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Hard(y) Law Talk: Pensions – protection or prevention?

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Pensions, pensions, pensions … pages and pages of headlines over the last two decades since the Maxwell pensions scandal and more recently, Enron and Equitable Life fiascos have made employees uneasy about their financial futures on retirement, and employers uneasy about their ability to fund their pension scheme commitments.



The Pensions Act 2004 – 325 sections long and with 13 accompanying Schedules – still often misses the radar of many HR practitioners, unless compensation and benefits is your speciality. This is not surprising, since as even those pension lawyers who have to digest it will tell you, it’s quite obscure.

Prior to the enactment of the wholesome Pensions Act 2004, the last major Pensions Act in the UK was that of 1995, which was in large part inspired by the Goode Report. Like the 1995 Act, the 2004 Act regulates the framework of law governing occupational pension schemes.

The main provisions of the 1995 Act took effect in 1997; subsequent Government pension initiatives introduced the Minimum Income Guarantee, the Pension Credit and above-inflation increases in the basic State Pension. All matters relevant to HR practice.

The pensions issue:
The Pensions Act 2004 which seeks to make provision relating to pensions and financial planning for retirement, created a new regime which came into force on 6 April 2005, with further changes due in April 2006.

The new regime applies to all occupational pension schemes. Various exemptions have been repealed. The new Act establishes a new pensions’ regulatory body, the Pensions Regulator, in place of the new abolished Occupational Pensions Regulatory Authority.

The new Act vests the Pensions Regulator with widespread supervising powers over pension schemes, trustees, participating employers and other connected parties and imposes mandatory reporting requirements upon trustees and employers. A full-blown ‘whistleblowers charter’ is provided in an adjoining Code of Practice.

In addition, in terms of insolvency, an insolvency practitioner is obliged to give written notice to the Pensions Regulator and others informing them of their appointment.

More significantly, the Act has replaced the Minimum Funding Requirement for final salary schemes with a Statutory Funding Objective.

The SFR will effectively require pension schemes to hold ‘sufficient and appropriate assets to cover its provisions‘, and employer contributions will need to be set accordingly.

The Pensions Regulator holds the power to fix contribution rates where there is no agreement between trustees and employers, and to require payments and/or other types of financial support from employers and connected parties in cases of pension scheme underfunding.

Further, the Act also provides for the establishment of a Pensions Protection Fund (PPF), under which all final salary schemes will be compelled to be mutually insured. As a result, employers cannot simply walk away from final salary scheme liabilities.

Other changes include an overhaul of the mandatory “internal dispute resolution” procedures that pension schemes must operate and forthcoming changes to the requirements that pension scheme members must have the opportunity to elect at least one-third (in due course, to be increased to one-half) of their schemes’ trustees.

In this regard it should be noted that the ability of employers to “opt-out” of the member-nominated trustee requirements is to be phased out over the next few years.

Moreover, from 6 April 2006, employers will be required to “consult” with prospective and active members before significant alterations to their pension schemes are made; final versions of the relevant regulations are awaited.

A-Day, 6 April 2006 is an auspicious date in the pensions world for reasons other than the Pensions Act 2004. On that date, the taxation and investment regimes of all tax approved pension schemes are to be changed and harmonized leading to new opportunities for pension schemes, but also potential dangers if employers and trustees are not adequately prepared for the forthcoming changes.

Pension schemes and their advisers should now be actively considering how they wish to prepare themselves for the impact of A-Day.

To that end, HR practitioners need to think ‘Pensions’ in all they do – recruit, change terms and conditions, dismiss. It is clear that the Pensions Act 2004 produces no new radical thinking, but it provides more regulation, regulation, regulation.

Since employees are more often than not concerned about their pension scheme, HR’s role should be to reassure them and advise them to contact the specialist practitioner.

Dr Stephen Hardy is Senior Lecturer in Law at the University of Manchester and a Barrister specialising in Employment and EU Labour law. Dr Wyn Derbyshire is partner at S J Berwin LLP, Solicitors, where he heads the pensions department.

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