The views below are Punter Southall's. This bulletin looks at major issues facing the pensions' industry over the past month including: More guidance from the Pensions Regulator, Department for Work and Pensions consults on risk-sharing and the Pensions Bill 2007/08.

Over the last few months, the Pensions Bill 2007/08 has been working its way through parliament. This is the Bill that will put the flesh on the personal accounts regime (expected to come into force in 2012), as well as making a number of miscellaneous changes to pensions legislation. During its passage through parliament, a number of government amendments have been made to the Bill.

One important amendment is to introduce sanctions against employers who attempt to induce employees to opt out of active membership of either personal accounts or a scheme that meets the relevant exemption criteria. Whilst this appears a sensible measure to encourage active membership of pension schemes, there have been concerns that this could hit employers who attempt to outline to employees that personal accounts may not be appropriate for everyone (for example, personal accounts may simply replace means-tested benefits for lower paid employees).

Another of the key changes has been to the treatment of Group Personal Pensions (GPPs). Under the new regime, employers will be required to provide access to personal accounts for their employees unless they enrol them automatically into their own scheme of at least broadly equivalent quality. It had been feared that GPPs would fail to exempt employers from personal accounts, because EU legislation might prevent personal pension schemes using automatic enrolment. The EU has now confirmed that automatic enrolment is possible into GPPs, and so the Pensions Bill has been amended accordingly.

Another area where an amendment is expected is in the sphere of 'qualifying earnings'. Contributions into personal accounts will be made at the rate of 8% of qualifying earnings (defined initially as £5,035 to £33,540 indexed to earnings). Under the initial proposals in the Bill, existing schemes would have had to provide at least broadly equivalent benefits based on the same earnings definition in order to exempt their employers from personal accounts. In practice, most pension schemes do not use this earnings definition. Following considerable lobbying, the government has now indicated that "employers will be able to use their existing arrangements to calculate qualifying earnings where that will produce at least as good, or a better, pension outcome than would come from personal accounts". It is not yet clear how this will work in practice.

Aside from personal accounts, the Pensions Bill also contains a number of amendments relating to other pensions issues. Amongst those laid recently is a clause that will enable the rules on contribution notices and financial support directions to be amended by regulations so that the Pensions Regulator (TPR) will have enhanced powers to intervene. The Secretary of State may make such regulations only where there is either a material risk of adverse effects on members' benefits or where there is a material risk of PPF compensation becoming payable. Our May Technical Bulletin [1] discussed these proposals in more detail.

An amendment has also been made which will remove the last remaining restriction on protected rights. At present, an annuity purchased from a protected rights fund must provide a spouse's pension where the member is married. It is now intended that this requirement will be removed from 2012, which will mean that pension schemes will no longer be required to make any special provision in relation to protected rights. Whilst this change is very welcome, the fact that schemes will have to wait until 2012 for the change to come into force is not.

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Department for Work and Pensions consults on risk-sharing

In June 2008, the Department for Work and Pensions (DWP) published a 110-page consultation paper on risk sharing. The aims of the consultation are to encourage and support good pension provision and to gather evidence and opinions on risk-sharing. In particular, the consultation considers two main methods of risk sharing which are not currently possible in the UK.

The first is conditional indexation, under which increases to pensions would be targeted, but not guaranteed. Where a deficit arises, increases could be withheld until full funding was restored. This approach could either be applied to existing defined benefit schemes, or to an entirely new breed of schemes. The Association of Consulting Actuaries (ACA) has proposed a new type of scheme, based on career average earnings with conditional indexation both before retirement and when the pension is in payment. They have also proposed that the scheme's normal pension age could be adjusted to allow for increasing life expectancy.

The second method considered is collective defined contribution schemes, under which members' assets would be pooled, and so risks would be shared between members. As with traditional defined contribution schemes, the employer would pay fixed contributions, but the payments would be made into a collective fund which would target (but not guarantee) a level of defined benefit pension. In order to achieve efficiencies on administration and investment management fees, these schemes would need to be large, possibly industry-wide.

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More guidance from the Pensions Regulator

Financial Assistance Scheme (FAS) and the Pension Protection Fund (PPF) have indicated that the key activities of winding up should be completed within two years. The regulatory statement sets out the regulatory approach and the powers that TPR can use to ensure that this two-year timescale is achieved, whilst the guidance document gives some practical advice to trustees on managing the wind-up process.

The guidance advises trustees to take a 'pragmatic and proportionate approach' in order to avoid unreasonable delays. It stops short however of providing definite recommendations on particular knotty issues that may hold up the winding up process, such as deciding whether and how to equalise Guaranteed Minimum Pensions (GMPs) between men and women. Instead, it lists some of the various approaches to GMP equalisation that other schemes have taken in the past. Whilst the guidance will undoubtedly be of use to the trustees of schemes in winding up, it will not answer all their questions, and trustees will still need to take their own advice.

The guidance also advises ongoing schemes to consider activities such as data cleansing and member tracing which would reduce the risk of unnecessary delays if the scheme does eventually wind up. TPR has now published a consultation on the importance of good record keeping which develops some of these themes further.

The second piece of guidance published by TPR sets out key issues for trustees to consider in their relations with their advisers. This covers the relationship with the adviser, the adviser's qualifications and experience, service standards and ways of working, fees, terms of appointment and conflicts of interest. At 18 pages, it is one of the shorter pieces of guidance produced by TPR, but it is nevertheless a helpful list of the points trustees should bear in mind both when appointing or reviewing their advisers and in their regular dealings with them.

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Other recent developments

Parliamentary Ombudsman's report on Equitable Life: Ann Abraham, the Parliamentary Ombudsman, has finally published her much delayed report into the role of the various regulatory bodies in the case of Equitable Life. The report makes 10 findings of maladministration against the regulatory bodies and recommends that the government apologise to Equitable Life policyholders and provide a compensation scheme for them.

PPF scaling factor and multiplier: As we highlighted in the 'Stop Press' in our last Technical Bulletin, the PPF's final scaling factor of 3.77 was much higher than the 'indicative' figure of 1.6 that had been published last year. The PPF has now published an explanation of the jump in scaling factor. 0.86 of the jump arises from the fact that D&B insolvency scores had improved considerably since the indicative figure was published. In addition, the final scaling factor includes an allowance of 0.87 which appears to cover future appeals of the D&B score.

Trivial commutation and unauthorised payments: HM Revenue and Customs (HMRC) has published draft regulations which set out the conditions under which members will be able to exchange their pension for cash without looking at benefits relating to other employments. The regulations also include some welcome changes to make it easier to administer schemes without being concerned about making unauthorised payments (for example, pension instalments made after a member's death). Please contact us if you would like a copy of our Pensions Briefing Note on these developments.

Personal Accounts Delivery Authority consultation on charges: The Personal Accounts Delivery Authority (PADA) has published a summary of the responses to its consultation on charges. This found that there was no consensus view on the most appropriate charging structure. The majority of respondents were in favour of either an annual management charge or a combination of an annual management charge and a charge on contributions. PADA are now considering their options and will provide recommendations to the DWP later this year.

FRC levies: The Financial Reporting Council (FRC) has announced that its levy on pension schemes for 2008/09 will be £2.90 per 100 members (compared with £2.20 last year). This levy only applies to schemes with at least 1,000 members and pays for the regulation of the actuarial profession.

Regulations on maternity leave: Regulations have been laid which will apply to the parents of children expected to be born or placed for adoption on or after 5 October 2008. In general, these regulations will remove the distinctions between the rights of employees on ordinary maternity leave and those on additional maternity leave. However, the Explanatory Memorandum accompanying the regulations confirms that it is not the intention to extend pension rights during unpaid additional maternity or adoption leave.

Countdown for Enhanced and Primary Protection: Individuals who are planning to rely on primary or enhanced protection of their pre A-Day benefits now have only eight months to submit their forms before the deadline of 5 April 2009. Our experience is that it can take several months to assemble the information needed to complete the forms. Please contact us as soon as possible if you would like further information or advice.

TPR longevity trigger: TPR has announced that any longevity trigger will only be introduced for valuations with an effective date of September 2008 onwards. It had previously proposed applying it from effective dates of March 2007 onwards. TPR expects to publish its approach to longevity assumptions later this summer.

Punter Southall [2] has been helping pension schemes manage their risks since 1988. It provides actuarial services, pension scheme administration, benefits consultancy, investment consultancy and advice on pensions aspects of mergers and acquisitions.