UK: Employee Benefits: The Government Green Paper On Pensions

Last Updated: 30 July 2003

By John Papadakis, Martin Scott & Rosalind Connor

On 17 December 2002 Andrew Smith, Secretary of State for Work and Pensions, released a Green Paper entitled "Simplicity, Security and Choice: Working and Saving for Retirement". At the same time, the Inland Revenue released its proposals on the simplification of the taxation of pensions. Whilst these documents, in particular the Green Paper, are still at the discussion stage, they indicate the government’s proposals for reforming pensions and are likely to result in some substantial changes to pensions regulation. This commentary summarises the main issues raised in those documents and also notes some of the industry’s suggestions that the Green Paper did not take up.

The Inland Revenue Reforms

The Inland Revenue proposes replacing the complex range of rules dealing with maximum benefits that may be provided under Inland Revenue approved pension schemes (which include personal and company pension schemes, both salary related and money purchase) with two simple limits on benefits:

• contributions in any year not exceeding £200,000; and

• a total fund value on retirement not exceeding £1.4 million.

Both these numbers will be revised on the basis of the retail prices index every year. If a pension fund exceeds £1.4 million, the excess will be subject to a 33% tax charge. Companies with executives at or near this level should be considering how to react to the new proposals.

A number of other changes are proposed, in particular:

• limiting the tax free lump sum on retirement to 25% of the value of the fund for all approved pension schemes;

• raising the minimum age for taking a pension from 50 to 55 (except in cases of ill health);

• allowing pensions to be drawn when the individual continues to work, although the rules of the pension scheme must also be amended to permit this; and

• permitting total pension funds under £10,000 to be fully commuted rather than taken as pension.

The Government Green Paper

The government’s Green Paper is much less detailed than the Inland Revenue proposals and focuses on concepts and ideas. It argues strongly that pensions are not in crisis in the UK but that a number of changes would be advisable in order to ensure that private pensions are more widely taken up and occupational schemes continued. All the proposals in the Green Paper are subject to feedback from interest groups. It must be stressed that these are consultation provisions and may alter radically before any legislation is introduced.

Provision of Pensions. The paper makes a number of suggestions in relation to personal pensions and the financial product market including:

• provision of personal pensions on a single set of standard rules;

• wide provision of state pension forecasts for individuals;

• a new type of independent financial adviser who is not obliged to advise on all products available;

• promoting and developing generic, rather than product specific, financial advice;

• provision of "stakeholder" forms of simple investment products as suggested in the Sandler Review; and

• widening the range of annuities available, including:

• "limited period annuities" to pay out for a fixed period of time; and

• value protected annuities to allow any residual amount to be paid as death benefits.

The government also wishes to use the workplace to promote understanding of pensions and is considering the following:

• an information pack on pensions in a standard form that is approved by the Financial Services Authority to be provided by employers to all employees;

• the compulsory provision by employers to each employee of a combined pensions forecast showing both state and private pension provision; and

• permitting employers to make membership of their pension scheme.

Deregulation. The Green Paper also recognises the burdens on employers and trustees of occupational pension schemes and has proposed the following changes:

• the replacement of the minimum funding requirement ("MFR") with a scheme specific standard of funding. This comes as no surprise as it was first announced in March 2001 in the Chancellor’s budget speech but there is still very little detail on implementation;

• allowing trustees to decide the level of transfer values when members transfer their benefits to another scheme, rather than being subject to the cash equivalent transfer valuation provisions;

• simplifying contracting out. There are a number of proposals here including:

• the possible alteration of guaranteed minimum pensions to be similar to post-1997 benefits;

• relaxing and changing some of the details of the reference scheme test (the actuarial test that schemes must comply with in order to contract out on a final salary basis); and

• allowing contracted out benefits to be treated similarly to other scheme benefits in terms of when and in what form they can be taken;

• permitting amendments to the scheme rules which change members’ existing rights so long as members are provided with something of an equivalent actuarial value; and

• making the rules on member nominated trustees and their appointment more flexible whilst possibly reducing the ability of employers to opt out of these rules altogether.

Member Protection. Deregulation is accompanied by a concern to ensure member protection. In particular, it is suggested that OPRA, the present pensions regulator, is replaced with a more "pro-active" organisation with investigative powers which can be used even when problems are not brought to its attention.

A number of changes are also suggested to alter the position on the wind up of a pension scheme. As mentioned above, the MFR is set to be replaced and this will itself have an effect on the debt due from the employer on the wind up of a scheme. However, a number of other changes are proposed or suggested in relation to the wind up of schemes:

• to change the order of priorities for benefits on the wind up from the present situation where all pensioners have their benefits bought out in full before any money is paid to non-pensioner members. It is proposed either to distribute benefits widely amongst all members or to increase the priority of those approaching retirement age with less opportunity to save in the future for their retirement;

• for insolvent employers, that the debt due to the pension scheme might move ahead of other unsecured creditors, possibly ranking with or above secured creditors;

• the provision of insurance to deal with underfunding in schemes with insolvent employers; and

• that solvent employers should pay the pension scheme a sufficient amount to buy full benefits on the wind up of the scheme or sufficient to buy full pensions for pensioners and those nearing retirement.

What is not in the Green Paper

A number of commentators feel that the Green Paper is a lost opportunity. There are certainly a number of issues that have been avoided by the government which feels that they are either too politically sensitive or impractical in achieving the goal of wider pension provision. These include:

• an increase in the state pension age. Despite the fact that this is a widespread phenomenon in other countries, the government is not suggesting any increase to the state pension age, other than the intended increase of women’s state pension age to 65 for those born after 1960;

• compulsory provision of contributory pensions by the employer. The requirement to provide access to a stakeholder pension is considered satisfactory;

• any legislation to reduce the effect of the FRS17 accounting standard for pensions. It was highly unlikely that the government would step in on this accounting issue but some commentators have called for consideration of this and the Green Paper explicitly rules out any legislation on the subject;

• the removal of the requirement to purchase an annuity at age 75. The government feels that an annuity is the most secure way of providing for old age; and

• the broadening of legislation so that it deals with principles rather than details. Although the government is proposing to consolidate the legislation in a new statute, there is no acceptance of Pickering’s view that detailed legislation should be replaced by principles to be interpreted by professionals.


The Inland Revenue originally proposed that most of its reforms are put in place by 6 April 2004, a date referred to as " ‘A’ Day". Many commentators thought this was an impractical deadline and unlikely to be met. In June 2003, the government announced that 6 April 2005 would now be ‘A’ Day. The proposals in the Green Paper are not timetabled. Consultation is presently requested and it is unlikely that any substantive issues will be resolved into active legislation this year.

Further Information

This commentary is a publication of Jones Day Gouldens. The contents are intended for general informational purposes only and are to raise your awareness of certain issues (as at July 2003) under the laws of England and Wales. This commentary is not comprehensive or a substitute for proper advice, which should always be taken for particular queries. It may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at its discretion. The mailing of this publication is not intended to create, and receipt of it does not constitute, a solicitor-client relationship.

©2003 Jones Day Gouldens. All rights reserved.

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