Yesterday was a busy day at the Department for Work and Pensions. In the morning, it issued a wide-ranging consultation on dealing with small pension pots, in which it also announced the abolition of short service refunds under defined contribution occupational pension schemes. After lunch, it issued final Regulations, which come into force next month, introducing "flexible apportionment arrangements" for dealing with employer debts. This Law-Now looks at the key proposals in each area.

Transfers and small pots

This consultation seeks views on what DWP calls "a key challenge... the proliferation of small pension pots". The options being canvassed include:

  • ways of encouraging members to consolidate pension savings, and of reducing the cost of administering small pension pots (such as additional information to members, using simpler transfer forms, requiring schemes to accept transfers-in or reducing the fixed costs of administering pots);
  • automatically transferring small pension pots to one or more "aggregator" schemes (possibly including NEST) when a member leaves service; or
  • automatically transferring pension savings so they follow an individual from job to job.

Government is intending to report back next summer, with a view to making firm proposals for reform later in 2012.

The abolition of DC short service refunds

Under current rules, a member is entitled to receive a refund of pension contributions if he or she leaves an occupational pension scheme within two years of joining it. The DWP says that it will amend existing preservation requirements by abolishing short service refunds under DC occupational schemes altogether.

In contrast to the relatively open consultation on small pots, this decision is clearly already made. The DWP claims that the existing rules "jeopardise pension savings for low to median earners and have no continuing role in an automatic enrolment world".

Government intends to implement abolition by 2014, but accepts that this is likely to be dependent on having arrangements in train for dealing with small pots by that time.

Flexible apportionment arrangements

A flexible apportionment arrangement is a new method of dealing with debts under section 75 of the Pensions Act 1995 that might otherwise arise on a corporate group restructuring. No "employment cessation event" triggering such a debt will be treated as occurring, so long as certain conditions are met which include:

  • meeting both limbs of the existing "funding test" for scheme apportionment arrangements (where a number of employers are leaving close together, the trustees may be permitted to perform the test only once);
  • all of the pensions liabilities of the leaving employer being reapportioned to a replacement employer or employers within the scheme; and
  • the trustees and those employers giving consent in writing.

Unlike the existing "restructuring" easement, there is no requirement for all corporate assets to be transferred over from one employer to the other.

The Regulations also extend the "grace period" under which an employer who ceases to have active members can currently prevent a debt being triggered, if it informs the trustees that it intends to employ new actives within 12 months and then does so. The employer may now, with the trustees' agreement, continue to have no active members for up to three years without triggering a debt. The employer will also have two months, rather than the existing one, to notify the trustees of its intention to rely on the grace period provisions.

The Regulations come into force on 27 January 2012.

Further information

The consultation on small pension pots can be found here.

The response to consultation on flexible apportionment arrangements can be found here.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 16/12/2011.