2004 Chapter 35

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These notes refer to the Pensions Act 2004 (c.35) which received Royal Assent on 18 November 2004

PENSIONS ACT 2004

EXPLANATORY NOTES

INTRODUCTION

1.     These explanatory notes relate to the Pensions Act which received Royal Assent on 18 November 2004. They have been prepared by the Department for Work and Pensions in order to assist the reader of the Act. They do not form part of the Act and have not been endorsed by Parliament.

2.     The notes need to be read in conjunction with the Act. They are not, and are not meant to be, a comprehensive description of the Act. So where a section or part of a section does not seem to require any explanation or comment, none is given.

CONTENTS

Summary and Background

The Act

Territorial Extent

Commentary on Sections

     Part 1 - The Pensions Regulator

     Part 2 - The Board of the Pension Protection Fund

• Chapter 1 - The Board

• Chapter 2 - Information relating to employer's insolvency etc.

• Chapter 3 - Pension Protection

• Chapter 4 - Fraud Compensation

• Chapter 5 - Gathering information

• Chapter 6 - Reviews, Appeals and Maladministration

• Chapter 7 - Miscellaneous

     Part 3 - Scheme Funding

     Part 4 - Financial Planning for Retirement

     Part 5 - Occupational and Personal Pension Schemes: Miscellaneous      Provisions

     Part 6 - Financial Assistance Scheme for members of certain pension      schemes

     Part 7 - Cross-border activities within European Union

     Part 8 - State Pensions

     Part 9 - Miscellaneous and Supplementary

Commencement

Hansard References

Glossary of Selected Terms

SUMMARY AND BACKGROUND

3.     In Spring 2002 the then Secretary of State for Social Security asked Alan Pickering to look at how the administration of occupational pension schemes could be simplified. Ron Sandler was jointly commissioned by the Chancellor of the Exchequer and the Secretary of State to review retail savings in the same period. A Quinquennial review of the Occupational Pensions Regulatory Authority (Opra) and a National Audit Office (NAO) Value for Money study into how Opra worked took place during 2002. The outcomes of all these separate reviews showed that major themes for pension reform were emerging.

4.     In December 2002 the Government published a Green Paper entitled Simplicity Security and choice: Working and saving for retirement [Cm 5677], and its proposals for simplification of the tax treatment of occupational and personal pensions. In response to the ensuing consultation, in June 2003 the Secretary of State for Work and Pensions published Working and saving for retirement: Action on occupational pensions [Cm 5835], which focussed on the need for member protection to rank alongside the other themes. It presaged primary legislation across the areas consulted, including a Pension Protection Fund to compensate members of defined benefit and hybrid schemes whose employers become insolvent leaving the pension scheme unable to meet its liabilities. The European Directive on the Activities and Supervision of Institutions for Occupational Retirement Provision (2003/41 EC) was adopted in September 2003 for implementation by September 2005. In February 2004 the Secretary of State for Work and Pensions carried forward broader policy on financial retirement planning in Simplicity, security and choice: Informed choices for working and saving [Cm 6111].

5.     These various strands of development have come together in this Pensions Act. Its main provisions are as follows.

6.     Part 1 establishes a new Non-Departmental Public Body (NDPB), the Pensions Regulator, to replace Opra. This will take over Opra's responsibility for regulation of occupational pensions, and specific functions relating to personal pensions and stakeholder pensions. Like Opra, the Regulator will be funded by a levy on schemes. Through this Act the Regulator will assume a number of new functions. A new tribunal - the Pensions Regulator Tribunal- will be established to handle references from determinations made by the Regulator.

7.     The Act also establishes in Part 2 a second new NDPB, the Board of the Pension Protection Fund; to provide compensation for members of defined benefit (normally final salary) and hybrid occupational pension schemes in the event of the scheme's sponsoring employer going insolvent and leaving the pension scheme with insufficient funds to pay its members at least the level of PPF compensation. The PPF will be funded by levies on relevant schemes, to be set by the Board of the Pension Protection Fund subject to parameters on the level and structure set by Parliament, and also by taking in any of the scheme's remaining assets, including any debt due by the employer, on insolvency. The external appeals body for the Board of the Pension Protection Fund's decisions will be the PPF Ombudsman. The Board of the Pension Protection Fund will subsume the functions of the Pensions Compensation Board.

8.     Part 3 replaces the Minimum Funding Requirement for defined benefit occupational schemes with scheme-specific funding requirements allowing schemes greater flexibility in developing funding strategies appropriate to their circumstances.

9.     Part 4 introduces a new, explicit function of the Secretary of State to promote and facilitate financial retirement planning. It provides for powers which may be exercised to require employers to provide their employees with access to pensions planning information and advice through the workplace and to be able to compel occupational or personal pension schemes to provide combined pension forecasts incorporating state pension data.

10.     Part 5 deals with a number of matters relating to the administration of occupational and personal pension schemes. Amongst these it changes the rules on limited price indexation for occupational and personal pensions, reduces the cap from 5% to 2.5% for defined benefit schemes and removes the statutory requirements for limited price indexation for pensions derived from money purchase benefits. It introduces a minimum level of pension protection for employees involved in TUPE transfers where they had access to an occupational pension scheme pre-transfer. It introduces a requirement for trustees to have appropriate knowledge for the performance of their duties, in response to the recommendations from the Myners Report on institutional investment.

11.     Part 6 provides for financial assistance to be given to members of certain pension schemes.

12.     Part 7 makes provision about cross-border activities within the European Union.

13.     Part 8 alters the position of pensioners who defer taking their State Retirement Pension by bringing forward an increase in increments originally planned for 2010. This will provide a higher weekly income on retirement. Provision is made for a new option, a lump sum, as an alternative to increments.

14.     There are a number of measures providing greater flexibility and simplification in pension scheme administration. Throughout Parts 5 and 8 there are a number of provisions clarifying existing pensions law.

THE ACT

15.     The Act consists of nine parts, as follows:

• Part 1 - The Pensions Regulator;

• Part 2 - The Board of the Pension Protection Fund;

• Part 3 - Scheme Funding;

• Part 4 - Financial Planning for Retirement;

• Part 5 - Occupational and Personal Pension Schemes: Miscellaneous Provisions;

• Part 6 - Financial Assistance Scheme for members of certain pension schemes;

• Part 7 - Cross-border activities within European Union;

• Part 8 - State Pensions;

• Part 9 - Miscellaneous and Supplementary.

TERRITORIAL EXTENT

16.     The Act extends to England and Wales and to Scotland with the exception of section 106 (legal assistance scheme) which only extends to England and Wales. The following provisions of the Act also extend to Northern Ireland:

COMMENTARY ON SECTIONS

PART 1 - THE PENSIONS REGULATOR

Summary

17.     The Occupational Pensions Regulatory Authority (Opra) will be replaced by a new Non-Departmental Public Body (NDPB), the Pensions Regulator (referred to hereafter in the Act and these Notes as the Regulator).

18.     Opra's existing powers will be carried forward to the Regulator. In addition the new regulatory body will have statutory objectives and functions that provide a framework for its activity.

19.     The Regulator will aim to operate a targeted and proportionate regulatory regime, applying greater regulatory scrutiny where it considers members benefits are most at risk. This approach will be supported by increased powers to gather, retain and share information. The information gathered will be subject to analysis to help identify those schemes where members' benefits are more likely to be at risk.

20.     The Act will introduce a range of new powers including:

• issuing improvement notices or third party notices to remedy breaches;

• the ability to freeze a scheme to protect members' benefits or scheme assets whilst investigations by the Regulator take place;

• power to issue a contribution notice, or financial support directions and to make orders in respect of transactions at an undervalue;

• increased powers covering the prohibition, suspension and removal of trustees;

• increased whistleblowing responsibilities and duties to report certain events.

21.     The Regulator will also be able to issue codes of practice. This will provide those involved in pensions, with practical guidance in relation to their duties and responsibilities under pensions legislation, thus assisting schemes in improving compliance and encouraging best practice. In certain areas the Regulator will be legally obliged to provide codes of practice, for example, on disclosure of information to scheme members.

22.     The Act establishes a new tribunal - the Pensions Regulator Tribunal - to hear references from the Regulator's determinations.

Establishment

Section 1: The Pensions Regulator

23.     This section establishes the Pensions Regulator.

Sections 2 and 3: Membership of the Regulator; Further provision about the Regulator

24.     Section 2 deals with membership of the Regulator. The Regulator will consist of: a chairman (who will be appointed by the Secretary of State); a Chief Executive; and at least five other members appointed by the Secretary of State, after consulting the chairman (subsection (1)(c)). The chairman must not be appointed from the staff of the Regulator (as defined in paragraph 7 of Schedule 1) or be the chairman of the Board of the Pension Protection Fund. By virtue of subsection (3) at least two of the members of the Regulator appointed under subsection (1)(c) are to be appointed from the staff of the Regulator.

25.     The inclusion of executive members on the Board implements a recommendation of Derek Higgs' review for the Chancellor of the Exchequer and the Secretary of State for Trade and Industry of the role and effectiveness of non-executive directors (January 2003) which states:

"The Board should include a balance of executive and non executive directors (including independent non-executives) such that no individual or small group of individuals can dominate the board's decision taking. (Annex A, item 3 - Board Balance and Independence)."

26.     The executive members of the Regulator are to be the Chief Executive and the two or more members appointed from the staff of the Regulator under subsection (1)(c). All other members of the Regulator will be non-executive members. Subsection (4) provides that in appointing members under subsection (1)(c) the Secretary of State must ensure that the majority of members of the Regulator are non-executive members. No member of the staff of the Board of the Pension Protection Fund is eligible for appointment as a member of the Regulator.

27.     Schedule 1 (which is introduced by section 3) contains further provision about the constitution of the Regulator

Schedule 1: The Pensions Regulator

28.     Paragraphs 1-3 set out the terms of appointment and tenure for members of the Regulator. These paragraphs set out that a person will cease to be a member of the Regulator if:

• in the case of the chairman of the Regulator, he ceases to hold this position or if he becomes a member of staff of the Regulator;

• in the case of any other non-executive member, he becomes a member of staff of the Regulator;

• in the case of an executive member appointed as one of the five other members of the Regulator appointed by the Secretary of State after consulting the chairman (under section 2(c)), he ceases to be a member of staff of the Regulator;

• in the case of the Chief Executive, he ceases to be employed as such.

29.     Paragraph 3 sets out that someone will not be prevented from being a member of the Regulator if they have previously been such a member.

30.     Paragraphs 4-6 set out provisions on remuneration which allow for the Secretary of State to determine the remuneration of the non-executive members of the Regulator, and allow for the Regulator to pay (as determined by the Secretary of State) allowances, gratuities or pensions to those who are or have been non-executive members of the Regulator. These paragraphs also provide for the payment of compensation (where it appears to the Secretary of State that such compensation is correct in the circumstances) to a non-executive member of the Regulator who ceases to hold such a position other than at the end of his term of office.

31.     Paragraphs 7 -10 provide that the staff of the Regulator consists of the Chief Executive as appointed under paragraph 8; the other employees of the Regulator as appointed under paragraph 9; and any additional staff made available by the Secretary of State under paragraph 10.

32.     Paragraph 11 sets out that in order to appoint a chairman of the Determinations Panel, the chairman of the Regulator must establish an appointments committee (consisting of a chairman (which is to be one of the non-executive members of the Regulator) and one or more people appointed by the chairman of the Regulator). The appointments committee will nominate a suitable person for the office of chairman of the Determinations Panel.

33.     Paragraph 12 provides that the Regulator is to determine the terms and conditions of appointment of members of the Determinations Panel, subject to the approval of the Secretary of State. A person is automatically removed from the Panel if, in the case of the Chairman of the Panel, he ceases to hold that office, or for any other member, he becomes a member of the Regulator or a member of staff of the Regulator. In conjunction with section 9(5), this ensures that members of the Determinations Panel cannot simultaneously be members of either the Regulator or its staff. However, former members of the Panel, the Regulator, or the staff of the Regulator are eligible to sit on the Determinations Panel.

34.     Paragraphs 14-16 allow the Regulator to remunerate members of the Determinations Panel at a level determined by the Secretary of State. They also enable the Regulator to pay (at levels determined by the Secretary of State) allowances, gratuities or pensions to those who are or have been members of the Panel. These paragraphs also provide for the payment of compensation (where it appears to the Secretary of State that such compensation is correct in the circumstances) to a member of the Panel who ceases to hold such a position other than at the end of his term of office.

35.     Paragraph 17 enables the Regulator to establish committees for any purpose. Such committees may establish sub-committees. Provision is made as to the membership of such committees. "Committees of the Regulator" is also defined for the purposes of the Schedule.

36.     Paragraphs 18 and 19 enable the Regulator to determine its own procedures. Determination Panel procedures may be determined only by the Panel. The Secretary of State has the power to make regulations prescribing the Regulator's procedures, which would include the Determination Panel's proceedings.

37.     Paragraph 20 allows the Regulator to authorise any executive member; any other member of staff; or, any of its committees (other than the appointments committee, the Determinations Panel and any of the Panel's subcommittees) to exercise on behalf of the Regulator, functions which the Regulator determines. However, this does not apply with regard to:

• the non-executive functions of the Regulator listed in section 8(4) (non-executive functions), which must be carried out by the committee established under section 8;

• the duty of the Regulator to appoint the chairman and other members of the Determinations Panel and to determine the terms and conditions of their appointments;

• the functions of the Regulator which are only exercisable by the Determinations Panel by virtue of section 10(1) (the power in certain circumstances to determine whether to exercise the functions listed in Schedule 2 and to exercise them) or section 99(10) (compulsory review) or any corresponding provision in force in Northern Ireland.

38.     The Regulator may authorise the Determinations Panel to exercise on the Regulator's behalf the power to determine whether to exercise, and to exercise, one or more of the regulatory functions listed in sub-paragraph (5). There is also power to delegate further functions to the Panel under sub-paragraph (6)

39.     Paragraph 21 allows the Secretary of State to make regulations limiting the functions delegated by the committee established under section 8 to any of its members or any of its sub-committees; limiting the functions delegated by the Determinations Panel to any of its members or any of its sub-committees; limiting the extent to which the functions of the Regulator may be delegated under paragraph 20, and permitting the Regulator in prescribed circumstances to delegate to prescribed persons any prescribed functions of the Regulator.

40.     Paragraphs 22 and 23 cover the application of the seal of the Regulator and its authentication by an approved person.

41.     Paragraphs 24 to 28 are concerned with matters relating to the funding and accounts of the Regulator, including the payment of the levy and the appointment of the Comptroller and Auditor General as auditor.

42.     Paragraphs 29 to 35 cover the status and liability etc of the Regulator as a corporate body and provide for exemption from liability in damages.

General provisions about functions