4. PENSION
CREDITSCLAUSES
7-13 AND SCHEDULE
2
4.1 Discharging liability for pension creditsthe
method
We welcome the approach that gives the scheme
or arrangement the choice between conferring rights under the
scheme (internal transfer) or external transfer. We also welcome
the flexibility over the benefits to be created, under the internal
transfer approach. We note that the value of the rights must be
equal to the amount of the credits. It is important for pension
schemes that this transaction is cost neutral for them.
The scheme's option
We note from paragraph 1(3) of Schedule 2 that
the arrangement may impose the external transfer option in circumstances
to be set out in regulations. We also note that external transfer
has to be offered before internal transfer can be implemented,
in a funded occupational pension scheme (but not in an unfunded
one).
We are pleased that there will be a default
route where the pension arrangement wants to follow the external
transfer route, but the spouse has not nominated a receiving arrangement.
Presumably regulations will give the transferring arrangement
the ability to buy benefits by external transfer on a money purchase
basis, to keep down the costs and thereby enable smaller transfers
to be made.
Where trustees hold annuities securing scheme
benefits, is the "pension arrangement" the policy rather
than the scheme? If it is the policy, the person responsible for
it would be the provider of the annuity, so it does not seem that
the trustees of the scheme will have any control over how the
liability for the credit is discharged.
Internal transfer
We do have some concern about the status of
holders of pension credit benefit ("PCB"). Where the
arrangement is a trust, they will be entitled to benefits under
the trust and will therefore be beneficiaries, for the purposes
of the trustees owing duties to them (eg contemplating them where
discretionary benefits are awarded, dealing with them even-handedly).
This requires trustees (and perhaps employers) to have regard
to a category of people not contemplated when the trust was established.
This may have implications in final salary schemes in relation
to discretionary benefits and distribution of any surplus.
The crucial details of the pension credit will
be left to regulations. However it seems a scheme could set up
credits on any of the following bases or in any combination of
these bases, whichever basis the member's benefits were on:
a fixed rate of benefit;
a money purchase benefit;
added years, for a spouse who is
already a member of the scheme in his or her own right;
a notional period of pensionable
servicewe are not clear how this would work in a salary-related
scheme but presumably the spouse would have to be credited with
a notional salary as well.
In the notional pensionable service case the
credit would have to include revaluation in deferment but there
is no requirement for LPI increases once the pension is in payment
(Schedule 4, paragraph 38). (We will comment separately below
on the requirements for credits derived from contracted-out benefits.)
In the other cases the scheme would have the ability to decide
whether revaluation or pension increases would apply.
We expect most schemes would want to create
rights in the same pattern as deferred pensions, although they
would not necessarily be the same in all respects and it seems
likely that options available to deferred pensioners would only
be made available on a cost neutral basis. From the administration
point of view, it seems easier to create pensions carrying LPI
increases than not.
In paragraph 5 of Schedule 2, we wonder whether
a more precise phrase could be found than "noting the rights
in his books". How about "established the rights in
its records"? Obviously there will be a process, from first
noting the fact of an impending divorce, through noting receipt
of the pension sharing order, to actually setting up rights for
the spouse.
External transfer
We note that, under Clause 9, the implementation
period will not start to run until the scheme has received copies
of the pension sharing order and the divorce order. Clause 9(1)(b)(2)
refers to prescribed information relating to the transferor and
transferee. Presumably the information in relation to the transferee
will include information about the chosen receiving arrangement
for an external transfer.
Presumably the regulations will allow transfers
without consent along the lines of regulation 12 of the Preservation
Regulations, presumably simply on the basis of an equivalence
of value test. If an actuarial certificate will be necessary,
and the actuary has to compare the relative positions on winding-up
under the transferring and receiving arrangements, transfers without
consent will be much more difficult.
We note that, if the transfer is from an approved
arrangement, the receiving arrangement has to be approved and
also satisfy prescribed requirements. It would be helpful if some
indication of these could be given. We also note the requirements
about receiving arrangements where contracted-out rights or safeguarded
rights are transferred. Presumably, for contracted-out rights,
the requirements will mirror the Contracting-out Transfer Regulations.
Where the member's pension arrangement is an
annuity contract or assurance policy, we note that the arrangement
may discharge its liability by entering into an annuity contract
with the spouse or by "assuming an obligation to provide
an annuity" for the spouse. Further information about the
difference between these two paragraphs would be appreciated.
Unfunded schemes
Paragraph 3 of Schedule 2 does not appear to
give the employer (as opposed to the managers of the scheme) any
choice over how the pension credit is discharged. Since the payment
of an external transfer crystallises the employer's liability,
the employer should have some say concerning the method of discharge.
Underfunded schemes
We note the provisions in paragraph 9 of Schedule
2 about reducing the amount of the pension credit if the scheme
is under-funded. The easiest way of doing this might have been
to link reduction of the pension credit to reduction of cash equivalents,
but on balance we think it would be better not to have a link
between the two. The reason is that employers and trustees may
choose to carrying on paying full cash equivalents even though
a scheme is temporarily under-funded, and we do not believe the
considerations would be the same for pension credit holders. Your
explanatory note says the scheme will only be able to offer a
reduced pension credit where the former spouse has refused the
offer of internal transfer. This presumably means that the credit
will only be reduced on external transfer, and the option of reducing
the pension credit will only be available to a scheme that offers
the option of internal transfer. Schemes that want to insist on
external transfer will therefore be forced to pay the pension
credit in full.
Overpayments
We note the protective provisions in paragraph
10 of Schedule 2, if an arrangement has made overpayments to or
for the member in ignorance of the pension debit. There is an
interrelationship here with Clause 3(6), which puts the onus on
the parties to notify the arrangement about the pension sharing
order, and provides that the order will lapse if not notified
within two months after the decree. We welcome this requirement
for notification. However it is conceivable that the member's
scheme might have paid benefits, or even a transfer payment, within
the two month period and before copies of the decree have been
supplied. In such a case, it seems paragraph 10 would allow the
pension credit to be reduced. The explanatory note says that the
pension debit can be reducedshould it in fact be increased?
Death before implementation
We realise there is a problem if the former
spouse dies after the pension sharing order is made but before
it is implemented. The explanatory note to Clause 10(2) says regulations
will provide that the deceased former spouse should be treated
as if they had become a member of the member's pension arrangement.
In other words, internal membership will be compulsory in the
circumstances. We are concerned about this because it requires
schemes which would otherwise be able to choose to assist on an
external transfer only to design a benefit structure for internal
transfer, including presumably obtaining a safeguarded rights
certificate. The explanatory note refers to a return of fund if
the pension credit was derived from a personal pension scheme.
Would an occupational pension scheme be allowed to design an equally
simple benefit in these circumstances, for example a return of
fund, paid on discretionary trusts?
We would like to see the ability for the member's
arrangement to hold the pension credit in suspense as a lump sum
if for any reason the liability for the pension credit cannot
be discharged, for example because the former spouse has failed
to notify a receiving arrangement, or because no receiving arrangement
can be found which will accept the former spouse, which might
happen perhaps in a case of a very small pension credit, or possibly
on the grounds of the ill-health of the former spouse.
4.2 Discharging liability for pension creditstiming
and sanctions
OPRA has power to extend the timescales for
occupational schemes but it seems there is no such flexibility
for other types of pension arrangement. Similarly there are penalties
for occupational schemes failing to comply but not for other types
of pension arrangement.
The timescales need to fit with the timescales
for transfer payments, both for consistency and so that the member
cannot require a transfer payment during the implementation period
and thereby defeat the pension sharing order.
4.3 Contracting-out
Clause 11 introduces new ss.68A68M of
the PSA and the following comments are on the new sections.
An ex-spouse with a pension credit from a contracted-out
scheme will be given "safeguarded rights" and these
have been modelled on the protected rights provided by contracted-out
money purchase schemes. It therefore seems that, if a contracted-out
salary related scheme wishes to offer internal transfers, it may
be easiest to offer the ex-spouse money purchase benefits. If
the scheme converts the part of the pension credit which derives
from the member's GMP and post-6April 1997 benefits into a money
purchase benefit, it will be very messy for the scheme if it tries
to deal with the rest of the credit except by giving benefits
also in a money purchase form.
68A If safeguarded rights will be on a money
purchase basis, it would be simpler to define the safeguarded
rights as the rights granted to the transferee of the pension
credit which derive from that part of the pension credit which
is attributable to contracted-out rights or safeguarded rights
of the transferor.
Are COMBS included in s.68A(5)(a)? We note
that scheme rules will need to be amended if the scheme is to
provide safeguarded rights (s.68A(2), 68C).
68B Is it really necessary that a contracted-out
scheme which wishes to provide internal transfers (and thus has
to provide safeguarded rights) should need to go to the Secretary
of State for a further certificate before it can provide the safeguarded
rights? This seems an unnecessary expense both for pension schemes
and for the DSS. It would be helpful if the DSS issued model safeguarded
rights rules.
The notes on sub-s.(2)(c) show that the
safeguarded rights are intended to include the provision of survivors'
benefits and indexation. This is consistent with the modelling
on protected rights. As regards indexation, it would be convenient
if all protected rights were subject to indexation along the lines
of s. 51 of the PA 1995 even if the pension sharing order was
against a member who had pre-6 April 1997 contracted-out rights.
68C This mirrors s.27(1) of the PSA. It is
not clear what is meant by "identification". Presumably,
it means distinguishing safeguarded rights from other rights of
the ex-spouse.
68G This mirrors the interim arrangements
provisions in the PSA. The 1993 Act provisions also include provisions
which apply where the member dies during the interim period and
is survived by a widow or widower under the age of 75. These are
presumably omitted from s.68G because the question of survivors'
benefits in relation to safeguarded rights is to be dealt with
in regulations. Will this section work if the safeguarded rights
are on a defined benefit basis?
68H The notes to the Bill say that this section
is intended to apply to schemes which do not provide defined benefits
in respect of safeguarded rights. The opening three lines of the
section however say that it does not apply to schemes where the
safeguarded rights involve "the payment of a pension which
takes the form of a defined benefit". The formulation in
the notes is more accurate because, even in a money purchase scheme,
a pension which comes into payment under the scheme will be a
defined benefit when it comes into payment. (The money purchase
pot is used to purchase an annuity of a specific amount and that
annuity is then by definition a "defined benefit").
The notes do not indicate what death benefits
will attach to the qualifying annuity. Presumably these will include
a survivor's reversionary annuity but will there be any provision
for a five-year guarantee?
We note that the definition of "normal
benefit age" in sub-s.(4) is similar to the definition used
in the proposed s.101B (see Clause 12 of the Bill), rather than
s.29(1) of the PSA so that, for example, the safeguarded rights
annuity could be drawn before age 60. The provisions introduced
by Clause 11 of the Bill as regards safeguarded rights do not
deal with the situation if the ex-spouse is already over the "normal
benefit age" when the pension sharing order is made. Nor
do they deal with the situation if the ex-spouse dies before reaching
normal benefit age and starting to draw his or her annuity.
68I If this section and s.68H are to be mutually
exclusive, the words "does not" need to be deleted in
line 3.
68L The notes to the Bill say that this section
complements the provisions for schemes which have ceased to be
contracted-out schemes in ss.52 and 53 of the PSA. However, under
sub-s.(1), it would also apply to a scheme which had never held
a safeguarded rights certificate at all but which had safeguarded
rights. Is the draftsman therefore making provision for the situation
where a contracted-out scheme tries to honour a pension sharing
order through an internal transfer without having obtained a safeguarded
rights certificate?
The more burdensome the requirements for safeguarded
rights are, the less pension schemes will be willing to offer
internal membership. There is a balance to be struck here between
different policy aims.
Schedule 3
The same formula is used in the proposed ss.45B(4),
55A(3) and 55B(4) of the Social Security Contributions and Benefits
Act 1992. In each case, the wording is difficult to understand
and should be clarified.
4.4 Preservation and transfer rights
General
Clause 12 reflects the preservation requirements
contained in Part IV PSA. Revaluation under s.83 PSA seems intended
to apply where the benefits are based on notional pensionable
service. However pensionable service has to cease in order
for that section to apply and you will need to amend it to address
this point as well.
It would be helpful if the Bill could make it
clear that a receiving scheme receiving PCB from another scheme
can separate it and treat it as PCB in their scheme also. Is the
word "indirectly" in the definitions in s.101B intended
to achieve this result?
Presumably the disclosure requirements are to
be extended to require both the trustees of occupational pension
schemes and providers of personal pension schemes to provide details
of the scheme, its funding, and benefit statements to those with
PCB under the scheme.
Clause 12
Clause 12 introduces new ss.101A to 101P in
the PSA. The following are comments on the new sections:
101B "pension credit rights"again
contains a reference to "future" benefits. It would
be helpful if terminology could be made consistent with terminology
in the PSA, which simply refers to "benefits";
"normal benefit age"this
definition refers to the earliest age at which a person is entitled
to receive "a pension" under the scheme by virtue of
PCB. The definition of normal pension age in s.180 PSA refers
to "benefits" and the two definitions should be made
consistent if they are intended to work in the same way;
"pension credit benefit"we
note that this definition does not contain any equivalent to the
link between long service benefit and short service benefit in
the equivalent definition of short service benefit in the PSA.
Thus PCB could be provided as a money purchase benefit before
normal benefit age but as a defined benefit on or after normal
benefit age and we assume this is intentional.
101C This suggests that Clause 12 deals only
with the equivalent to short service benefit, ie benefits accrued
before age 65. There are no equivalent provisions to those contained
in the PSA which describe long service benefit and how that might
be split for a member of a scheme divorcing after age 65. Similarly,
101D(2) mirrors the provisions which apply to short service benefit,
such as alternatives to paying it at normal pension date, which
emphasises that this is intended to deal with a divorcing member
who would otherwise have short service benefit. A separate section
is needed to deal with splitting a pension which is in payment
or where the member is past normal pension date.
101E This is one example of where the use
of "member" may cause confusion in relation to PCB.
"Member" is used in pensions legislation as meaning
someone who is or has been in pensionable service under the scheme
in question. 101E provides that a discharge under s.19 PSA only
applies where the scheme has a liability to provide PCB for or
in respect of "a member" of the scheme. Regulation 3
SI1991/167 provides that a member is a person who has been in
pensionable service under the scheme. Since references to a "member"
of a scheme can become confused when looking at the amendments
made to the PSA by Clause 12, it would be helpful if a different
term could be used for a PCB holder. Legislation could then provide
that such a person was to be treated as if they were a
member for prescribed purposes, which would give you more flexibility.
The definition of deferred member under the PA 1995 seems to be
a catch-all for all other types of member, in which case the MNT
amendments in paragraph 36 of Schedule 4 will not work. Also,
where PCB is in payment and if it has transferred-in the PCB holder
may fall within the "pensioner" definition. To take
another example, s.111 of the PSA allows all Members to pay voluntary
contributions. Is that provision meant to apply to PCB holders?
101F Again, "member" is used, and
is intended to cover the person awarded PCB rights, but it would
be helpful if a definition of member could make this clear.
101H This reflects the provisions of s.93A
PSA which also deals only with final salary occupational pension
schemes. However, we assume that the requirements of money purchase
schemes and personal pension schemes to provide statements of
cash equivalents on request will be extended to cover PCB.
101I We note that a further Guidance Note
from the Faculty and Institute of Actuaries will be required,
as well as the regulations contemplated.
101J Here, as well as elsewhere in the Bill,
penalties are to be imposed by OPRA. Both occupational (both final
salary and money purchase) and personal pension schemes are required
to comply with the provisions of the Bill. OPRA will deal with
occupational pension schemeshow are personal pension schemes
to be dealt with?
Similarly, this section allows occupational
pension schemes to apply to OPRA to extend the period within which
it must comply with the notice to transfer. There is no equivalent
for the personal pension providers.
101K There are no mirror provisions to s.100(3)
PSA, which allows a person to make a further request for a transfer
if the original one is withdrawn. We assume that it is intended
to allow this within the confines of not allowing too frequent
transfer requests.
101L We note the intention to lay regulations
similar to 8 and 9 of SI1996/1847. These require discretionary
benefits (particularly pension increases) to be taken into account
in the calculation of cash equivalents unless the trustees direct
the cash equivalent shall not take account of the discretionary
benefits. When these regulations are laid, they should make it
clear that even if the discretionary benefits are included for
calculations of "ordinary " cash equivalents, it is
a separate issue whether they should be included for the calculations
of cash equivalents of PCB. This is a separate category of member
under the scheme, and trustees/employers may not wish to benefit
PCB holders with discretionary increases at all, but if an established
custom does arise, they may not feel it is justified to capitalise
those discretionary benefits for those who take external transfers,
even if they do for other members. Requiring them to do so may
result in PCB holders being excluded from discretionary benefits.
101N It might be helpful to have a provision
preventing a divorcing member transferring his/her benefit wholly
to the spouse where there is a potential claim by the employer
against the member under s.91 PA 1995.
101P Subs. (4). An unfunded top up scheme
may insure death benefits. It would be helpful to make it clear
that death benefits are excluded for the purpose of considering
"liabilities" for this purpose.