Pension News 01/05

January 15th, 2005 by JCB
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PENSION NEWS

 

This is a summary of a speech given to the UKMPA at their annual conference held in Eastbourne in November 2004.

PENSIONS CRISES

2004 has been a year of media hype and hysteria over the pensions’ crises and the Government’s attempts to restore public confidence through:

·        Financial Assistance Scheme

·        Pensions Protection Fund

·        Finance Act 2004

·        The Pensions Commission Report

And on the 18 November the Pensions Bill received Royal Assent. Most will have an impact on the PNPF, but what are they hoping to achieve?

THE FINANCIAL ASSISTANCE SCHEME

Although the Pensions Bill makes provision for a Pensions Protection Fund (PPF) to pay pensions when an insolvent employer withdraws from an underfunded defined benefit scheme, this does not come into effect until April 2005. More importantly it does not cover employers of underfunded schemes that commenced wind-up prior to this date.

It is estimated that some 65,000 members face losses of 20% or more of their pension. So after much lobbying the Government agreed to make £400 million available in a Financial Assistance Scheme to provide compensation for the thousands of workers who have lost benefits because their schemes have been wound up while underfunded prior to April 2005. This sum of money is to be spread over 20 years and this scheme is open to the industry to provide further support. According to the Government the pensions industry has an “ethical duty” to contribute towards the FAS to help restore the public’s confidence in pensions.

The design of the FAS has not been finalised, however it will be used to top-up benefits in existing schemes. The current expectation is that the legislative framework should be in place by Spring 2005 with the first payment to be made as soon as possible after this date.

PENSIONS PROTECTION FUND (PPF)

The PPF is one of the provisions covered by the Pensions Bill and is due to be launched in April 2005. It will provide “core” benefits for members of under-funded defined benefit schemes where the sponsoring employer has become insolvent. The compensation fund will cover 100% of benefits for members who have reached the Fund’s retirement age and 90% for members below that age subject to an overall cap of £25,000 p.a.

The pensions protection levy, payable by pension schemes, will comprise two elements, one based on scheme specific factors, such as the number of member and the second based on risk-related factors, such as the funding levels of schemes. In other words the schemes most likely to claim will pay more.

FINANCE ACT 2004

This Act received Royal Assent on 22 July 2004 and introduces a new simplified tax regime for occupational and personal pension schemes and will be effective from 6 April 2006.

This is the most profound overhaul of tax treatment since the establishment of formal tax approval in 1921. Eight different regimes will be replaced by one single regime. The onus will be on scheme members rather than the scheme for policing the new regime with allowances, one lifetime and one annual, replacing benefit and contribution limits

The Lifetime Allowance (LTA)

When benefits are put into payment their value must be tested against the LTA, any excess will be subject to a tax charge.  The limit is the maximum amount that a member may take from all forms of registered pensions savings. The level of the LTA for the next five tax years starts at £1.5m and moves up to £1.8m for 2010/ 2011.

The Annual Allowance

In addition to the lifetime allowance there will also be an annual limit known as the annual allowance. This allowance ranges from £215,000 in 2006 to £255,000 in 2010.

For members who have already reached the LTA limit it will be possible to protect rights accrued within approved arrangements before A-Day provided the benefits are within existing Inland Revenue limits. If members have benefits in excess of these limits and the rights have not been protected then a recovery charge will be applied to the net excess.

The two types of protection are:

PRIMARY PROTECTION

This type of protection can only be used if the member’s benefits from all approved schemes of which he was a member are greater than £1.5m on ‘A’-day.

ENHANCED PROTECTION

This type of protection is available to any member with accrued benefits at ‘A’-day, however no further benefit accrual or contribution will be allowed into the pension scheme.

Members will have until April 2009 to register claims with the Inland Revenue for primary or enhanced protection.

PENSIONS BILL

The Pensions Bill received Royal Assent on 18 November 2004 and although the majority of the measures will be introduced from April 2006 the Department for Work and Pensions (DWP) has confirmed that it expects the following measures to be introduced from April 2005.

·        The Pension Protection Fund (PPF) and The Pensions Regulator (TPR)

·        Pension rights on TUPE transfers

·        Change in Limited Price Indexation

(LPI) for defined benefit schemes

·        Withdrawal of the need to provide LPI for defined contribution schemes

PENSIONS COMMISSION REPORT

PENSIONS: CHALLENGES and CHOICES

Adair Turner as Chairman of the

Pensions Commission has recently

published his interim report on the UK pensions system entitled Pensions:

Challenges and Choices. It looks into the adequacy of pension savings and provision in the UK and lays out the choices and challenges facing individuals and society.  The report comments that the government has seriously overestimated the level of retirement savings and if the voluntary system is to survive the number of employers contribution to schemes will have to rise.

The interim report’s task was to describe the situation and quantify it. In the second report due out in the Autumn of 2005 the Commission will make recommendations and consider what adjustments should now be made.

PNPF SECRETARIAT

2005 will be a busy year for the Secretariat and the Trustees as well as we all come to grips with the new legislation and how it will affect the PNPF Added to this a triennial valuation is due as from 31.12.2004 so data will need to be collected and transferred to the actuary during the beginning of 2005.

Debbie Marten

debbie@pnpf.co.uk