits provided. Out of the sample of schemes surveyed, 58% of those registered as defined-benefit were found to be DC or hybrid.

In the Bulletinonline, Opra expresses its hope that the regulator's new data collection powers and the codes of practice, particularly the code covering trustee knowledge and understanding, will address these issues.

Details of future expected Regulations that will be required to enable the regulator to exercise its powers under the Pensions Act are also given in the Bulletinonline. These will cover matters such as independent trustees, the register of pension schemes and pensions liberation. However, unlike the codes of practice, no indication is given of the timing of these regulations.

¹ "Bulletinonline", issue 33, available only from the Opra website (www.opra.gov.uk) via "publications" and "bulletins".

Source: Opra's Bulletinonline 33.