UK: Real Estate Sector Pensions Update

Last Updated: 27 February 2012
Article by Mark Heighton and Venetia Trayhurn

This Law-Now has been produced in conjunction with the Pensions department to offer insight into several topical issues of relevance to the Real Estate sector.

Pension Fund Trustees Gamble on Property

Three men have recently been banned for life from acting as trustees after they liquidated their pension scheme's assets, borrowed over £20 million, and gambled 87% of the combined total on speculative property investments. The Pensions Regulator imposed the ban after it was discovered that the scheme had at one point held assets of only £800,361 whilst having liabilities of £43 million. The scheme's 450 members are expected to recover a large proportion, but not all, of their benefits from the pension industry's compensation scheme, the Pension Protection Fund.

The case is a stark reminder that, in spite of 20 years of legislation to try to combat abuse of funds by pension trustees, schemes and their members are still vulnerable. Further, whilst the direct theft of large sums may have been curtailed by the regulatory overhaul that followed the Robert Maxwell scandal, more sophisticated forms of abuse – such as this unsanctioned, high-risk property investment, can still occur.

There are strict regulations governing the investment of a pension fund's assets, both scheme-specific rules and under national law. Schemes are not allowed to invest the majority of their funds in illiquid assets such as property, and there are also detailed and rigid conflict of interest provisions, some of which relate directly to the holding of title to trust property.

The real estate industry, both commercial and residential, should be aware of the potential for abuse of scheme funds through investments in property. Any transaction or proposed transaction with pension scheme trustees should be carefully considered, and any concerns should be raised with a specialist pensions adviser.


Auto-enrolment, the process by which employees are to be enrolled in a pension scheme automatically, without any active participation on their part, and with both employees and employers being required to pay minimum levels of contributions, is to begin this year.

UK workers aged 16 and over with an income of £5,564 or more, must be allowed to join a pension scheme if they wish, and workers aged 22 and over, earning £8,105 or more, must be enrolled automatically (the earnings figures have yet to be finalised). Those who join a defined contribution scheme, for example, must have a minimum of 8% of their qualifying earnings contributed to their pension. Of that 8%, at least 3% must be contributed directly by the employer, with no prejudice to the employee (i.e. without a reduction to the member's salary to offset against the cost of the employer's contribution). These provisions include anyone working as an employee (i.e. under a contract of employment), and those with a contract to provide work or services other than as part of their own business. They also include workers with annual, monthly, and daily payment periods. This therefore extends compulsory pension provision far beyond the scope of permanent employees, to include short term labour contracts.

The auto-enrolment requirements will begin for organisations with 120,000 employees or more from 1 October 2012. There is then a timeline running to the smallest employers who must begin by April 2017. 

For example, the table below shows staging dates for employers depending on the number of employees they have on their PAYE scheme:

 Number of employees 

 Staging date


 1 September 2013


 1 October 2013


 1 November 2013


 1 January 2014


 1 February 2014

The minimum contribution levels will also be phased in over a period of time.

Employers can find guidance on how to prepare for auto-enrolment here, and information on their role, and online updates here.

For those employers that do not have a suitable occupational pension arrangement, the Government is setting up NEST, the National Employment Savings Trust, which employers can use as a scheme to auto-enrol employees in. For more information on NEST, please click here.

PPF Levies

The Pension Protection Fund ("PPF") levy, used to raise compensation payments for scheme members whose benefits have been lost in underfunded schemes on employer insolvency, is calculated by reference to the level of underfunding of an employer's pension scheme, and the risk of that employer's insolvency. The information used for that calculation must be submitted annually and the deadline this year is 5pm on 30 March 2012, so employers wishing to reduce their pension scheme's levy should take action as soon as possible.

One way of reducing the levy is for contingent assets to be made available to the pension scheme.  In addition to guarantees from other group companies, contingent assets can include the provision of security over assets such as land, building premises etc. and third party letters of credit.   These must be in PPF standard form and submitted to the PPF by 30 March 2012.  A further method of reducing the levy payable is by certifying any deficit reduction contributions that the employer may have paid to the pension scheme (contributions made over and above the normal cost of accrual, administration and augmentations).  Any such deficit reduction contributions must be paid to the scheme by 31 March 2012 and certified to the PPF by 5pm on 10 April 2012 to be taken into account for levy calculation purposes.

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

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 21/02/2012.

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