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Occupational pension hazards

The Pensions Bill introduces a large number of changes for money-purchase occupational pension schemes and smaller changes for contract-based money purchase, such as personal pension and stakeholder. It is too early to draw up a comprehensive list, since we need to see the regulations which will dribble out after Royal Assent but it is worth identifying some of the main changes.

The most important change – and the one major simplification in the Pensions Bill – is the abolition of the requirement for any inflation-proofing to annuities bought by a money-purchase pot. This is intended to take effect for pots vesting after April 5, 2005. There will be no requirement to buy any inflation-proofing, regardless of when the benefit accrued, whether it is protected rights or non-protected rights, and whether it is occupational pension or contract-based. In practice, most people will probably take the maximum level pension, although between April 6, 2005 and April 5, 2006 there may be some lucky occupational scheme members who need to buy inflation-proofing to avoid exceeding Inland Revenue maximum on their starting pension.

A small but significant change for money-purchase occupational pension schemes relates to transfer out after at least three months’ pensionable service but before becoming entitled to preserved scheme benefits (which must be the case after a maximum two year pensionable service). The trustees will have to tell the departing member in such circumstances that he or she can choose a transfer instead of a refund of contributions. This begs the question whether a receiving vehicle other than Stakeholder is available for such a small transfer, and who is going to advise on it.

There are a number of changes for all occupational pension schemes. The trustees will have to satisfy the knowledge and understanding requirements for the new Pensions Regulator.

This may sound like motherhood and apple pie but on the Opra website there is a consultation paper which takes 10 pages just to list the headings under which the trustees may have to satisfy the Pensions Regulator. It is easy to see a stampede taking place out of money-purchase schemes and into group personal pensions and stakeholder. For defined-benefit schemes, this escape route is virtually impossible but that is another story.

Another change affecting money-purchase occupational pension schemes relates to member-nominated trustees (MNTs). The new Secretary for State for Work and Pensions, Alan Johnson has announced the Government’s intention to require at least half of trustees to be MNTs instead of one-third but I understand this is not likely to happen until 2008 or 2009. In the meantime, there will have to be an election procedure whereas at the moment there can be an opt-out.

At the moment, the internal dispute resolution procedures required for all occupational pension schemes are very restrictive. The Pensions Bill will allow IDRs to be tailored more to the circumstances of the scheme, so that is potentially a helpful change.

Another helpful change is the removal of the requirements for an occupational pension scheme to offer an add- itional voluntary contribution facility. In the context of money purchase, it would be nice to think that scheme design would allow members to increase their contribution rate within wide limits once the 15 per cent ceiling drops away on April 6, 2006.

A big unknown for all pension plans, including money purchase, is the degree to which they will have to change their procedures to meet the needs of the Pension Regulator. For example, we know that the whistle-blowing regime will change but until we see the draft code of practice we do not really know any detail.

This is just a selection of the changes for money-purchase pensions which will flow from the Pensions Bill, and there is also the little matter of changes coming from pension tax simplification. Advisers will need to be very diligent and alert if corporate clients are going to get through this without costly errors and omissions.

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