House of Lords - Explanatory Note
Welfare Reform And Pensions Bill - continued          House of Lords

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Clause 11: Effect of bankruptcy on pension rights: approved arrangements

Where a person becomes bankrupt, his assets usually vest in the trustee in bankruptcy. However, the position of pensions on bankruptcy was considered by the Pensions Law Review Committee (PLRC), set up under the chairmanship of Professor Goode. The Committee's report, published in 1993, recommended that pension rights (as opposed to the pension payments themselves) should not be counted as an asset in bankruptcy. (The report was published as Pension Law Reform: The Report of the Pensions Law Review Committee - Cmd 2342-1.)

The recommendations on pensions and bankruptcy in the Report were accepted by the Government (Security, Equality, Choice: The Future for Pensions - Cmd 2594). The Committee's recommendations formed the basis for sections 91 to 95 of the Pensions Act 1995.

However, the provisions on bankruptcy in the Pensions Act only apply to occupational pension schemes. No equivalent protection for other types of pension, for example personal pensions, was included in the Act. The measures in the Bill provide statutory protection on bankruptcy for pension rights in approved schemes, as defined.

  • Subsection (1) provides that where a bankruptcy order is made against a person, any rights that he has in an approved pension arrangement are to be excluded from his estate for the purposes of the bankruptcy proceedings.

  • Subsections (2) and (3) define the expression "approved pension arrangement". Broadly, it is a pension arrangement recognised for tax purposes under Part XIV of the Income and Corporation Taxes Act 1988. Because of the variety of pension arrangements that exist, a regulation-making power is included as a safeguard to protect arrangements that might fall outside a strict interpretation of the definitions contained in paragraphs (a) to (g) of subsection (2).

  • Subsections (4) and (5) provide for circumstances where a person has pension rights in a pension scheme that has applied to the Inland Revenue for approval but not yet received a decision. If approval is still being sought on the date that a bankruptcy order is made against a person, and subsequently the Inland Revenue decide not to grant approval, then the bankrupt's pension rights in that scheme are to vest in the trustee in bankruptcy (subject to regulations under clause 12).

  • Subsections (6) to (8) provide for the circumstances where a bankrupt has pension rights in a pension scheme and the Inland Revenue withdraws approval from that scheme. If the Inland Revenue issue a notice withdrawing approval after a bankruptcy order is made and the effective date for the withdrawal of approval is before the date of the bankruptcy order itself, then any rights that the bankrupt has in the pension scheme are to vest in the trustee in bankruptcy (again subject to regulations under clause 12).

Schedule 13 makes a number of repeals as a consequence of this clause and clause 12. (The Schedule is introduced by clause 76.)

Clause 12: Effect of bankruptcy on pension rights: unapproved arrangements

Regulations made under this clause will enable rights of a person under an unapproved pension arrangement to be protected in the same way as a person's rights under an approved pension arrangement in prescribed circumstances. The intention is to cover circumstances where the other pension benefits that the bankrupt will receive are likely to be inadequate to meet his reasonable needs and those of his dependants

Clause 13: Sections 11 and 12: Application to Scotland

This clause applies clauses 11 and 12 to Scotland.

Clause 14: No forfeiture on bankruptcy of rights under pension schemes

Currently, where a person becomes bankrupt, occupational pension schemes (approved and unapproved) protect the person's benefits by means of forfeiture arrangements. The member's benefits are forfeit to the scheme, which can then pay them on a discretionary basis to the member or his family.

If these arrangements were left untouched it would give better protection to unapproved pensions because unapproved pensions could continue to be protected by a forfeiture clause. That would tilt the balance against the interests of creditors. Consequently, this clause provides that pension schemes of all kinds will no longer be able to forfeit pension rights on a member's bankruptcy.

Clauses 15-16: Excessive pension contributions made by persons who have become bankrupt

Clause 11 ensures that if someone becomes bankrupt, their tax approved pensions are protected. However, it is possible that people could put large amounts of their assets into pensions in order to keep them out of the reach of creditors. So clauses 15 and 16 (and paragraph 64 of Schedule 12) give the power to recover excessive contributions from a pension so that they can be used for the benefit of creditors. These measures were added to the Bill as amendments at Commons Report stage (Hansard vol. 331 col. 701).

Clause 15 amends the Insolvency Act 1986 by replacing sections 342A to 342C; clause 16 makes parallel provision for Scotland, by replacing sections 36A to 36C of the Bankruptcy (Scotland) Act 1985. References below are to the new sections 342A to 342C in clause 15.

Application for a court order (new section 342A)

Where an individual has been made bankrupt and the trustee in bankruptcy has reason to believe that excessive contributions have been made to the pension, he can apply to the court for an order to recover the excessive contributions (subsection (1)).

The test the court has to consider is whether the making of contributions has unfairly prejudiced creditors (subsection (2)). Contributions that have unfairly prejudiced creditors are termed "excessive contributions". Subsection (6) provides that the court must consider two matters in particular when considering whether contributions are excessive:

  • whether the making of any of the contributions was for the purpose of putting assets beyond the reach of creditors;

  • whether the total amount of contributions was excessive in the light of the bankrupt's circumstances when the contributions were made.

If the court is satisfied that excessive contributions have been made, subsection (2) provides that the court may make an order to restore the position to what it would have been if the excessive contributions had not been made.

Court orders (new sections 342B and 342C)

Section 342B gives more details about the nature of an order made under subsection(2) of section 342A. Subsection (1) says that the order may include provision:

  • requiring the pension scheme to pay an amount to the trustee in bankruptcy;

  • reducing any pension benefits that the individual and his family are entitled to; and

  • for recovery of costs incurred by the scheme in supplying information for the purposes of the application and in complying with the order.

Subsection (3) clarifies that an order to restore the rights of an individual to what they would have been, had the excessive contributions not been made, does not apply to rights arising out of a pension sharing order or agreement.

Subsection (4) limits the amount which the pension scheme can be required to pay to the trustee in bankruptcy to the lesser of:

  • the amount of the value of the excessive contributions; or

  • the current value of the individual's pension rights under the scheme.

Subsections (5) and (6) provide that, where an order is made for the pension scheme to pay an amount to the trustee in bankruptcy, the order must provide for a corresponding reduction in the individual's rights under the scheme.

An order under section 342A is binding on the trustees or managers of the pension scheme concerned, and overrides the scheme's rules so far as is necessary (section 342B(7)).

Section 342C provides supplementary details and clarification:

  • In particular, subsection (1) of section 342C requires the trustees or managers of the pension scheme to give the trustee in bankruptcy information about the individual's pension arrangements for the purposes of making an application to the court.

  • Subsection (2) provides that any other provisions or enactments which prevent assignment of rights, do not apply to a court which is making an order restoring the position to what it would have been had excessive contributions not been made.

  • Subsections (4) and (5) provide for regulations and guidance concerning the calculation of payments which must be made in respect of an individual's rights under the pension scheme and the calculation of the subsequent reduction in that person's rights under the scheme.

Pension sharing and bankruptcy

Paragraph 64 of Schedule 12 covers the situation where both pension sharing and bankruptcy are involved: where in the run-up to a person's bankruptcy, his pension rights were the subject of a pension sharing order or agreement.

Paragraph 64 inserts a new section342D in the Insolvency Act 1986. This applies only to England and Wales; the Government has announced that it intends to bring forward a parallel provision for Scotland at a later date.

Broadly such a situation may occur where a couple divorce and share the pension. If, subsequently, the scheme member becomes bankrupt and a court rules that his pension rights are based on excessive contributions, the pension share awarded to his former spouse, or a portion of it, may in limited circumstances be available to his trustee in bankruptcy.

Current insolvency law provides that, subject to certain time limits, financial settlements on divorce (that is, settlements applying to the house, the car or other assets) can be re-opened if the settlement is found by a court to be transacted at an undervalue or a preference. "Undervalue" means an asset has been transferred to another person for less than full value. "Preference" means that an asset has been given to one creditor in preference to another. That is to say, they deprive creditors of funds which would otherwise have been theirs.

The policy linkages between pension sharing and bankruptcy build on this existing legislation. The pension sharing order or agreement will only be able to be unpicked if:

  • it can be shown to a court that the pension sharing order or agreement was at an undervalue or amounted to a preference (i.e. had the effect of defeating creditors); and

  • the pension rights of the bankrupt at the time of the pension share were attributable to excessive contributions; and

  • a full recovery of the bankrupt's pension share still leaves some excessive contributions outstanding; and

  • the transfer to the former spouse under the pension share could not have been made from non-excessive contributions.

In practice, the way that the provision will work will be that the court will examine the contribution history of the bankrupt and will come to a view about the value of the excessive contributions. As a result of the pension share, the value of the bankrupt's remaining pension rights may not be sufficient to enable the full amount of the excess contributions to be recovered from that pot. In such a case, the trustee in bankruptcy might look to the former spouse's pension share, and make an application to the court for an order for recovery. However, the application could only succeed to the extent that the court was satisfied that the pension sharing order/agreement in question amounted to a transaction at an undervalue or a preference.

If the court should find the order/agreement to have been to any extent at an undervalue or a preference, the court will be able to order that that part of the former spouse's pension share should be passed to the trustee in bankruptcy.

  • Subsections (1) and (2) of the new section 342D define what is meant by a pensions sharing transaction in this context.

  • By virtue of subsections (3) to (8), the court first has to decide what proportion of the pension rights at the time of the split were due to contributions made by the bankrupt or on his behalf. If any of the rights were a result of such contributions, the court then has to decide whether any of these unfairly prejudiced creditors. If, after disregarding any such unfair contributions, the remainder is sufficient to fund the share that passed to the former spouse, then no recovery can be made from the former spouse's share. If any of the share assigned to the former spouse could not have been funded from "fair" contributions, that amount is considered to have arisen from excessive contributions - and is available for recovery.

Clause 17: Compensating occupational pension schemes

The compensation provisions were introduced in the Pensions Act 1995, and are administered by the Pensions Compensation Board (PCB). The PCB pays compensation to an occupational pension scheme if it has suffered a reduction in its assets through dishonest action, the remaining assets are below a set level and the sponsoring employer is insolvent. The level to which a scheme's assets must fall before a claim can be made, and the amount of compensation that the PCB can pay, is set out in the Pensions Act 1995 and the Occupational Pension Schemes (Pensions Compensation Provisions) Regulations 1997.

Currently, the value of a scheme's assets must fall below 90% of the amount of its total liabilities before a claim may be made. The maximum amount of compensation payable is that needed to restore the scheme to the 90% threshold, or 90% of the loss-whichever is less. (In salary-related schemes the funding level is measured using the valuation method for the Minimum Funding Requirement (MFR), which sets a benchmark funding level that schemes are required by law to attain.)

  • Subsections (1) and (2) reduce this limitation on occupational pension schemes applying for compensation, by amending the rule in the 1995 Act.

    Instead of having to fall below 90% of its total liabilities, a scheme will be eligible for compensation if its assets fall below a new "protection level". This is the combined value of 100% of its most urgent liabilities and 90% of its other liabilities. The most urgent liabilities include those to its members already receiving a pension, and those to its members within 10 years of retirement (who will be defined in regulations). This latter group already has to be identified separately for the statutory MFR valuation. Taking a power to prescribe it allows flexibility for compensation calculations to be adjusted in line with any future changes to the MFR basis.
  • Subsections (3) to (6) correspondingly increase the maximum amount of compensation that may be paid, in line with the new threshold.

These changes are intended to ensure that more members of schemes receive a greater proportion of their benefits than under the current compensation provisions, should funds be lost because of theft or fraud.

Clause 18: Miscellaneous amendments

This clause brings into force Schedule 2 (see below), which makes various minor amendments to the Bankruptcy (Scotland) Act 1985, the Insolvency Act 1986, the Pension Schemes Act 1993, the Pensions Act 1995 and the Employment Rights Act 1996.

Schedule 2: Miscellaneous amendments

Paragraphs 1-2: Income payments orders against pension payments

These paragraphs provide that income payment orders can still be made despite anything in clauses 11 and 12 of the Bill by amending section 32(2) of the Bankruptcy (Scotland) Act 1985 and section 310(7) of the Insolvency Act 1986.

Income payments orders are orders made by a Court against a bankrupt and stipulate that a percentage of his income must be surrendered and paid to his creditors. Pension income actually in payment is included in the calculation of the bankrupt's income.

The revised wording makes it clear that pension "rights" in approved schemes, which would be protected on bankruptcy, do not extend to pension "income". This ensures that income payment orders can still be made in respect of pension income.

Paragraph 3: Extended meaning of "personal pension scheme"

The current definition of a personal pension in section 1 of the Pension Schemes Act 1993 is couched in terms of a scheme capable of providing benefits on death or retirement in respect of employed earners. This definition could exclude a scheme (including a stakeholder pension scheme - see clauses 1-8) set up exclusively for a group of self-employed earners. That would leave some self-employed earners with less statutory protection than that enjoyed by employed earners. This amendment addresses that.

As a result of the amendment, parts of sections 73, 96 and 181 of the Pensions Schemes Act 1993, and part of section 126 of the Scotland Act 1998, are repealed by Part I of Schedule 13 (introduced by clause 82).

Paragraph 4 : Revaluation of earnings factors: meaning of "relevant year"

In order to protect the pension position of individuals who leave their pension schemes before state pension age, the Pension Schemes Act 1993 requires schemes to revalue Guaranteed Minimum Pension (GMP) rights in line with certain prescribed percentages to keep pace with inflation. The provisions governing one particular method of revaluation, known as fixed rate revaluation, do not allow a GMP to be revalued after April 1997.

This paragraph removes that restriction. It provides for a Guaranteed Minimum Pension to be revalued by the prescribed percentage for each year in the period between the earner's leaving the scheme and reaching state pension age (currently 65 for men and 60 for women).

Paragraph 5 : Interim arrangements

Section 28 of the Pension Schemes Act 1993 gives holders of personal pensions the right to an interim arrangement in respect of protected rights when their pensions mature. Interim arrangements for non-protected rights are permitted by section 58 of and Schedule 11 to the Finance 1995. Under an interim arrangement, instead of immediately using the accumulated fund to buy an annuity, the pension holder may withdraw an income from the fund, within specified maximum and minimum limits, and defer the purchase of an annuity. When the member reaches the age of 75, the remainder of the fund must be used to buy an annuity. However, unless the fund is sufficiently large (at least £100,000-£200,000) an interim arrangement could deplete the fund to a point where there was insufficient remaining to buy an annuity that would provide a reasonable level of income from age 75 onwards.

There is a power (section 145 of the Pensions Act 1995) to extend the availability of interim arrangements to cover protected rights in occupational schemes, but at present such an extension would create a requirement on schemes to offer such arrangements. For this reason the power to extend the availability of interim arrangements in this way has not been used.

This paragraph amends section 28 of the Pension Schemes Act 1993 to allow the providers to decide whether or not to supply interim arrangements. It is intended that the power to extend the availability of interim arrangements to protected rights in occupational schemes will then be used.

Paragraph 6: Effect of certain orders on guaranteed minimum pensions

This paragraph amends section 47 of the Pension Schemes Act 1993. Section 47 contains provisions in relation to pensions that are contracted out of SERPS. Broadly, the position is that where a person is entitled to a Guaranteed Minimum Pension (GMP) from an occupational pension scheme, his/her SERPS entitlement is reduced by the amount of GMP. That prevents double provision.

The paragraph provides that where an order has been made to recover excessive pension contributions (see commentary on clauses 15 and 16), the full value of the GMP will be assumed for the purposes of the SERPS calculation. Hence SERPS would still be reduced by the full amount, and the state will be prevented from making up any shortfall in the occupational pension which has occurred as a result of the recovery of excessive contributions.

Paragraph 7 : Mandatory payment of contribution equivalent premium

Paragraph 7(1)

When a person leaves an occupational salary-related scheme with less than two years' service (or dies having less than two years' service) the scheme may refund his or her contributions rather than providing him or her (or his or her widow or widower) with a pension. Where this happens the scheme trustees pay a "contributions equivalent premium" (CEP) which restores the leaver's (or widow's or widower's) rights in the state earnings-related scheme (SERPS) for that short period of service. The policy is that payment of a CEP should be mandatory where there are state scheme rights to be restored.

The Pensions Act 1995 introduced new rules for contracted-out schemes, and also amended the legislation dealing with CEPs to take account of those new rules. Section 55 of the Pension Schemes Act 1993, as amended by the 1995 Act, now deals with the payment of CEPs. However, that section does not provide for the mandatory payment of CEPs in certain circumstances.

Paragraph 7(1) amends section 55 of the 1993 Act to make such provision. This paragraph also provides that the Inland Revenue must be notified by the prescribed person where a CEP is required to be paid, and introduces a power to set out how and when such notification must be made.

Paragraph 7(2)

The Northern Ireland Act 1998 excepts certain matters from the legislative and executive powers of the Northern Ireland Assembly, including matters relating to the payment of CEPs. Therefore, the Department of Social Security is responsible for introducing any amendments relating to CEPs to the Pension Schemes (Northern Ireland) Act 1993. Paragraph 7(2) makes amendments to that Act equivalent to those made by paragraph 7(1) to the Pension Schemes Act 1993.

Paragraph 8: Payment by Secretary of State of unpaid pension contributions

The Secretary of State can make payments from the National Insurance Fund in respect of contributions to occupational pension schemes that an employer, who has become insolvent, was responsible for but failed to pay. There are provisions to recover these payments from the assets of the insolvent employer. However, these were not amended to reflect the new provisions for contracting out that came into effect from April 1997.

This paragraph amends Schedule 4 to the Pensions Schemes Act 1993, to ensure that certain payments will continue to be recoverable from the insolvent employer's assets as a priority debt where the employer has become insolvent.

Paragraphs 9 to 11: Supervision by the Occupational Pensions Regulatory Authority

Paragraph 9

This paragraph amends section 3 of the Pensions Act 1995. It widens the scope of section 3(2)(b) of the Pensions Act 1995 so that it can apply to, for example, stakeholder pension schemes, provided for in this Bill. At present section 3 refers only to Part I of the 1995 Act. The paragraph extends the reference to cover all of that Act and any other Act (which would include this Bill after Royal Assent).

Paragraph 10

Section 8(4) of the Pensions Act 1995 currently allows OPRA to appoint someone with full powers to act as a trustee, and at the same time order that the other trustees on the board cannot exercise any of their powers. It also allows OPRA to appoint trustees who have restricted powers.

However, the legislation does not make it clear that OPRA can appoint a trustee who has restricted powers and at the same time prevent the other trustees from exercising their powers only in the areas of those restricted powers. For example OPRA may wish to appoint a trustee who, because of the inexperience of the other trustees, would be solely responsible for decisions relating to the scheme's investment strategy. Other day to day administration of the scheme could be left to the remaining trustees.

Paragraph 10 clarifies the situation. It allows OPRA to appoint a trustee with restricted powers and to order that those powers may be exercised to the exclusion of the other trustees on the board.

Paragraph 11

OPRA has the power, under section 10 of the Pensions Act 1995, to impose fines for certain breaches of the legislation. It also has the power to recover the penalty. However, if someone refused to pay, and OPRA had to enforce the penalty through the courts, it would currently have to take out a debt action in the courts.

To avoid having to take out a debt action, the County Court rules provide a fast-track system, which the amendment will allow OPRA to use. This means that to enforce an unpaid penalty OPRA will only have to certify the amount of the unpaid penalty to the County Court and file a copy of the penalty. The Court could then issue a court order (or a warrant in Scotland) to allow the penalty to be enforced.

Paragraph 12: Occupational pension schemes: institutions who may hold money deposited by trustees etc.

To ensure that pension schemes do not keep money in an employer's bank account, which might put members' funds at risk, section 49(1) of the Pensions Act 1995 requires trustees to keep pension fund money in a separate account at an institution authorised under the Banking Act 1987.

Similarly, where an employer acts as paying agent for the trustees, section 49(5) requires the employer to keep such money in a separate account at an authorised institution.

Reference to the Banking Act 1987 has the effect of preventing money from being kept in building societies because they are exempt from the requirement to apply for authorisation under the Banking Act 1987.

This paragraph amends section 49(1) and (5) of the Pensions Act 1995 to include building societies and European authorised institutions as institutions in which pension fund money may be held.

Paragraph 13: Annual increase in rate of pension

Once occupational pensions become payable, schemes are required to increase them annually. This applies to all pension rights which have accrued on or after 6 April 1997, and to certain rights accruing on or after 5 April 1988. The existing legislation requires an occupational scheme to apply the annual increase by reference to a Revaluation Order which is published each year, based on the published Retail Price Index percentage for the month of September. The Order is not published until the following January. A procedure to advise any scheme which needs to make an increase before the order is published has been in operation.

This paragraph amends section 54 of the Pensions Act 1995 to make it clear that the reference period to be used by schemes to determine the percentage rate of annual increases to occupational pensions in payment is the period covered by the most recently published Revaluation Order.

Paragraph 14: Occupational pension schemes: certificates etc. relating to minimum funding requirement

Paragraph 14(1)

The Minimum Funding Requirement (MFR) sets a benchmark funding level that salary related schemes are required by law to attain. These schemes are required to have regular MFR valuations. Following each valuation, the rates of contributions payable over the next five years are set out in a schedule of contributions. The rates must be certified by the scheme's actuary as adequate to ensure that funding will meet the MFR provisions. At present this has to be done by reference to the funding level on the date the actuary certifies the schedule. This requires some complicated calculations because the rates have to be agreed before the actuary can certify them. This change will simplify the procedures by enabling the actuary to certify the contributions by reference to the funding level at an earlier date. The power to prescribe the appropriate date allows flexibility to adjust it if there are further operational difficulties.

Paragraph 14(2)

Where there has been a deterioration in the funding level of a salary related scheme and it is below the MFR, the trustees must prepare a report setting out the reasons for the deterioration. This change will introduce powers for regulations to set out the time limit in which the trustees must prepare that report. This is consistent with many other provisions in the Pensions Act 1995 relating to time limits for compliance, enabling the period to be adjusted in the light of practical experience. The Government intends to consult with the pensions industry on what the period should be, but it is expected to be three months.

Paragraph 15: Excess assets of wound up schemes

Section 77 of the Pensions Act 1995 sets out the rules as to how excess assets are to be distributed where a scheme is winding up and where there is a scheme rule prohibiting the distribution of assets to the employer. Trustees are required to use any excess assets to enhance members' benefits up to certain limits. Any assets left over after this may then be distributed to the employer, even though the scheme rules would normally prevent this.

Where trustees fail to comply with these requirements, OPRA can prohibit the trustees from being trustees of the scheme but cannot impose a civil fine. The amendment inserts a reference to section 10 of the Pensions Act 1995 (the power allowing OPRA to impose civil fines) into section 77(5). This means that where a trustee of an occupational pension scheme fails to follow the rules for distribution of excess assets, and where he makes a payment to the employer in contravention of the section, OPRA will be able to impose a penalty on him.

Paragraph 16: Pensions Compensation Board

The Pensions Compensation Board (PCB) is the body that administers the occupational pensions compensation provisions. It is required to produce an annual report and annual accounts. Currently these two documents do not cover the same annual period. The annual report covers a 12 month cycle which started from 1 August, the date the PCB was formed. The accounts cover the financial year cycle, ending on 31 March.

This paragraph amends section 79(1) of the Pensions Act 1995 to bring the annual report into the same cycle as the accounts, and allows for the first annual report after the change to cover a shorter period, to allow the two cycles to coincide.

Paragraph 17: Diligence against pensions: Scotland

For the purposes of debt recovery, it is intended that occupational pensions should be treated as earnings. Hence there is special provision in the Pensions Act 1995 to allow attachment of earnings orders against occupational pensions. This paragraph allows occupational pensions to be subject to arrestments of earnings (the Scottish equivalent of attachment of earnings orders); this is currently precluded by the Pensions Act 1995.

Paragraph 18: Pensionable service

This paragraph amends section 124(3) of the Pensions Act 1995 to allow occupational pension schemes to round the length of pensionable service (for example, to round two weeks of pension up to a month when calculating the final pension). The pension based on these rights would then be increased annually by the published Retail Price Index. This will prevent occupational pension schemes having to identify any rounded rights separately and exclude them from the annual increase.

Paragraph 19: Occupational pension schemes: rights of an employee who is director of a corporate trustee

This paragraph amends sections 46, 58 and 102 of the Employment Rights Act 1996, which provides for paid time off for performance of trustee duties and for training, and for the rights not to suffer detriment in employment or be unfairly dismissed. It ensures that the rights in those sections apply to employees who are directors of a trust company in the same way as they do to employees who are individual trustees.

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Prepared: 24 May 1999