As some of you may be aware, I work in pensions. Currently my job title is Subject Matter Expert Project Technician, which doesn’t mean a lot to anyone. It may help shed a little light on the subject if I tell you that my Subject Matter is Defined Benefit pensions, particularly those in wind up or in financial difficulty.
I worked as an administrator for over 4 years. Part of this (a fairly small part) involved working out the retirement benefits that people would get (or the benefits payable to their next of kin in the event of a death). A much larger part of my work was in ensuring that scheme data is accurate, reliable, consistent and that it corresponds to the rules of the scheme and current legislation.
I worked on schemes that didn’t have enough money. They had been through a valuation and the actuary believed that they would not be able to pay everyone’s pension in full. Once upon a time, this would have meant that the pensions would be reduced, or that increases that had been promised would be stopped, or possibly even that some people wouldn’t have got any benefits at all (depending on how bad the funding position was), but nowadays we have the Pension Protection Fund (PPF for short).
The government established the Pension Protection Fund in the Pension Act 2004. It began working with schemes that had gone insufficient funds from April 2005. I joined the pension world in August 2006, and was immediately assigned to work on a scheme that was thought to be eligible for the PPF. This was the first such scheme that my office had dealt with, and so we were doing a lot of learning as we went along.
Everything that the PPF does is set out by legislation, so I’ve spent a fair bit of time going through the various Acts and seeing exactly what the situation is. This is really the only area of law that I have looked into, and as such I’d hate to comment on the rest of it, but the law surrounding the PPF could definitely be better.
Before I comment on the legislation, I’d just like to take a brief moment to tell you a little bit about pensions. There are (broadly) two types of pension. You can have a Defined Benefit (DB) pension, or a Defined Contribution (DC) pension. You may have heard in the news recently that a lot of DB schemes are closing down. The difference between DB and DC is that with a DB pension you can determine the pension that will be payable based on the service details of the member. This category includes final salary pensions (where the pension is simply years worked x final salary x accrual rate) and Career Average Revalued Earnings (CARE) pensions, where the pension is determined by your salary for each year that you work, building up to a sort of average. DC pensions on the other hand cannot be calculated in advance. You pay contributions (as does your employer) and the money is put into a “pot” which is then invested. When you come to retire, you take whatever’s in the pot and use it to buy an annuity.
Because the rules are fairly strict about how you treat the money in a DC pot, the government assumed that they would not suffer overmuch if a scheme went bust, as the money would still all be there. Thus, the PPF only takes on DB benefits, and will not take responsibility for DC benefits.
The initial problem that we faced was that the scheme we had was in two parts. One final salary, the other CARE. Going over the PPF rules, it seemed clear that it had been written based on the scheme that the writer best knew – the public sector pension scheme – and as such took an awful lot of things for granted, and got others completely wrong. For example, the legislation said that a DB scheme that could not afford to provide at least the level of benefits that the PPF would provide had to enter the PPF – the problem was that the PPF had no rules for how to deal with a CARE scheme. There were more problems to come though…
The legislation was rather wordy, but basically, the PPF determined what your benefits were at the date that the scheme entered the “assessment period” – that is, when you first realised that the scheme probably couldn’t pay the benefits – as follows:
If you were a pensioner already, your protected pension amount is either (a) the amount in payment the day before the assessment date (the start of the assessment period) if you are over your normal pension age or (b) 90% of the amount in payment the day before the assessment date if you were under your normal pension age.
(That was the one thing that the PPF did – anyone under Normal Pension Age had their benefits reduced 10%. They would still get a lot more than if the scheme went under, so not that big a deal.)
If you were a deferred member, then your protected amount was 90% of whatever the scheme rules said it was had you reached normal pension age the day before the assessment date (unless you’re already over normal pension age, at which point your pension must be put into payment from the assessment date).
If you were an active member at the assessment date, then your pension amount was determined by AR x PE x PS where AR is your accrual rate under the scheme, PE is your pensionable earnings and PS is your pensionable service.
Seems fair enough, right? Except that it meant that in a CARE scheme, if you were active at the assessment date, your benefits were all of a sudden final salary (which probably made them a fair bit higher, as the accrual rate was not changed). The other problem with this is that some members have transfers in from other schemes. The transfer of benefits from another scheme would grant either additional service (which is ok, as it can be included in the pensionable service above) or a fixed pension payable at your normal pension age. If you were active, you lost any such fixed pension, as it’s not included in the equation above.
There were a number of ways that people could have fixed (non-increasing) benefits. EPBs, transfers in, augmentations, and probably a few more that I’ve not come across or can’t think of right now. Any of these is lost if you were active at the assessment date.
On the plus side, the legislation states that once the scheme has entered the assessment period, all benefits revalue. So your fixed benefit does start to increase from the assessment date to your retirement date, so long as you weren’t active at the assessment date.
All of these issues were raised with the PPF and a few things have been done about it. They changed the rules so that CARE schemes have an extra proviso – if you’re a CARE member and active at the assessment date, then your benefits are whatever the scheme rules say that they should be.
They also introduced a fix for the fixed benefits, kind of. They put in a new rule that said that if a scheme has no revaluing benefits, then you don’t have to apply revaluation after the assessment date. This seems a little bit retarded though, because any benefit earned since 1985 has to be revalued (and any benefits before that, if you had service after a certain date) so you’d have to have a scheme that closed down before 1985, wasn’t contracted out and only went bust after April 2005. At present, fixed benefits are still receiving revaluation in the assessment period.
The issue with active members of final salary schemes who have fixed transfers in has not been addressed – currently they simply lose those benefits. This is apparently being looked at, but I’m not going to be holding my breath for a fix.
There are many other issues like this - but this one is the one that I run into most often as I prepare the data for the PPF. I don’t know why they don’t just get someone who knows pensions to write the rules, or at least to proof-read them before they’re made…
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