3 - Pensions Regulation

Question 1

Who is the primary regulator for pensions in the UK?

Answer 1

The Pensions Regulator (TPR)

Question 2

Which schemes are covered by TPR?

Answer 2

Mainly occupational schemes (including DB, DC, public, auto-enrollment) although they also cover stakeholder schemes.

Also “direct pay” personal pensions.

Question 3

What are the 2 primary aims of TPR?

Answer 3

Generally protecting members and promoting good practice and governance.

Also helping to avoid pension funds passing into the Pension Protection Fund or Financial Assistance Scheme.

As such they also provide assistance to those running schemes.

Question 4

What is the approach of TPR?

Answer 4

Risk based and proportionate.

This means they focus on larger schemes where failure would have a big impact.

Question 5

What are the powers of TPR?

Answer 5

• To investigate potential issues - workplace pensions are required to submit returns to TPR.
• To seek to have problems addressed - including issuing improvement notices, bringing prosecution, freezing assets, remove or prohibit individuals or chase employers for payments.
• Prevent parties avoiding obligations via:
  
  • Contribution notice - Force employer to pay into the fund or the PPF.
  • Financial support directions - If employer lacks resources to pay.
  • Restoration order - Can unwind a transaction if members are disadvantaged.

Question 6

Pensions Advisory Service

What is it?

Secondary role?

Answer 6

TPAS is a voluntary organisation set up by the government to provide advice (eg Pension Wise) on drawing benefits.

It has another role to attempt to resolve conflicts between schemes and members or schemes and other schemes, but has no binding power and can’t get involved until local resolution and the ombudsman have attempted to help.

Question 7

Who are the two ombudsman services?

Answer 7

• Financial Ombudsman Service (FOS);
• The Pensions Ombudsman (TPO).

Question 8

What is the purpose of the Financial Ombudsman Service?

Answer 8

The FOS is involved in investigating compliants against firms who sell or market financial products including pensions (also investments, mortgages etc.).

Question 9

Process and time limits for complaints to FOS

Answer 9

You must attempt local resolution (i.e. complain to the firm itself) first. Can complain to FOS once their final response has been received, or 8 weeks if earlier.

You have 6 months after the final response to contact the FOS.

This should also be within 6 years of the event, or 3 years of finding out about the event if this is later (eg if the event happened 7 years ago but you only just found out you still have 3 years to complain to FOS).

Question 10

Eligible complainants to FOS

Answer 10

• Individuals;
• Charities with under £1m annual income;
• Trustees of trusts with under £1m net assets;
• Small business with fewer than 10 staff and up to Eur 2m turnover.

Question 11

What can the FOS do?

Answer 11

They can make a binding adjudication to the provider, although the provider can reject it and go to court instead.

Maximum limits for compensation are £150k plus interest plus costs plus interest on costs.

They can advise a higher amount but it is advisory only, not binding.

Question 12

Focus of The Pension Ombudsman

Eligible Complainants

Power

Answer 12

They look at scheme administration.

They won’t look at the state pension or anything the FOS or another ombudsman would look at.

Complaints can be received from members, widow(er)s of deceased members or those entitled to divorce credit.

It’s decisions are binding and final.

Question 13

What is the overall purpose of the Pension Protection Fund (PPF) and Financial Assistance Scheme (FAS)?

Answer 13

To protect the interests of scheme members in relation to employers being unable to meet their obligation (i.e. insolvency of the employer providing an occupational scheme).

Question 14

Pension Protection Fund

How is it funded?

Answer 14

PPF is funded via a levy on all pension schemes, with a higher charge on larger and more risky schemes.

Question 15

Pension Protection Fund

In what circumstances will PPF pay compensation out?

Answer 15

• A DB scheme is underfunded AND the employer is insolvent; or
• Funds of a DB scheme have been misappropriated through fraud.

Question 16

Pension Protection Fund

What are the criteria for moving a fund into the PPF?

Answer 16

• Must be a DB scheme;
• Didn’t commence wind up before 6/4/05 (start of PPF);
• Must be a qualifying insolvency event;
• There must be no chance of the employer recovering sufficiently to restore the scheme to health; and
• The funds in the scheme are insufficient to pay the PPF benefit levels to members.

Question 17

Pension Protection Fund

What happens when a scheme passes into the PPF after insolvency of the employer?

Answer 17

It enters into a 2 year assessment period where everything gets frozen, although those alread drawing benefits can continue to do so (subject to PPF maximum limits).

Transfers are banned, no new members are allowed and existing members accrue no further benefits.

A valuation will take place to establish the shortfall and any recent changes in scheme rules than might exaccerbate the shortfall may be rolled back (eg a recent increase in accrual rate is highly likely to be reversed).

Question 18

Pension Protection Fund

What maximum benefits are payable under the PPF?

And for dependents?

Answer 18

• Pensions already in payment (members and dependents) are honoured in full;
• Other members get 90% (subject to £37,420.42 maximum, = £33,678.38 pension), reducing if they retire under age 65;
• Survivors benefits not yet in payment: 50% for spouse plus 25% for each child (so spouse + 2 kids or no spouse + 4 kids gives 100%). Child is over 18 or over 23 in full time education. (maximum of 100%).

Question 19

Financial Assistance Scheme

Which schemes are eligible for it?

Answer 19

The FAS can be used when the winding up of the scheme began before 5/4/05 when the PPF was started.

The scheme must be underfunded and the winding up of the scheme must also have started after 1/1/1997.

Question 20

Financial Assistance Scheme

What maximum benefits are payable?

And for dependents?

Answer 20

Benefits are paid to top up pension payments from the scheme to 90% of benefits accrued before wind up began.

This is subject to a cap of £33,890 per annum.

Dependents pensions of 50% of members entitlement usually apply.

Question 21

Workplace Pensions

What are workplace pensions?

Answer 21

These are pensions that all employers must set up for employees (being gradually rolled out but will be fully implemented by April 2019).

Most employees are automatically enrolled with contributions paid by the employer.

Question 22

Workplace Pensions

Which employees are entitled?

Answer 22

• Eligible jobholders: Earning more than £10k pa and aged 22 to SPA. They must be automatically enrolled.
• Non-eligible jobholder: Earning over £5,824 but not eligible. Must be given information about the scheme and have the option to opt in, but no employers contributions required.
• Entitled workers: Everybody else. Must be given access to some kind of scheme and given information about it, no employers contributions required.

Question 23

Workplace Pensions

Opting out and re-enrollment rules

Answer 23

Within one month of becoming a member of the scheme (or receiving information on it if later) an employee can opt out, meaning all contributions are returned (less tax).

After three years of being opted out they will be re-enrolled on the same basis (as long as they are still eligible jobholders).

Otherwise if they wish to leave they will have to do so in accordance with the scheme rules.

Question 24

Workplace Pensions

Information provision requirements of employer

Postponement

Answer 24

Once an employee has been enrolled the employer must provide full info to them within 6 weeks.

This inclues information on the scheme, the fact that they have been enrolled and information on rights to opt-in or out.

The employer can postpone establishing the status of the employee for up to 3 months, but must provide a postponement notice to the employee.

Question 25

Workplace Pensions

When are obligations removed for an employee?

Answer 25

If the employer believes the employee is subject to transitional arrangements that might be damaged by a workplace pension, their obligations are suspended for that employee.

Also if the employee has given notice to end employment, or been given such notice, there are no auto-enrollment obligations.

Question 26

Workplace Pensions

What is the standard amount of contributions?

(Qualifying earnings and percentage contributions)

Answer 26

Qualifying earnings: Any salary, overtime, commission or bonus within the band £5,824 and £43k (16/17 rates).

Current maximum contributions are 1% employer, 0.8% employee and 0.2% tax man.

By April 2019 they will be 3% employer, 4% employee and 1% tax man.

Question 27

Workplace Pensions

Alternative contribution levels

Answer 27

To enable existing schemes to continue and meet the rules there are three other “tiers” of contribution. Following levels are from April 2019, current amounts are lower for the same tier.

• Tier 1: Min overall 9% of pensionable pay with at least 4% from employer
• Tier 2: Min overall 8% of pensionalbe pay with at least 3% from employer, but pensionable pay must be at least 85% of earnings.
• Tier 3: Min overall 7% of all earnings with at least 3% from employer.

Current levels (pre April 2019) are 3%/2% for tier 1 and 2%/1% for tier 2 and 3.

Question 28

Workplace Pensions

Who are the providers?

Answer 28

• NEST: Set up by UK govt., charges 0.3% PA and 1.88% for contributions. Limited to £4,080 pa contributions until Apr 2017
• NOW Pensions: Set up by Danish govt., charges 0.3% PA plus £1.50 per month
• The People’s Pension: Run by a not for profit, charges 0.5% per annum

Question 29

Divorce

What are the three methods of taking into account pensions in a divorce settlement?

Answer 29

• Offsetting
• Earmarking
• Sharing

Question 30

Divorce

How does offsetting work?

Answer 30

Offsetting involves transferring other assets from spouse A to spouse B to account for the value of spouse A’s pension, thus avoiding any transfer of pensions.

This isn’t a great solution as spouse A might end up with very few assets and spouse B ends up without a pension.

Question 31

Divorce

How does earmarking work?

Answer 31

An order is made against spouse A’s pension for cash or income to be paid to spouse B.

So spouse A retains the pension and draws it when they like, but when they draw it they will have to pay something to spouse B.

Problems include that tax is paid by one person on income for two people (so higher tax rates), spouse A has full control of timing the drawdown, income orders cease on re-marriage and the spouses have to remain “connected” for a long time.

Question 32

Divorce

How does sharing work?

Answer 32

Sharing involves the court declaring a percentage by which the pension fund must be split and transferred into the other spouse’s name.

It is a clean split so that each spouse has their own pension going forward.

For DB schemes it can be a bit complicated, unfunded DB schemes might offer “shadow membership” for ex spouses, effectively treating the ex spouse as a former employee.

Question 33

Bankruptcy

Are pensions taken into account in bankruptcy proceedings?

Answer 33

In payment pensions will be included with income orders being put on future pension income.

Not in payment pensions will usually be ignored.

State pensions will also be ignored.

Question 34

What measures can TPR use if an employer is avoiding it’s obligations (so that the PPF has to pick up the tab)?

Answer 34

• Contribution notice: Where there is a deliberate attempt to avoid paying a debt (either to the pension scheme or the PPF).
• Financial support directions: Require support to be put in place where the sponsoring employer is either a service company or insufficiently resourced.

Question 35

What are the pension growth factors for normal and deferred members under PPF scheme?

Answer 35

Normal members

• <1997: 0 growth
• >1997: CPI capped at 2.5%

Deferred members

• <09: CPI capped at 5%
• >09: CPI capped at 2.5%