Occupational Pension Schemes – abolition of defined benefit contracting-out: a consultation on draft regulations – Sackers’ response to consultation

In this response:

• Background
• Respondent information
  
• General comments
• Interpretation
• Unconventional funding arrangements
• The role of the actuary
  
• Multi-employer schemes
  
• Costs and benefits
• Contracted-out regulations
  

Background

The Pensions Act 2014 provides employers with a unilateral power to amend their schemes to take account of the increase in their National Insurance Contributions when the single tier state pension is introduced, and DB contracting-out ceases, from 6 April 2016.

The DWP has asked for views on proposed legislative changes which follow from the abolition of DB contracting-out, together with two sets of draft regulations which set out the detail of how the statutory modification power may be used, and the rules that schemes which were contracted-out on a DB basis immediately before the abolition date will need to comply with from that date.

Respondent information

Sackers is the UK’s leading law firm for pension schemes and pension scheme employers.  As a specialist practice working exclusively in the pensions industry, everything the firm does is geared towards advising clients in relation to pensions.

Sackers advises over 500 occupational pension schemes across all industry sectors and across all sizes and structures.  Around 80% of the firm’s appointments are as advisers to trustees and Sackers acts for more of the UK’s top 100 pension funds than any other law firm.  Sackers retains key scheme sponsor appointments too, both on an ongoing and project basis.

The views expressed in Sackers’ response to this consultation have been collated following discussions with some of the firm’s solicitors.  We have focused on the issues that are relevant to our practice and have not sought to answer every question in the consultation.  In particular, we do not comment on provisions which require specific actuarial expertise.

General comments

We welcome the proposed measures that are intended to help employers deal with changes that will need to be made to their scheme rules as a result of the abolition of DB contracting-out.  However, there are certain aspects of the draft regulations which we consider require further thought.  Our specific comments are outlined below.

We have two general points.  First, it should be noted that the draft Occupational Pension Schemes (Power to Amend Schemes to Reflect Abolition of Contracting-out) Regulations 2014 currently contain no mechanism for the employer to use the statutory override power.  For example, is it intended that this should by deed or board resolution, or will there be flexibility as to how the power is employed?  If the latter is the case it would be helpful if this could be made clear.  Second, in “The single-tier pension: a simple foundation for saving” (at paragraph 65) the Government stated that it would “remove the requirement to consult on ending contracting out as this is the direct result of a Government policy change”.  We note that there is no such change in the draft regulations.

Interpretation

Definition of “principal employer” (Q1)

In our view, the definition of “principal employer” will not currently help multi-employer schemes that do not already have a principal employer or a mechanism in place for nominating one.  In any event, such mechanisms tend to be rare in the context of non-associated / industry wide schemes – see further below our comments in relation to multi-employer schemes.

Unconventional funding arrangements

Salary sacrifice (Q9)

We agree with the DWP’s understanding as to the way in which salary sacrifice arrangements work, and we do not consider there to be a need to make specific provision in the regulations for such arrangements.

The role of the actuary

Appointment (Q12)

The consultation notes the intention that “it is for the employer to appoint an actuary”.  In our view this is not clear in the draft regulations.

The regulations could also be clearer about what is expected of the actuary, namely that the actuary should act impartially in carrying out the calculations and providing the certificate.  Their actions should in no way be influenced by their appointee.

Provision of information to the employer (Qs 13-15)

Draft regulation 13 currently requires the trustees or managers of a pension scheme to provide the employer with such information as the employer requests.  This provision is very widely framed and, in our view, there may be certain information in the trustees’ possession which it will not necessarily be appropriate to share with the employer.  We therefore suggest that this provision is limited to information that it is “reasonable” for the trustees to provide.

We do not consider four weeks to be an appropriate timeframe for the provision of scheme information by the trustees or managers to the employer.  In line with other pensions disclosure requirements which have moved away from this level of prescription to the use of “reasonable periods”, we consider that the same would be helpful here.  Some forms of information will be easier than others for the trustees to provide, and as such, may take much less than, or longer than four weeks.  We therefore consider that a blanket four week timeframe is not appropriate here.

Similarly, we do not consider that the regulations need to be prescriptive as to the type of data that the trustees will need to provide to the actuary.  This could be expressed as “such information as is reasonably required by the actuary and / or the employer” for the purpose of carrying out the relevant calculations.

In general, there should not be scheme information that the trustees do not have access to, which the employer is likely to need to be able to make amendments to scheme rules.

Multi-employer schemes

We envisage certain difficulties with the draft regulations for multi-employer schemes for the purpose of using the statutory override.

• Inadvertent consequences: Care needs to be taken to ensure that any nomination for the purpose of the statutory override does not affect existing nominations, for example where there is a standing nomination for the principal employer to exercise any powers and give consents on behalf of participating employers in the scheme, where those powers or consents arise under the Pensions Act 1995 and the Pensions Act 2004.  It will therefore be necessary to ensure that any nomination is effective for the purpose of the statutory override only, and to ensure that existing nominations or delegations are not affected.
• Information sharing: For employers that are not associated, there will be commercial sensitivities regarding the sharing of information with another employer who is required to be nominated as the principal employer for these purposes.  We understand that this issue has been discussed extensively with representatives of non-associated multi-employer schemes.

Costs and benefits

We do not consider scheme size (Q26) to be a key determining factor in relation to use of the statutory override.  For many schemes, this is likely to be one element of wider changes linked to the overall impact of the abolition of DB contracting-out.

Contracted-out regulations

Preservation of accrued contracted-out rights (Qs 27-28)

Part 3 of the draft Occupational Pension Schemes (Schemes that were Contracted-out) Regulations 2014, is intended to deal with the protection of reference scheme test (RST) benefits.

The draft regulations will not preserve the RST, in any form, after the transitional period.  While this may not be problematic for DB schemes, due to the restrictions on alterations to accrued benefits, it will cause problems for DC schemes that currently operate an RST underpin.

We consider that there should be provisions which make clear that, in respect of contracted-out service up to 6 April 2016:

• the RST requirement continues to apply and
• survivor benefits should be payable, and in what circumstances.

This will put such issues beyond doubt where, for example, there is no equivalent provision in a scheme’s rules.

Regulation 45 of the Occupational Pension Schemes (Contracting-out Regulations) 1996, which currently deals with protection of former contracted-out benefits, could provide a good model for maintaining the RST underpin in affected DC schemes.

General power for trustees to modify scheme rules for the abolition of contracting-out

We agree that, with the introduction of the single tier pension and the abolition of DB contracting-out, it is likely that many schemes will need to make changes to their scheme rules to take account of legislative changes.  A power for trustees to make the necessary amendments by resolution would be helpful.  However, this power would need to be carefully framed so as not to be unduly restrictive.

The consultation asks what changes are needed to “ensure […] scheme rules continue to have the same effect as a result of the abolition of contracting-out and the introduction of the single-tier pension” [our emphasis].  It is not clear what the Government’s intention is here.  Schemes may not want rules to have the same effect as they would have done under the previous state regime but may still want to make changes so that their benefit structure remains appropriate and, for employers, affordable.

Where the current state pension is incorporated and / or has an effect on a scheme’s benefit structure, employers and trustees will need to consider how they wish to deal with this going forward.  For example, state benefits are often taken into account via:

• a deduction in pensionable salary
• a deduction to a pension in payment or
• a bridging pension.

A scheme may consider it appropriate for its current benefit structure to continue after the introduction of single tier.  For such schemes, it would be helpful to have standard tables showing what the BSP would have been, had it not been replaced, in a similar way to the tables produced by HMRC to provide a notional earnings cap following its abolition from 6 April 2006.