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Over the last few years there have been numerous stories of company failures and pension scheme closures as a result. In many cases members have received only a fraction of the benefits that they had expected, and in some extreme cases nothing. In addition, the industry regulator, OPRA, was criticised for not being proactive enough in protecting members' benefits.
The Pensions Act 2004 aimed to change all this. It replaced OPRA with the Pensions Regulator and put in place the Pensions Protection Fund (PPF) to give financial assistance to pension scheme members whose employer goes bust.
The Pensions Regulator's objectives are to protect the benefits of members of work-based pension schemes; promote good administration of schemes; and to reduce the risk of situations which may lead to a claim on the Pensions Protection Fund.
Part of the regulator's role is to provide information, education and help to those involved in running pension schemes. The regulator has a wide range of powers to achieve its aims.
The regulator has the powers given to it by the Pensions Act 2004. It has published a number of codes of practice which:
provide practical guidance on complying with the legislative requirements on pensions
set out the standards of conduct and practice that are expected of those involved in providing and running pension schemes.
However, the codes of practice are not statements of the law and there are no penalties for failing to comply with them.
In particular, the regulator has considerable information gathering powers. All schemes are required to complete an annual return giving detailed scheme information. In addition, the regulator requires trustees, scheme managers, those involved in the administration of the scheme, advisers and employers to provide information about breaches of the law and possible risks.
This is known as "whistleblowing". In general, a report needs to be provided to the regulator where there is reasonable cause to believe that a breach has occurred and the risk is of material significance to the regulator.
One particular area that is scrutinised is the late payment of contributions by the employer to the scheme.
The regulator also requires trustees and employers to give early warning of events that could lead to a claim on the Pensions Protection Fund. In particular:
the trustees are required to report events relating to the funding of a pension scheme -for example a reduction in the scheme membership
the employer is required to report events relating to its solvency -for example changes in its credit rating
both the trustees and the employer are required to report any proposal to compromise the debt owed to the scheme on winding-up.
The regulator has powers designed to tackle risks for example:
Where there is not enough money in the scheme to provide benefits the members are expecting, to order the employer to pay any shortfall in the scheme.
If companies are believed to have been involved in actions sought to avoid the shortfall on winding-up, such as a corporate re-organisation, the regulator can order those individuals or companies involved to pay the shortfall.
If the employer cannot make contributions because the business is struggling to help trustees and the employer come to an agreement about levels of contributions to the scheme, and put in place a long-term funding plan.
Where there is poor administration by the trustees or others involved in running the scheme to order scheme administrators to improve the service they provide to trustees.
If someone tries to steal money from the pension scheme to make sure that money stolen from a scheme is returned.
In extreme cases the regulator is able to fine trustees or employers and remove trustees from a scheme.
The PPF is designed to help members of defined benefit pension schemes if their employer becomes insolvent after 5 April 2005. The company pension scheme does not have the funds to pay the expected level of benefits and the PPF has become responsible for the scheme.
Pension schemes that began to wind-up between 1 January 1997 and 5 April 2005, before the Pension Protection Fund came into force, may be eligible for help from the Financial Assistance Scheme.
In deciding whether to take responsibility for the scheme, the PPF carries out an assessment process that must last at least 12 months. During the assessment period, the trustees of the scheme retain responsibility for the administration of the scheme and for communicating with and making pension payments to scheme members. The trustees must continue to act in the interests of all the scheme members.
During the assessment period, various restrictions and controls will apply in relation to the scheme. In particular, pensions will be restricted to PPF compensation levels.
The PPF will monitor the trustees of the scheme to ensure that they maintain the scheme in an appropriate manner for potential entry to the PPF. In certain circumstances, the PPF can issue directions to trustees in relation to areas such as the investment of the scheme's assets, the incurring of expenditure and the bringing or conduct of legal proceedings.
The Pension Protection Fund will also monitor the progress of the insolvency proceedings of the employer, liaising closely with the insolvency practitioner.
If the board of the PPF is satisfied that all requirements have been met, the PPF assumes responsibility for the scheme. Its assets and liabilities are transferred to the PPF, and pension payments are made to members from the fund.
Benefits paid out under the PPF will be:
Compensation at the 100 per cent level for members at or above normal pension age and those already in receipt of an ill-health or dependant's pension. Typically this will amount to 100 per cent of the benefit in payment. Benefits in payment will be subject to an annual increase in line with retail prices limited to 2.5 per cent in respect of pensionable service after 6 April 1997.
Compensation at the 90 per cent level for members who have not yet reached normal pension age. Typically this will amount to 90 per cent of the benefit accrued plus revaluation in line with retail prices limited to 5 per cent. This is subject to a cap, of £25,000 per year.
Compensation in respect of for survivors pensions.
From September 2005, the PPF assumes the powers of the Pensions Compensation Board. A new Fraud Compensation Fund is created to pay compensation (provided certain qualifying criteria are met) to eligible defined benefit and defined contribution pension schemes where a pension scheme has suffered a loss of assets as a result of certain offences.
Both the regulator and the PPF are funded by a levy on pension schemes. The levy for the regulator is based on the number of members. The levy for the PPF is based upon a combination of scheme and risk based factors.