Proposals for Pension Protection Fund and New Pensions Regulator – Ros Altmann

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  • Ros Altmann

    Ros Altmann

    Proposals for Pension Protection Fund and New Pensions Regulator

    Proposals for Pension Protection Fund and New Pensions Regulator

    for Pension Protection Fund and New Pensions Regulator

    by Dr. Ros Altmann

    (All material on this page is subject to copyright and must not be reproduced without the author’s permission.)


    The new Regulator and the Pension Protection fund are being
    established as part of the current Pensions Bill, in order to try
    and restore confidence in occupational pensions in the UK. Until the
    last few years, our occupational pensions system was the envy of
    other countries and was often held out as a model system, for others
    to follow. Unfortunately, due to a combination of circumstances,
    occupational pension provision, in particular in the form of final
    salary schemes, has started declining and companies are pulling out
    of providing defined benefit pensions. Most final salary schemes are
    now closed to new members and many have wound up, often in
    significant deficit. The existence of enormous pension deficits,
    coupled with an ageing population, rising longevity and falling
    interest rates, has led to a crisis of confidence in pension
    provision. The Government would like to restore some of the lost
    confidence and has, therefore, announced measures in the current
    Pensions Bill, to establish a new Pensions Regulator and also to
    introduce a scheme to offer insurance-style protection to members of
    defined benefit pension schemes whose employers fail and whose
    schemes do not have sufficient assets to pay the promised pensions.
    This will be called the Pension Protection Fund (PPF).

    Historical Background:

    The last major piece of pensions legislation affecting occupational
    pensions in the UK was the 1995 Pensions Act. This was introduced as
    a result of the Maxwell pensions scandal of the early 1990’s. Robert
    Maxwell plundered the assets of his Mirror Group pension funds. He
    and his sons were trustees of the pension schemes and fraudulently
    siphoned off money, leaving the pension schemes significantly
    underfunded when he died. Therefore, the members were at risk of
    losing the pensions they were promised and the Government of the day
    decided that legal protections needed to be put in place, to protect
    pension scheme assets and restore confidence in occupational
    pensions. The Goode Committee was established to investigate the
    workings of the UK occupational pension system and make
    recommendations as to how to protect members’ pension benefits in

    The recommendations of the Goode Committee formed the basis of the
    measures of the 1995 Pensions Act, which came fully into force in
    April 1997. This Act introduced many measures, including:

    • establishing a
      Regulator for occupational pension schemes (known as OPRA –
      Occupational Pensions Regulatory Authority)
    • requiring a
      proportion of the trustees to be nominated by members,
    • a compensation
      scheme for cases where employers defrauded pension assets
    • a Minimum Funding
      Requirement (MFR) for schemes, designed to ensure that they were
      adequately funded to pay the promised pensions.

    When the Act was
    passed, scheme members were told that pensions would now be
    protected by law, accrued rights could not be reduced, a Regulator
    would protect members, oversee schemes and would act quickly to
    ensure that employers behaved properly and that the new MFR would
    ensure schemes were adequately funded.

    Why are new measures now needed?

    Sadly, the measures of the 1995 Pensions Act, although
    well-intentioned, did not, in practice, deliver the promised
    protection for defined benefit pension schemes. In the past few
    years, tens of thousands of members of UK company schemes have found
    that the pensions they thought were safe and protected by law have
    disappeared. The Regulator, OPRA, was not effective enough in
    policing employers or protecting members. Its powers were not
    sufficiently strong to give it enough teeth, it did not act quickly
    and it tended to focus on identifying small breaches of the pension
    rules, such as penalising employers for late payment of
    contributions, but was unable to prevent employers from continuing
    to run schemes which had insufficient assets to meet their
    liabilities, particularly on wind-up. The Minimum Funding
    Requirement (MFR) has proved to be wholly inadequate to ensure that
    pension schemes had sufficient assets on discontinuance. Being fully
    funded on the MFR gave trustees comfort to believe their schemes
    were adequately funded, but, in practice, this was not the case when
    the scheme was wound up. The assumptions used for the MFR
    calculation were not updated frequently and the test is only applied
    every three years, so sharp movements in asset markets in between
    MFR valuations can cause significant changes in the adequacy of
    scheme funding.

    The Government’s proposals:

    As a result of the devastating losses suffered by so many members
    who saved in their company scheme for decades, the Government has
    decided to introduce a protection scheme for members’ pension
    benefits, rather than just relying on an official funding standard.
    This Pension Protection Fund (PPF) is designed to ensure that
    members of final salary schemes, whose employers become insolvent
    and whose schemes do not have sufficient assets to meet their
    liabilities, will receive a pension from a central insurance fund.
    (The payouts will be funded by other employer schemes, not by the
    Government). This brings the UK into line with other countries,
    which already have an insurance underpin for their defined benefit
    pension schemes.

    The PPF will be designed to collect levies from all employers who
    run defined benefit schemes in the private sector. These levies will
    be used to help pay out pensions to members of schemes which fall
    into the PPF. The mechanism will be that, when an employer fails,
    its scheme assets will be assessed and, if they are not sufficient
    to pay out all the future liabilities by buying annuities, these
    assets will be put into a central fund. The fund will run the assets
    and pay out all the pension commitments of the schemes as they
    become due over time. The levies paid in will be designed to ensure
    that the PPF has sufficient assets to pay out future liabilities and
    the Pensions Bill gives the PPF Board powers to vary the levy.
    Initially the levy will be a flat rate charge, per scheme member,
    but as soon as possible after the first year of operation, the idea
    is that the levies will also reflect the probability of a scheme
    ending up in the PPF. Schemes which are thought to be higher risk,
    will be required to pay higher levies.

    Alongside this PPF, the Government proposes to establish a new
    Regulator, to replace OPRA, which is to be given much greater
    powers. The new Regulator will be able to investigate the behaviour
    of employers and will also be expected to proactively assess the
    strength of an employer, whether a pension scheme is likely to be
    underfunded and whether there are particular risks that a scheme may
    fall into the PPF. The Regulator will have powers to require an
    employer to put more money into the scheme and will be expected to
    oversee adequate funding and adequate performance of pension fund
    trustees in future.

    The overall aim of these new measures is to restore confidence in
    occupational pensions and encourage more people to contribute. The
    should be in place by April 2005. Occupational pension schemes in
    the UK are an extremely important part of overall pension provision.
    For the past few decades, successive British Governments have tried
    to offload the cost of pensions support away from the State pension
    system and onto the private sector, with occupational company
    schemes being a particularly important part of this provision. If
    individuals lose confidence in company schemes, the implications for
    pension coverage in the UK are serious. The State pension is
    extremely low and, without adequate private provision, people will
    end up relying on means tested State benefits, which will add to the
    burden of old age support in future. It is, therefore, considered
    crucial by the Government to ensure that the new measures for
    protecting pensions will be seen to work well.

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