UK: Pension Trustee Bulletin - Autumn 2011

Last Updated: 8 September 2011
Article by Matthew Maneely, Stephen Drew and Julie Mutton

A briefing for occupational pension scheme trustees and their advisers


  • Taking action to identify your scheme's statutory employer
  • PMI launches updated Pensions Terminology guide
  • Revised actuarial factors published
  • Publications on special purpose vehicles and internal controls
  • PRAG in association with PMI – 2010 Summary Reporting Awards
  • Automatic enrolment
  • NAPF Annual Conference and Exhibition 2011

Taking action to identify your scheme's statutory employer

The Pensions Regulator has recently published a statement Identifying your statutory employer, to help trustees understand the importance of identifying their scheme's statutory employer and how they should set about doing this.

A statutory employer is legally responsible for meeting the scheme-specific funding requirements of a defined benefit scheme, paying the section 75 'buy-out' debt if certain events, including insolvency, occur, and triggering entry to the Pension Protection Fund (PPF) assessment period on insolvency.

The Government has recognised that some schemes have in the past lost their statutory employer, and are currently consulting on a limited extension of the Financial Assistance Scheme (FAS). The proposed extension covers schemes:

  • which lost their relevant employer before 10 June 2011
  • for which the last remaining employer had an insolvency event before 6 April 2005
  • which commence winding up by the day before the new FAS regulations come into force.

If a scheme loses its statutory employer (or employers if it is a multi-employer scheme), there are likely to be serious consequences for members. The scheme may not be eligible for PPF protection and may not qualify for FAS. Without a statutory employer the scheme could be entitled to limited or no support from its sponsors. A scheme's statutory employer may be different from its principal or participating employers. If trustees discover that their scheme has no statutory employer they must tell the Regulator.

If the statutory employer is incorrectly identified, this could mean the trustees' assessment of the strength of the sponsoring employer's ability to support the scheme (employer covenant) is inaccurate. Employer covenant relies on an employer having a legal obligation to support the scheme, and affects the scheme's technical provisions (the amount calculated as required to pay pensions as they fall due).

The Regulator's chief executive Bill Galvin said: "Trustees should act immediately to ensure they have no doubt about their scheme's statutory employer (or employers), as this can prevent major problems arising for member security.

For the majority of schemes that are open to future accrual, identifying the statutory employer should be straightforward. However, over time there is a risk of closed defined benefit schemes being taken over by an organisation with no legal obligation to support the scheme.

If they are not 100% sure of the position, trustees need to take action by requesting information from employers such as employment records and historic documents which note any employer departures from the scheme. This will help them identify the statutory employers and understand what needs to be done to rectify the situation if needed."

From November 2011, the Regulator's 'scheme return' forms will include a requirement that trustees identify the statutory employer for their scheme. Hence, trustees should consider this issue urgently and keep it under review. If the scheme's position is unclear they will need to seek specialist legal advice.

PMI launches updated Pensions Terminology guide

The Pensions Management Institute (PMI) has launched its Pensions Terminolog y guide, 8th edition, which is a glossary of terms produced in conjunction with the Pensions Research Accountants Group (PRAG).

The guide's purpose is to encourage all pensions professionals to speak the same language and it is revised and updated periodically to keep it relevant to the current pensions climate. Pensions Terminolog y is also accessible online.

Commenting, Vince Linnane, PMI chief executive, said, "Pensions Terminology, which is now recognised as the standard reference guide for pensions professionals, plays a really important role in helping to provide consistency and relevance in the pensions industry. As such, the PMI regularly reviews and revises the guide's content to ensure that it is as modern and accurate as possible.

This is particularly significant with the introduction of auto-enrolment around the corner, which is estimated to bring millions of people into pension saving for the first time. It will be vital to the success of these reforms for pensions professionals to be, not only uniform in their approach, but communicating with these people in a way that is appropriate and consistent."

Zahir Fazal, chairman of PRAG, commented: "Once again, we are delighted to have worked successfully with PMI to produce the latest edition of Pensions Terminolog y. The 8th edition is the most comprehensive to date, and will play a vital role in ensuring that those new to the industry understand the complex terms in use."

Revised actuarial factors published

The PPF has published revised commutation factors, early retirement factors and annualised value of lump sum factors. The new factors should be used for all calculations with an effective date on or after 1 August 2011.

The factors can be found on their website at:

Publications on special purpose vehicles and internal controls

Over recent years there has been an interest in alternative pension scheme funding arrangements and the use of special purpose vehicles (SPVs) is one of the latest innovations.

A high level guide has recently been issued by PRAG and is aimed at trustees, sponsoring employers and preparers of pension scheme and company accounts who are new to these arrangements. This guide will help readers understand the reasons why trustees and employers enter into these arrangements, how they might be structured and covers some of the associated legal, tax, valuation and accounting principles. It also covers some of the practical issues and considerations in respect of these structures.

PRAG's recent publication Internal Controls Example Checklist is aimed at assisting trustees and those involved in the operation of pension schemes in identifying suitable internal controls to put in place in order to mitigate scheme risks. The guidance is intended to be a practical overview, giving pointers to a suitable approach. PRAG reiterate that it should not be used as a 'boilerplate' template.

PRAG in association with PMI 2010 Summary Reporting Awards

At the PRAG meeting on 22 June 2011, Zahir Fazal, the chairman of PRAG, and Matthew Maneely, head of pensions audit at Smith & Williamson and chairman of PRAG's Summary Reports Working Party, presented awards to three schemes for their summary reports to members. The recipients were as follows.

Defined benefit schemes with assets of more than £1bn

Awarded to: Merchant Navy Officers Pension Fund

The judges commented that the report provided a nice blend of graphics and words with the use of industry related graphics. The A5 format worked well and the simple financial statement presentation provided the right level of information.

Commended: Royal London Group Pension Scheme; IBM Pension Plan

Defined Benefit schemes with assets of less than £1bn

Awarded to: Ernst & Young Retirement Benefits Plan (final salary section)

The use of 'interview style' sections with scheme trustees and management was particularly effective at conveying important messages to members.

Commended: Hess UK Pension Plan

Defined contribution schemes

Awarded to: Bacardi-Martini UK Pension Scheme (defined contribution section)

The use of strong colours to grab the attention of the reader worked well with the judging panel. The judges also agreed that there was a clear focus on members and adoption of corporate and industry messages that the members would relate to.

Commended: Wolseley Group Defined Contribution

Overall comments

The reports entered for all of the categories demonstrated the value of design in conveying complex messages and the professionalism of trustees and managers in operating a pension scheme.

A clear focus on the membership was also apparent from the entries and the submission of a report designed purely for online viewing was an innovation this year. One word of caution from the trustees though, was that style must not overtake the substance of the messages being conveyed.

Overall, the judges were impressed by the quality of entries, although they were again disappointed to see only one entry in the category for defined benefit schemes with less than £100m of assets. No award was presented in this category.

Zahir Fazal, chairman of PRAG, commented: "It has been another year where the quality of entries is fantastic. The importance to trustees of high quality communication is evident from the reports we have seen and PRAG will continue to encourage the sharing of best practice.

The support of the Pensions Management Institute (PMI) for the first time this year has been invaluable. The additional resource has really helped the judging panel to understand how the reports focus on the needs of members."

Vince Linnane, chief executive of PMI said: "Pension schemes need to work hard at ensuring that they communicate effectively with members, and PMI is proud to be part of an initiative designed to improve standards. We have worked closely with PRAG, and have been greatly impressed by the standards of all entries received. We expect next year's competition to be an even greater success."

Automatic enrolment

The Pensions Regulator has released online interactive tools to help smaller businesses to begin preparing for automatic enrolment.

By filling in basic information, such as their PAYE reference, the number of people they employ and salary information, employers can find out more detail about:

  • when the changes to pensions law will affect them
  • which staff need to be automatically enrolled into a pension scheme
  • how to automatically enrol staff
  • how much they will need to contribute to their staff's pensions.

The feel of the interactive tools should be familiar to many users, as they are similar in style and format to other online financial and budgeting tools and 'ready reckoners'.

Minister for Pensions Steve Webb said: "We know that easing burdens on small employers will be key to making automatic enrolment a success. That is why I'm very pleased that the regulator's new tools will be a simple and practical way for small businesses to learn about their duties."

In addition to the interactive tools, the Regulator has recently published a range of information to help employers, pension scheme managers and professional advisers as follows.

  • Summary of duties – a five-page overview of the new duties for employers: Workplace pensions law is changing...
  • Employer checklist – for large employers that will be receiving letters from the Regulator in coming months, this includes straightforward tips on knowing when to act, starting the planning process, implementing the duties and communicating the changes to staff: Your 5-step action checklist.
  • Trustee checklist – aimed at trustees of existing schemes, this sets out some of the issues that should be taken into account when current pension schemes are considered for automatic enrolment: 5-step action checklist for trustees.
  • Detailed guidance – this covers all aspects of workplace pension reform legislation, and is designed to be suitable for large employers with experience of providing pensions, advisers and intermediaries.
  • Software guidance – released in April (updated July) to over 500 payroll professionals, this guidance is helping payroll software developers implement changes to their products, better enabling them to support employers: A guide to workplace pensions reform for software developers.

Automatic enrolment is introduced on a gradual or 'staged' basis from October 2012 to February 2016 depending upon employer size. From 2012, the UK's largest employers will have to enrol all eligible workers into a qualifying pension scheme. Eventually an estimated 1.3 million employers will be affected.

NAPF Annual Conference and Exhibition 19-21 October 2011, Manchester Central

The NAPF Annual Conference and Exhibition 2011 is the most important annual event for anyone involved in pensions, typically attracting 1,000 top industry professionals. From trustees, pension managers and finance directors who control assets worth billions of pounds to HR specialists responsible for workforces of thousands of people, the delegates are made up of the most important pension decision makers in the country.

The conference includes keynote speeches, streamed focus sessions, fringe meetings, a trustee learning zone, welcome drinks reception, conference gala dinner and exhibition.

Smith & Williamson will be exhibiting on stand 340 and we should be delighted to see you there. The first ten lucky visitors to our stand to bring a copy of this bulletin with them will each receive a bottle of wine. All visitors will be entered into a prize draw.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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