ALTHOUGH 2007 SAW THE FIRST STEPS TOWARDS THE INTRODUCTION OF PERSONAL ACCOUNTS, THE PRINCIPAL LEGISLATIVE CHANGE WAS THE REFORM OF STATE PENSIONS

The reforms being introduced by the Pensions Act 2007 and the Pensions Bill recently presented to parliament represent the biggest transformation in UK pension provision since 1988, at the very least, and possibly since 1978. The new Act addresses both the increasing cost and the declining value of state pensions. It also prepares the ground for the introduction of personal accounts by the current Bill, which will require compulsory employer contributions and auto-enrolment. These changes overshadowed all other regulatory developments in 2007.

State pensions addressed

The Pensions Act provides that the basic state pension will once again increase in line with national average earnings, probably from April 2012, rather than in line with retail prices as now. In addition, the number of qualifying years needed to gain a full state pension is being reduced to 30, for both men and women.

The government was concerned at the spiralling costs of state pensions as a result of greater longevity, and the Act raises state pension age (SPA) in a series of short phased steps, finally to 68 in 2044–46. In addition, the Act changes the state second pension (S2P) from an earnings-related pension into flat-rate provision.

The Act ends contracting out on a protected rights basis, which is linked to the change to S2P and will also probably be implemented in 2012. The government has said that contracting out on the basis of the reference scheme test will be reviewed five years later.

The Act established the Personal Accounts Delivery Authority and provided for enhancements to the financial assistance scheme. In addition, a programme of reform to public sector schemes was completed last year. Regulations established a new-look local government scheme (OP, August 2007), a career-average scheme was introduced for civil servants (OP, November 2007) and an announcement made about the form of a much-changed National Health Service scheme (OP, November 2007).

The principal legislative change of 2007, introduced by the Pensions Act, was to relink state pension increases to average earnings, raise state pension age to 68 by 2046, and change the state second pension into a flat-rate pension.

SUMMARY OF KEY POINTS

The Act ends contracting out on a protected rights basis.

During 2007 the Pensions Regulator’s Determinations Panel issued the first two financial support directions (against Sea Containers Ltd), but these are subject to appeal.

Both the Pensions Regulator and the Revenue issued guidance on the offering of inducements to members to transfer their benefits out of occupational schemes.

During the coming year, parliament will debate the new Pensions Bill, which is planned to introduce personal accounts and will require compulsory employer contributions and autoenrolment by all employers.

The Bill caps the revaluation of deferred pensions at a maximum of 2.5% per annum.

Regulations are expected on internal disputes procedures and on disclosure.

Regulator’s activities

Last year saw the Pensions Regulator flex its muscles in earnest for the first time. Concerned that Sea Containers Ltd was distancing itself from two occupational schemes run for employees of a subsidiary, the regulator’s Determination Panel endorsed a decision to impose financial support directions on the company (OP, August 2007). However, the company has appealed (OP, September 2007) to the Pensions Appeal Tribunal. More generally, the regulator was concerned about what it calls “scheme abandonment” and issued guidance in this area (OP, June 2007).

The regulator also issued advice for trustees on the inducements some employers are offering members to transfer out of occupational schemes (OP, March 2007). At the same time HM Revenue & Customs announced that, in future, cash payments made to the members themselves, rather than to their pension funds, would be taxable.

Finally, the regulator updated the guidance that complements its whistleblowing code of practice and issued similar guidance on internal controls (OP, June 2007). However, it decided not to publish the promised guidance to accompany its code on benefit modifications, and chose not tell anyone it had had a change of heart (OP, December 2007).

Full agenda for 2008

The coming year will see the new Pensions Bill considered. It will require all employers to automatically enrol employees aged 22 or more and earning at least £5,000 a year into personal accounts. Employers must contribute a minimum of 3% and employees 4%, although employees can opt out. Employers that offer good alternative pension provision, including auto-enrolment, will be exempt. In addition, the Bill will implement the so-called deregulatory review changes (OP, December 2007 and p.1 of this issue), notably limiting revaluation of deferred pensions to 2.5%.

Final revised Regulations on the calculation of the employer’s debt, particularly in relation to employers ceasing to participate in multi-employer schemes that are continuing, are expected early in the year. There may also be Regulations introducing a principles-based approach to the Disclosure Regulations, another change resulting from the deregulatory review.

There will be Regulations early in the year on the more flexible internal disputes procedure, and a code of practice from the regulator on the associated time limits. The consultation on these has just ended (OP, December 2007). Towards the end of the year, the regulator consulted on changes to its clearance procedure – these proved to be controversial and the outcome is awaited.

OUR RESEARCH

In preparing this review of 2007, we drew on the coverage of pension regulatory developments in Occupational Pensions during the year. We also searched the websites of the Office for Public Sector Information (OPSI) and of the various UK bodies involved in the regulation of pensions.