UK: UK Pensions Update

Last Updated: 11 November 2008
Article by Robert West

Consultation on Guaranteed Minimum Pension conversion Regulations

Schemes are to be able to convert Guaranteed Minimum Pensions ("GMPs") into other scheme benefits, provided that after conversion they are at least actuarially equivalent.

Trustees considering GMP conversion would need to:

  • obtain employer consent and consult members;
  • request reconciliation of HM Revenue and Customs ("HMRC") National Insurance data with scheme records;
  • with actuarial advice, decide on actuarial assumptions for conversion;
  • decide whether to commute part, or all, of the GMP and whether to include all members;
  • ask the actuary to carry out the calculations and certify the actuarial equivalence;
  • amend the scheme to provide for conversion and remove any double benefit;
  • notify members and HMRC of the conversion; and
  • ensure survivor benefits are provided by the scheme in the same way as before conversion.

The Department for Work and Pensions (the "DWP") is consulting on the equivalence requirements, which are scheduled to come into force next April. The consultation paper queries whether schemes receiving transferred converted benefits should have to provide the same survivor benefits as the transferring scheme and whether GMP conversion should be extended to ill health and early retirement cases. However, the paper does not comment on the need to equalise GMPs or the impact this will have on the conversion.

Members taking a transfer out to another scheme will need to be informed of any loss of survivor benefits.

Conversion will be regulated by the Pensions Regulator.

The consultation paper can be viewed by clicking here.

DWP report on employer attitudes to risk sharing schemes

Following consultation, the DWP has issued a report on the attitudes of interviewed employers to risk sharing pension schemes.

Employers see difficulty in explaining to employees the entitlements and benefit structures of risk sharing schemes. Those with defined benefit schemes view risk sharing as being attractive to employers but less so to employees, as regards the flexibility to make changes to indexation, revaluation and pension age. Employers with defined contribution schemes feel risk sharing would introduce unwelcome risk and add administrative costs for them. The lack of guaranteed revaluation on deferred benefits and indexation on pensions in payment, and the ability to change pensionable age in line with changing longevity, are thought by employers to be vulnerable to legal challenge. The report suggests employers seem to have little appetite for risk sharing and there is no indication that it would help to keep open schemes that might otherwise close.

For risk sharing to be workable, significant changes to legislation would be needed, including redefining what constitutes an accrued right and a money purchase scheme, and perhaps introducing some form of actuarial equivalence value test to allow flexibility. Given that the risk is shared, it is possible that additional assets might have to be held above the scheme's technical funding provisions in order to comply with European law.

The report can be viewed by clicking here.

Regulator issues guidance on member communications

On 18 September 2008, the Pensions Regulator (the "Regulator") issued guidance on member communications, together with an investment guide that can be provided to members.

The member communications guidance is for use by trustees, managers and employers, and contains principles and guidelines on good practice in written communications to members. The key messages contained in the guidance include the following:

  • identify objectives and have a clear communication plan;
  • identify the best ways to communicate;
  • tailor communications to the audience;
  • remember the needs of all groups, not just active members;
  • be open and honest;
  • avoid jargon; and
  • try to get members to engage.

The investment guide can be issued by trustees and employers, if they choose, to help members understand defined contribution fund choices.

The member communications guidance can be viewed by clicking here and the investment guide can be viewed by clicking here.

Regulator publishes final approach to mortality assumptions

The Regulator has published its response to the recent consultation on good practice in selecting mortality assumptions for defined benefit pension schemes. As reported in our July 2008 UK Pensions Update, the Regulator announced earlier this summer that it was delaying the introduction of its new approach.

The full response that has now been published:

  • confirms that mortality assumptions will only be scrutinised where a scheme is flagged up by an existing trigger;
  • reiterates that the Regulator's approach will not be based on any one approach, with a range of different measures able to achieve equivalent outcomes;
  • highlights that recovery plans are governed by payments that are reasonably affordable;
  • releases guidance for trustees on the process for determining mortality assumptions; and
  • confirms that the changes will apply to valuations with effective dates from 22 September 2008 onwards.

The Regulator's press release can be viewed by clicking here.

Compulsory retirement age - the Heyday case

We mentioned in our Special Edition Update on age discrimination in November 2007 that an organisation called Heyday, a branch of Age Concern for England, is challenging the legality of the default contractual retirement age of 65 as set out in the age discrimination legislation. The High Court referred to the European Court of Justice ("ECJ") the question of whether the European Framework Directive extends to national rules permitting employers to dismiss employees aged 65 and over if the reason for dismissal is retirement.

Yesterday, the Advocate-General, agreed with Age Concern that UK rules on mandatory retirement are covered by the Framework Directive. However, he made it clear that a rule such as the default retirement age rule "can in principle be justified ... if that rule is objectively and reasonably justified in the context of national law by a legitimate aim relating to employment policy and the labour market and it is not apparent that the means put in place to achieve that aim of public interest are inappropriate and unnecessary for the purpose".

The Advocate-General's opinion cites the Palacios case which suggests that Member States are left a relatively wide discretion in identifying the means to be used to achieve a legitimate aim relating to the social and employment policies pursued. The opinion also indicates that different treatment on the basis of age is "not by its nature a 'suspect ground', at least not so much as for example race or sex".

While the ECJ is not bound by the Advocate General's opinion, they are usually followed. Once the ECJ has delivered its ruling the case will be referred back to the UK courts. It will then be a question of whether the UK government can objectively justify the inclusion of the default retirement age in the age discrimination legislation.

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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