UK: Human Capital – Pensions, July 2007

Pensions Regulator issues first Financial Support Direction

The Determinations Panel of the Pensions Regulator recently ruled, in the first case of its kind, that Sea Containers Limited should be subject to a Financial Support Direction ("FSD") to support two of its UK defined benefit schemes. Hammonds acts for one of these schemes, and recently represented the trustees of the scheme at a two-day hearing before the Determinations Panel. Simon Price and Jay Doraisamy, partners at Hammonds, commented: "We are pleased to see that the Pensions Regulator has agreed to exercise these powers, which were given to it under the Pensions Act 2004, primarily to look after the security of members’ interests". The Regulator issued the FSD on 27 June 2007 and the Determinations Panel’s reasons for making the determination have been published on the Pensions Regulator’s website at www.thepensionsregulator.gov.uk/pdf/seaContainers.pdf.

The new Prime Minister, Gordon Brown, has appointed Peter Hain to the post of Secretary of State for Work and Pensions, replacing John Hutton who took the job in November 2005. Peter Hain is the former Northern Ireland secretary. Also, Alastair Darling has been appointed as Chancellor of the Exchequer. Mr Darling is already familiar to the pensions industry, having served as Work and Pensions secretary from 1998 to 2002.

The Regulator has added a set of ‘technical queries’ to the scheme funding pages of its website. The questions and answers cover a range of funding-related topics such as a scheme’s first Part 3 valuation, setting an initial contribution rate in a newly established scheme, the interaction between a scheme’s contribution rule and the need for employer agreement, setting recovery plan assumptions and the valuation of insurance policies for Part 3 purposes. The FAQs are available at www.thepensionsregulator.gov.uk/guidance/schemeFunding/technicalQueries/index.aspx.

The European Parliament last month supported a report, written by Liberal Democrat Diana Wallis, which urges the British Government to assist policyholders who suffered severe losses when Equitable Life got into financial difficulties in 2000.

The report found that the Government had failed to comply with EU insurance law in not ensuring that Equitable Life had sufficient funds to meet its obligations to policyholders. It concluded that, as a consequence, the Government contributed to the losses policyholders suffered and that it should therefore assume responsibility for establishing a compensation scheme for policyholders. Whilst the report is not binding, it comes ahead of a report into the Equitable Life problems by Ann Abraham, the UK Parliamentary Ombudsman to be issued later this year, which could well reach similar conclusions.

The PPF has made several announcements over the last few weeks. The first relates to a new booklet which it has created for pension scheme members, called "Help! My employer has gone bust…and I think I might lose my pension" to describe how PPF compensation works. The booklet explains the background to and purpose of the PPF, and gives details of the level of compensation which will be made to members when an employer goes bust. Fictional case studies are included in the booklet to illustrate how PPF compensation will be calculated for various different categories of member. The booklet is available at http://www.pensionprotectionfund.org.uk/ppp_leaflet_blue.pdf.

It was also announced recently that Lawrence Churchill has been reappointed as the Chairman of the PPF for a further three-year term from 1 July 2007.

Finally, watch out for the ‘PPF 7800 Index’ which the PPF is set to unveil on 9 July. According to the PPF, it will be one of the most comprehensive snapshots ever produced about how well UK pension schemes are funded. The new Index will be updated monthly and will reflect the latest estimated funding positions of 7,800 defined benefit pension schemes against their PPF level of liabilities. The data used to compile the Index was originally taken from the PPF’s PURPLE Book (which stands for Pensions Universe Risk Profile), published back in December last year, which is to be updated annually and which pulls together information to help identify and manage risks relating to DB pension schemes.

On 5 June 2007, Paul Thornton issued an independent review of pensions, examining the institutions and organisations which regulate work-place pensions. He was asked by the Government to examine the current framework of institutions, including how organisations interact with each other, and to make recommendations going forward for the improvement of these organisations, how they regulate, and how they interact. The report recommends: building upon the existing relationship between the PPF and the Regulator to facilitate closer coordination and cooperation; clarifying the relationship between the Financial Services Authority and the Regulator in relation to work-based defined contribution pension schemes; and streamlining the Pensions Ombudsman and the Financial Services Ombudsman by combining the two bodies. The Thornton report is available on the DWP’s website at http://www.dwp.gov.uk/pensionsreform/pdfs/InstitutionalReviewFinalreport180507.pdf.

From 1 July 2007, a new method of pensions taxation has been introduced in Australia. As a result, it will in some circumstances be possible for members in Australian pension schemes to get tax relief on their pension contributions and on their pension benefits, with the scheme itself being subject to tax. In the UK, the original post-‘A day’ rules relating to overseas schemes did not envisage this unusual system of taxation, and a scheme operating under such a system would not have been able to qualify as a qualifying recognised overseas pension scheme (QROPS). Therefore, with effect from 1 July 2007, HMRC has amended the relevant UK legislation by means of the Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) (Amendment) Regulations 2007 so that an Australian scheme operating under this new tax regime will be able to qualify as a QROPS. The Regulations are available at http://www.opsi.gov.uk/si/si2007/20071600.htm.

Following a three-month consultation period, the Government last month published its response to the consultation on its White Paper ‘Personal Accounts: A new way to save’ which was issued back in December last year. The consultation concluded that there is overwhelming support for the establishment of the Personal Accounts scheme, and for the establishment of a Personal Accounts Delivery Authority which will be put in place to establish and initially run the Personal Accounts scheme. The Government’s White Paper is available at http://www.dwp.gov.uk/pensionsreform/pdfs/PA_ExecutiveSummary.pdf and the response document is at http://www.dwp.gov.uk/pensionsreform/pdfs/PersonalAccountsConsultationResponseJune2007.pdf.

HMRC has published Newsletter No 28 which, amongst other things, confirms that the HMRC list of qualifying recognised overseas pension schemes will be published twice a month rather than monthly as at present to make it even more up-to-date, announces some transitional relief in relation to bridging pensions, and contains guidance on reporting non-cash benefits provided after retirement. HMRC also advises that it will no longer be publishing monthly newsletters. Instead, newsletters will be published periodically as and when there is information to pass on to customers. The newsletter is available on the HMRC website at http://www.hmrc.gov.uk/pensionschemes/newsletter28.htm.

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