UK: "Come In Number Ten, Your Time Is Up…"

Last Updated: 30 December 2013
Article by Kris Weber

The reform of the traditional public sector pension schemes is a well-known aspect of the Public Service Pensions Act, and probably needs little rehearsal. Familiar old names will soon disappear from sight, and many thousands of professionals (let alone hundreds of thousands of members) will have to grapple with a new regulatory and operational regime likely to be completely alien to them in many ways. Less well appreciated, however, is the impact that the Act will have on the pension arrangements of many staff working in "public service" for "public bodies", whose pension arrangements are also facing the prospect of swingeing reform. In this article we consider whether yours could be one of them?

Background: welcome to the jungle

The Public Service Pensions Act received Royal Assent on 25 April 2013 after a tortuous passage through Parliament, the reports of which – contained in an official journal called Hansard – would give Tolstoy a real run for his money.  Considerable time, energy and larynx was expended by members of both Houses in debating the finer points of perhaps the most significant reforms of the pension arrangements of those in public service for nigh-on half a century.

None of the Act is yet in force.  That said this process is anticipated to start happening imminently, as the main bulk of the Act's reforms are due to take effect during the course of 2014.  Indeed we are already starting to see a steady trickle of draft Regulations emerge from Parliament that set out the detail of what the new public service pension schemes will look like, and the shape that the new regime will take. 

The fact that the new schemes (and all those involved with them) are being brought under the auspices of the Pensions Regulator for the first time, is perhaps one of the most ground-breaking moves of the new framework.  TPR has clearly bucked the trend in this regard, taking on literally hundreds of new staff – in spite of the Government's Comprehensive Spending Review – to help with this and auto-enrolment, its other new responsibility.

Public body pension schemes

Clearly the Government's main focus over the next 12-18 months will be the reform of public sector pension arrangements.  However, tucked away in the nether regions of the Act are provisions that deal with the pension schemes operated by public bodies, these being entities that are established and sponsored by Government but which operate on a semi-autonomous basis outwith the strictures of direct governmental control: in other words, quangos.  Well-known current and former quangos include such august bodies as the British Waterways Board, BNFL (British Nuclear Fuels Ltd), the Office of Fair Trading, and our old friend the Pensions Regulator.

In spite of 2010's so-called "Bonfire of the Quangos" – another part of Government's efforts to curb public spending – in the region of 400 such bodies are thought still to exist.  And many of them, at least at the moment, are happily operating their own final salary occupational pension schemes.  Such schemes often contain subtle design quirks that betray their provenance as offspring of one of the main public sector schemes.  But essentially they are pre-funded DB schemes just like those in the private sector, particularly in one very important respect: deficits.

Accrual no more...

And the d-word appears to be at least one of the driving forces behind the Government's assault on public body pension schemes . Section 31 of the new Act will require the "restriction" (i.e. closure to future accrual) of DB schemes operated by any of the quangos listed in Schedule 10 to the Act.  It places responsibility for bringing this about on the sponsoring government department, rather than with the public body itself.  The date after which no further accrual is to be permitted has yet to be decided, but is anticipated to be at some point during the course of 2015.  As a corollary the Act also envisages the creation of new public body pension arrangements that we would expect to be similar to those created for 'traditional' public servants.

Just as section 31 is somewhat hidden away, Schedule 10 to the Act is deceptively short.  It presently lists just over a dozen quangos whose schemes are to be restricted in this manner, including the UK Atomic Energy Authority and the Secret (or, perhaps, now not so secret) Intelligence Service.  Therein lies the sting in the tail, however: the Schedule only contains such a short list of quangos because, at the time the Act was making its way through Parliament, no reliable and comprehensive list of all remaining quangos – let alone the pension schemes they operate – was found to exist! 

The Government made it very clear during the Parliamentary debates faithfully recorded in Hansard that, as they become aware of the existence of additional quangos, their names will be added to the list in Schedule 10.  Accordingly one can, in time, expect to see in the region of 400 names in the Schedule, each of which will come under an obligation to bring accrual in their DB scheme to an end.  A considerable number of traditional final salary schemes – many of which, leaving aside their deficits, are felt to be on a healthy financial and regulatory footing – will see this stage of their lives brought to an end.  Subtly they will begin that inexorable move towards the ultimate end game, namely the buy-out of members' benefits and the winding-up of the scheme.

So where will all this lead?

A good deal of work is likely to be necessary, in bringing about the "restriction" of target schemes by the designated date, whenever that might ultimately be.  In comparison with the exercise to revamp public sector pensions it may well pale into insignificance, but it is likely to be an involved exercise nonetheless.  Trustees' duties from a legal and an investment perspective are likely to be paramount, both now and into the future.  And whether it will solve the underlying issue of the deficits in those schemes, which of course are a given, is somewhat open to question.

In the meantime perhaps spare a thought for the trustees of such schemes, many of whom are not fully aware of the ramifications of the Act or what it will mean for their memberships.  By contrast those who are fully apprised are really no better off: they find themselves somewhat in limbo at the moment, playing what is really just a waiting game to see what happens next.  The coming 12 months may well bring certainty, but will also undoubtedly bring change; and change, even if necessary (and here this might be debatable), is rarely entirely palatable.  Merry Christmas!

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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