On 2 September 2008, the Department for Work and Pensions (DWP) published draft regulations which set out some of the detail as to how trustees may be able to convert Guaranteed Minimum Pensions (GMPs) into ordinary scheme benefits.The aim is that it will be possible to carry out such conversions from 6 April 2009.
GMPs were accrued by members of contracted-out occupational pension schemes between 6 April 1978 and 5 April 1997. The rules governing the calculation of GMPs are complicated and the structure of GMPs is typically different from that of ordinary scheme benefits, particularly in relation to increases both before and after retirement. Given the complications involved in administering GMPs, the Pensions Act 2007 introduced measures which would allow trustees to convert GMPs into ordinary scheme benefits provided that the benefits after the conversion are ‘actuarially at least equivalent’ to the GMPs. The draft regulations now issued provide further detail. They are accompanied by an Annex which sets out some guidelines as to how GMP conversion might work in practice.
In particular, the draft regulations are concerned with the ‘actuarially at least equivalent’ test. It is the trustees’ responsibility to determine actuarial equivalence, having obtained advice from the actuary. Once the actuarial values have been calculated, the actuary must send the trustees a certificate to the effect that the post-conversion benefits are actuarially at least equivalent to the pre-conversion benefits.
In general, there are no restrictions on the form of the scheme benefits into which the GMPs are converted. However, the draft regulations do introduce a requirement for the post-conversion benefits to include a survivor’s pension on the same terms as GMP. In addition, the Pensions Act 2007 prohibits the conversion of GMPs into money purchase benefits and requires that pensions already in payment must not be reduced as a result of the conversion.
The conversion process is accompanied by a number of disclosure steps. Consent is required from the employer, and so the Annex suggests that any proposed conversion should be discussed sooner rather than later with the employer.
Unless the scheme is in wind-up, the trustees must take all reasonable steps to consult affected members and survivors before the conversion takes place. Members do not have a veto, but trustees should consider any responses received.
Once the GMPs have been converted into scheme benefits, members should be notified of their new benefits and HM Revenue and Customs (HMRC) should also be informed.
Once the process has been completed, the trustees will no longer be liable to pay GMPs. However, the Pensions Regulator will have the responsibility for overseeing the process, and in extreme cases will have the power to declare the conversion void if the conversion process has not been carried out correctly.
It remains to be seen whether GMP conversion will prove an attractive option to many trustees, in particular as trustees may well have to tackle the thorny issue of GMP equalisation before they can convert GMPs. We expect that schemes are most likely to take advantage of this possibility at the same time as other changes to the scheme are being proposed.Whilst changes cannot be made until 6 April 2009, trustees and employers interested in converting GMPs may wish to consider taking advice in advance of that date.
The Pensions Regulator consults on good record-keeping
At the end of July 2008, TPR issued a consultation paper on good record-keeping. The consultation notes that poor record-keeping can lead to significant additional costs, including more complaints from members and more expensive administration. The problem is worse with historic data, because of factors such as changes in administrator and members failing to notify the scheme of changes of address. However, TPR also notes that it is important not to be complacent where current data is concerned.
TPR therefore proposes that there should be a core set of data that should be held for all scheme members. In addition, trustees should be responsible for identifying what further information is needed to run their scheme efficiently. It should be noted that these proposals focus initially only on the presence of data; further work will be needed to ensure that the data is of appropriate quality.
TPR intends to proceed initially by educating trustees on the importance of good record-keeping and using guidance to enable them to maintain good records. The proposals are only recommended as good practice, but TPR will reconsider the position in 2009 and may consider enforcing its recommendations at that stage if its ‘educate and enable’ strategy has not achieved an improvement in data quality.
Two major announcements – mortality assumptions and the PPF levy
On 23 September, TPR announced that it no longer proposes to set a trigger specifically in respect of mortality assumptions. Instead, mortality assumptions will only be scrutinised where a scheme is flagged up by an existing trigger, such as the level of its technical provisions.Where it does scrutinise the assumptions, it will not look for a specific method of mortality improvement (e.g. the long cohort projection with an underpin), but will instead look at the overall strength of the mortality assumption. This approach will come into force for valuations with an effective date on or after September 2008.Alongside this announcement, TPR has published some helpful guidance to assist trustees in analysing mortality assumptions.
Two days later, the Pension Protection Fund (PPF) issued a consultation on its proposals for the 2009/10 levy. It proposes to keep the same structure for the levy as for 2008/09 and to raise £700 million, i.e. the 2008/09 target of £675 million indexed in line with wages. Insolvency risk and underfunding risk will both be calculated as at 31 March 2008 – however contingent assets and deficit reduction contributions will still be considered so long as they are submitted by 31 March 2009 or 7 April 2009 respectively. D&B have been reappointed as the insolvency risk provider for the 2010/11 and 2011/12 levy years.
The PPF has also announced that the scaling factor will be 2.22. Whereas last year the PPF published an ‘indicative’ scaling factor, which later changed significantly, it has stated that this time the factor is ‘unlikely to change’ and should be finalised in November. This should give some reassurance to employers and trustees that they can rely on the levy calculation this time round. There will be a further more wide-ranging consultation on the long term structure of the levy in October.
Overall, both developments are welcome news for pension schemes. The announcement of an almost certain levy scaling factor should provide much needed stability for schemes’ PPF levy calculations for 2009/10, whilst TPR’s decision not to have a specific mortality trigger is a sensible and pragmatic one.
Other recent developments
Final guidance on transfer values: TPR has issued its final guidance on transfer values just in time for 1 October, when the new legislation comes into force and trustees become responsible for setting the assumptions on a ‘best estimate’ basis.The final guidance differs very little from the original draft guidance published in August.
EU consults on Solvency II and pensions: the European Commission has recently issued a consultation paper on solvency and pension schemes. The focus of the consultation is very narrow and focuses only on cross-border schemes and ‘regulatory own funds’ (schemes which need to carry additional reserves because there is no ongoing sponsor commitment to the scheme). Both types of scheme are rare in the UK, and so the effects of this particular consultation should be minimal.
Conflicts of interest and the Companies Act 2006: the provisions in the Companies Act 2006 will come into effect on 1 October 2008. Trustee company directors who are also directors of the sponsoring employer will be affected and potential conflicts may need to be authorised by both the board of the employer and the board of the trustee company. Trustee boards that may be affected should take legal advice, if they have not already done so. Trustees will also need to take account of the final TPR guidance on conflicts of interest, which is expected to be issued in the next few weeks.
Surplus options paper: according to press reports, the DWP has been consulting informally on a series of possible options as to the circumstances in which surplus funds may be returned to the employer. This follows earlier proposals relating to the return of surplus made in the Deregulatory Review.
Pensions on divorce: the DWP recently consulted on regulations which will relax the circumstances in which a pension credit can be paid, for example allowing pension credit members to take early retirement or to exchange some of their pension for cash.The DWP has now announced that these new rules will come into force in April 2009 (not October 2008 as previously expected).
Anti-money-laundering: after months of confusion, HMRC have finally confirmed that trustees of occupational pension schemes will be classed as ‘low risk’ and therefore will not be required to register under the new anti-money-laundering legislation. Previously, it had been feared that trustees who received payment might need to register.
The Pensions Regulator brings pressure to bear on ex-employer: Duke Street Capital has made an £8 million contribution into the Focus DIY pension schemes a year after selling the Focus DIY Group. Whilst no formal statements have been made, it appears that the payment was made following a threat by TPR to issue a Financial Support Direction.
Guidance on member communication: The Pensions Regulator has issued guidance which contains principles and guidelines on following good practice in written communications to members. In addition, it has published an investment guide that can be provided to members of defined contribution schemes.
State pension centenary: 1 August 2008 saw the 100th anniversary of the introduction of the Old Age Pension. Punter Southall has published a booklet to celebrate this and other key pension anniversaries falling this year, as well as an essay by our Senior Adviser, David Willetts. Please contact us if you would like a copy.
Countdown for Enhanced and Primary Protection: individuals who are planning to rely on primary or enhanced protection of their pre A-Day benefits now have only six months to submit their forms before the deadline of 5 April 2009. Our experience is that it can take weeks or even months to assemble the information needed to complete the forms so urgent action is now needed.
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