5. Occupational and private pensions

The coalition programme

The government says it will “simplify” the rules and regulations to “help reinvigorate” occupational pensions; “encourage” companies to offer high-quality pensions to all employees; and “work with business and the industry to support auto-enrolment”. Rules requiring those with a relevant private pension scheme to “annuitise” it (take their previous pension) by the age of 75 will end and the government will also “explore the potential to give people greater flexibility in accessing part of their personal pension fund early”.

It will implement the Parliamentary and Health Ombudsman’s recommendation to make “fair and transparent” payments for Equitable Life policy holders’ relative loss “as a consequence of regulatory failure”. Not in the programme were Conservative plans to reverse the effects of the abolition of the dividend tax credit for pension funds (abolished by the Labour government in 1997) or the Lib Dem policy that tax relief on pensions should be given only at the basic rate “so that everyone gets the same tax relief on their pension contributions”.

Workplace pension agenda

Employers, particularly in the private sector, have been on the retreat from quality workplace pension schemes long enough for unions to have identified a pattern: Closure to new members, followed or accompanied often by a reduction in benefits or an increase in employee contributions, leading in the worst cases to closure of the scheme for further benefits (accruals) by existing members. There even seems to be a timetable, in this scenario, of six to ten years from closure to new members to closure for future accruals.

Instead of a final salary scheme, providing a defined benefit (DB) pension, new employees are likely to be offered a defined contribution (DC) “money purchase” pension with reduced levels of funding (lower employer contributions) offering uncertain and less valuable pension benefits (from 2012 onwards this could include the NEST scheme). Union efforts to find a “middle way” — preserving the best features of the old scheme for new members — are often by-passed as employers opt for the “simplicity” of a DC scheme.

Things are rarely as simple as this: Not all changes to final salary schemes end in DC and when insurance and human resources firm Aon announced plans to cut pension contributions in April 2009, it was a DC scheme that was to be cut. However, the “flight” from defined benefits is real enough, driving some of the last Labour government’s initiatives. These included the “2012” reforms (auto-enrolment and NEST), the Pension Protection Fund (PPF), a powerful Pensions Regulator to prevent problems from developing and keep schemes “on the right track for the long term”; and a “rolling” deregulatory review.

There was little in the coalition government’s early statements to indicate how it would take these initiatives forward. Simplifying and reinvigorating workplace pensions could point to deregulation raising concern on the union side that protections for members’ pension benefits may be removed.

The prospect of a new legal duty to auto-enrol employees and contribute to their pensions has not deterred employers from coming forward with proposals for change, as was the case in 2009 at IT firm Fujitsu. Workers at Rhodia, were among the first to take strike action to protect their pensions several years ago, and still have their defined benefit (DB) pension scheme, guaranteed to remain open to existing members until at least 1 January 2012.

Overall funding

Pensions are seen as deferred wages, a view confirmed by the European Court of Justice (Barber vs GRE, 1990), so when employers say they have to make cuts, unions will want to be certain they are justified. During the 2008-09 recession unions were willing to make negotiated concessions on pay and conditions, like the Honda deal, to save jobs but resisted “opportunistic” attacks. That goes for pensions too.

While defined contribution (DC) pensions are becoming increasingly common, defined benefit (DB) schemes generally provide a better level of benefits. The deregulatory review started by the previous Labour government (see below) set its sights on the possibility of maintaining quality workplace pension schemes, which require secure funding.

The UK National Accounts show that employer contributions to occupational pensions and employer-sponsored personal pensions more than doubled between 2001 and 2006, reaching a peak of £46.1 billion, but fell to £40.6 billion in 2008 as the economy moved into recession. Employee contributions to funded pension schemes rose to £42.5 billion, overtaking what the employers paid for the first time since 2002.

The recent fall in contributions was driven by a decrease in employer contributions to “funded” occupational pension schemes, which fell from £37 billion in 2007 to £33 billion in 2008 “as company finances came under pressure”. Employer contributions to personal pensions and “unfunded” (public sector) occupational pension schemes rose in 2008 but not enough to prevent the drop in total contributions.

Total income (including investment income) of self-administered pension funds fell from a high point of £71.8 billion in 2006 to £58.6 billion in 2008, due to a reduction in employers’ special contributions (as well as a drop in transfers between pension funds). These funds are managed by scheme trustees or investment managers, who invest scheme income including employer and employee contributions. The figures relate to “funded” occupational schemes in the private sector and local government.

Contributions

Levels of workplace pension scheme funding vary by scheme type. Overall employer contributions to DC schemes in 2007 were worth an average of 6.5% of salary while employer contributions to defined benefit (DB) schemes were much higher, at 15.6% (Pension Trends, ONS). Among smaller private sector employers with less than 100 employees, 6% of employers with Group Personal Pensions and 14% with stakeholder pensions received no employer contribution.

Examples from LRD’s Payline database where both DB and DC schemes operate highlight this. Contributions to DC schemes may be flat-rate, age related, or variable in some other way, including by employee choice, where employers may offer to “match” higher contributions up to a certain level.

In the Merchant Navy there are two multi-employer officers’ pension schemes, a DB fund closed to new employees and a DC scheme. Both are run as Trusts but while the DC scheme had a minimum contribution rate of 5.1% from employers and 3.9% from employees the corresponding joint contribution rate to the DB scheme in 2010 was 25%. Even if contribution rates for the DC scheme increased significantly, officers’ union Nautilus recognises that the benefits would not match those of the DB scheme.

Protecting pension funding

While some employers have sought to cut their pension costs by moving to a cheaper, often DC-based pension scheme (for new employees at least) others have had to increase pension spending to meet their liabilities. Under the Pensions Act 2004, workplace pension funding is overseen by the Pensions Regulator while the Pension Protection Fund (PPF) safeguards workplace pensions against the risk of employer insolvency.

The Regulator’s objectives are to:

• protect the benefits of members of work-based pension schemes;

• promote good administration and improve understanding of work-based pension schemes;

• reduce the risk of situations arising which may lead to compensation being payable from the Pension Protection Fund (PPF); and

• maximise employer compliance with employer duties (including the requirement to automatically enrol eligible employees into a qualifying pension provision with a minimum contribution) and with certain employment safeguards.

DB pension schemes are protected under the Pension Protection Fund (unless they began being wound up before 5 April 2005, when the Financial Assistance Scheme FAS could step in). To help fund the PPF, compulsory annual levies (the Pension Protection Levy) are charged on all eligible pension schemes, calculated on the basis of data provided by trustees and managers, and a measure of insolvency risk. Over 7,000 schemes pay into the levy and, as of May 2010, there were 150 schemes in the PPF with 46,393 receiving compensation or due to receive it in future.

The total level of PPF compensation available for scheme members is subject to an overall cap (£29,748 in 2010 after the 90% limit) recalculated every year. It generally pays 100% compensation to members who have reached their scheme’s normal pension age or who have retired on legitimate ill health grounds regardless of age (and those receiving a pension in relation to someone who has died); and 90% to those who have not yet retired (or have retired but not reached their scheme’s normal pension age) on reaching retirement age.

The PPF paid out around £19 million in April 2010, an average yearly compensation of £4,000 per person and had 348 schemes in its assessment period representing 195,436 members.

Educate, Enable, Enforce

The Regulator’s remit is wider than just DB schemes, it takes an interest in all kinds of pension scheme. Its approach is to “Educate, Enable, Enforce” but it does have a range of powers which include investigating schemes to identify and monitor risks, ‘putting things right’ where problems have been identified, and acting against avoidance. It can issue an improvement notice to individuals or companies, or third parties, and take action, on behalf of a scheme, to recover unpaid contributions from the employer if the due date for payment has passed.

Because of the defined benefits available under a DB scheme the Regulator can step in if funding appears to be insufficient, acting on the basis of the relevant legislation (see below).“Actuarial” valuations including three-yearly triennial reviews become vary significant in these circumstances, as do the assumptions made and methods used (see below).

The level of DB scheme funding is usually expressed as a percentage. In 2008, for example, the USS university lecturers’ pension fund had £28.8 billionin assets and £28.1 billion in liabilities, a funding level of 103% calculated on a “technical provisions” basis (see below).

Corus met opposition to its plans to close the final salary British Steel Pension Scheme to new entrants in 2010, partly on the grounds that its most recent scheme valuation (31 March 2008) showed that it was 100% funded, on a “prudent” basis agreed by trustees; and that future benefits would be met by contributions of 12% of pensionable pay from the employer and 6% from members.

Valuations are carried out every three years and in the case of Corus unions argued that this is done specifically to avoid a premature response to what may be short-term difficulties. GMB guidance on actuarial valuations points out that they are based on a number of assumptions about members, the financial outlook (inflation, earnings) and the return on investments (known as the “discount rate”). They can be based on a number of possible scenarios and methods, some more difficult and potentially damaging than others from a trade union perspective:

• continued funding (also known as scheme specific);

• discontinuance (no future service building up or contributions);

• wind–up (transferring the scheme to an insurance company);

• PPF basis (to calculate levy and whether scheme would need to enter PPF);

• accounting standard (FRS17); and

• cost of paying members’ accrued pension (Past Service Liability, known as Technical Provisions)

DB schemes must prepare recovery plans when “appropriate”. During 2008-09 over 1,800 recovery plans were received and the Regulator “closed its files” on just under 2,000, including some carried over from 2007-2008. Schemes are classified into four categories for action by the Regulator:

• Active intervention: Schemes considered high risk, based on their size and the Regulator’s knowledge of events or circumstances.

• Intelligence-based action: Applies when an event increases the risk of a loss for members in a smaller scheme, requiring the collection of further intelligence

• Proactive monitoring: Prudent where a scheme is large enough to pose a significant potential risk to the Regulator’s objectives.

• Focus on education and support: Schemes that have not triggered any specific enforcement actions, where the focus is on providing education, mitigating risks through responses to queries or whistle-blowing reports.

Although DB remains the most common form of pensions provision many employers are switching to DC schemes and the Pensions Regulator issued guidance on them in 2008. The key issues raised concerned the “decumulation stage”, the point at which a pension is taken from an accumulated fund; voluntary employer engagement in contract-based schemes; and the production of guidance on governance and administration issues (such as conflicts of interest and record-keeping).

DC scheme members bear the risk (that investments may not pay off and that anticipated income may not arise) rather than employers and pay the price if investment values tumble. For example, in February 2009, Aon Consulting calculated that a member paying 10% of a £25,000 salary into a DC scheme planning to retire at 65 would only receive an annual salary for life of £10,900 in January 2009, compared with £17,100 forecast in September 2007. That equates to a 30%-36% drop in pension value.

DC schemes should have an appropriate process in place to help members (or dependants) when they want to convert money purchase funds into income. However, Pensions Regulator guidance emphasises the importance of the open market option (OMO) in which members are free to take their accumulated fund and seek a pension (annuity) from other providers.

This is something the coalition government is keen to promote. In the longer-term the Regulator is looking for DC schemes to secure good standards, including accurate and timely payment of contributions, regular reconciliation, accurate and timely payment of benefits (annuities and transfers) and accurate and timely disclosure of information.

Employers may offer employees inducements to leave a DB scheme but trustees and employers have been warned that they must give full and proper information to members in a transfer incentive exercise: “Where we suspect that the guidance is not being followed, or that there is other poor practice associated with the transfer exercise, we will look at the dealings of that employer and scrutinise their scheme”, the Pensions Regulator says.

The Regulator takes the view that inducement offers create risks for members and issues for Trustees (e.g. that entitlements are protected, including for remaining members, Data Protection Act requirements complied with and independent financial advice made available). If the pension scheme is in deficit, any offer should say when the trustees expect the scheme to be in a position to offer full, unreduced, cash equivalent transfer values, and the amount of the reduction.

Regulation and deregulation

Pension schemes are subject to extensive regulation, added to recently by new regulations implementing the 2012 reforms. Some of the pension scheme protections that currently exist, particularly in DB schemes, originate from pensions legislation in the 1990s and subsequent amendments. That includes the requirement to increase pensions in payment (money paid out to retired members) when the cost of living rises, and the protection of accrued benefits (for non-retired members who have moved on to other jobs).

In December 2006 the previous government set up a “rolling” review of private pension regulations conducted by Ed Sweeney (then the deputy general secretary of Unite, forerunner of Amicus) and Chris Lewin (formerly Head of UK pensions at Unilever). They warned that an “ever-increasing” regulatory burden, together with the “open-ended” risk to employers in providing a defined benefit pension scheme, lay behind the “flight” from DB schemes.

With the continuing drive to control costs and liabilities more and more employers opted to abandon traditional final salary schemes and go straight over to DC schemes. It has been argued that the remaining regulatory framework left after the Finance Act 2004 contributed to this by treating all non-DC schemes as DB schemes, applying constraints that were not fitted to the development of hybrid and risk-sharing alternatives to “pure” DC.

The review has been accused of moving slowly and failing to deliver meaningful policy changes (e.g. by NAPF). However, it has resulted in some changes and its deregulatory themes are still part of the current pensions agenda. Changes that have been introduced include:

• a reduction in the cap on the revaluation of “deferred” pensions (important to members who move on to another job before they retire) from 5% or Retail Prices Index (RPI) to 2.5% compounded, whichever is the less, under the Pensions Act 2008;

• a limited “statutory override” to make it easier for trustees to change pension rules; and

• measures to simplify what happens when a pension has been shared as a result of a divorce.

Other themes raised during the review, which could re-surface, included normal pension age; the applicability of DB rules to non-final salary/non-DC schemes; levels of funding; PPF compensation and the levy; protection of benefits (Section 67); survivors’ pensions; ill-health pensions; guarantee periods; the definition of DB schemes; contracting out constraints; communication with and consultation of scheme members; principles-based regulation; employer debt in multi-employer schemes (where they have ceased to have employees who are active members of the scheme); trustees’ role; accrued rights; trivial commutation (converting small savings to a cash sum); disclosure; and the return of surpluses to employers.

Earlier deregulation (under the Pensions Act 2004) amended Section 67 of the Pensions Act 1995, which protects accrued rights, to allow “detrimental modifications” to members benefits (either on the basis of informed consent or on actuarial equivalence). The Pensions Act 2004 also removed the requirement for DC pensions to be secured by an increasing annuity (with effect from April 2005), thereby allowing members to buy annuities with no inflation protection. More recently the Occupational, Personal and Stakeholder Pensions (Miscellaneous Amendment) Regulations 2009 (SI2009/615) introduced a limited “statutory override” to allow scheme rules to be changed, where trustees agree, to reflect the lower revaluation and indexation caps that are now available in law.

Reacting to the original Deregulatory review report (October 2007), the TUC warned that deregulation can stray into attacks on pension scheme members’ rights and benefits. It congratulated ministers for standing up to a very strong employer lobby for ending limited price indexation (LPI) for pensions in payment, but was disappointed at the proposal — subsequently implemented — to reduce the cap on the revaluation on deferred pensions should be cut from 5% to 2.5%. “This is particularly important for those with broken careers, typically women and carers”, the TUC warned.

Tax

Tax is a big factor in pension scheme design. Relief from income tax is currently available on pension contributions worth up to 100% of earnings each year (tax is payable above an annual allowance of £255,000) although the new government may reduce this. A proportion of pension can be taken as a tax-free lump sum while “salary sacrifice” arrangements allow members to avoid paying National Insurance on pensions contributions too. The Pensions Act 2004 introduced a single universal tax regime for pension schemes, which replaced eight existing regimes on 6 April 2006 (known as A-Day).

The cost of providing tax relief on pensions in 2007-08 was £37.6 billion, but on Treasury figures, it is heavily skewed towards higher rate tax payers (60% of tax relief). The TUC points out that nearly £10 billion a year (25% of tax relief) goes to the top one percent of earners on more than £150,000 a year. The authors of the Deregulatory Review argued that tax simplification now allows additional creativity in benefit design.

Risk-sharing and pension scheme redesign

The deregulatory review’s authors hoped that changes to the regulatory regime could create the conditions for the survival of quality workplace pension schemes: “We believe that employer involvement beyond putting funds into a defined contribution account can be beneficial to all. Employers can offer advantages of scale and sophistication that place them in a position to shoulder some risks in a more informed and efficient manner than individuals can do by themselves”.

Where unions accept that change is needed, they have sometimes been willing to negotiate away from the traditional final salary scheme, either through piecemeal modifications to contributions and benefits (accrual rates, pensionable service or pensionable earnings) or to more fundamental scheme re-design and “risk-sharing”. Not all options are likely to be equally acceptable.

Capping and sharing: Member contribution levels may be adjusted. Contributions to the closed Aviva (Norwich Union ) defined benefits scheme rose from 5% to 7.5% recently. The scale of any increase in pensionable earnings can be capped. Astra Zeneca, AGA Rangemaster , Lloyds Banking Group and RBS have all tried this approach while BT’s 2009 pay award did not flow through to pensions. The amount of pension a worker accrues (qualifies for) in relation to each year of service can vary too (as the public sector pension examples on page 53 show).

DB alternatives

Career average (CARE): Schemes are usually based on career average re-valued earnings rather than final salary. Pension will depend on how salary levels are re-valued (e.g. by price inflation or earnings growth) as well as service, and may or may not be acceptable to unions. Nearly 12% of DB members are in CARE schemes of the kind that operate at Morrison, BBC, Tesco, Nationwide and for new members of the civil service scheme.

Unite proposed a CARE scheme when Barclays Bank announced plans to close a final salary scheme to new contributions from existing staff and the latest civil service scheme is based on CARE. But in higher education UCU members voted against a “two-tier” scheme involving CARE. The union calculated that a lecturer at the top of scale B retiring after 35 years and living for a further 18 would receive over 30% less pension, worth at least £127,000. The GMB suggests that, as a general rule, a CARE accrual rate needs to be at least 15% more generous than a similar final salary scheme

Hybrids: Combinations of DB and DC schemes are known as hybrids and can be “sequential” (one after the other), combined, or involve one acting as an “underpin” for the other.

“Cash Balance” schemes generate a defined lump sum rather than a defined pension, which then has to be converted into an annuity, leaving members to take some of the risk. Barclays Bank Afterwork scheme is an example, while Unilever has a CARE scheme on salaries up to £38,000 and DC benefits above that. Scheme specific annuity rates (where the risk of purchasing the annuity is taken on by the employer) and DC schemes with a Defined Benefit Underpin are other examples.

Collective DC schemes: Unions should look beyond the employer guarantee to consider the case for large “collective investment pots”, a recent Unions 21 report suggested (David Pitt-Watson’s contribution to Tomorrow’s Pensions). These would have lower costs and higher investment returns than the small individual pots typical of DC scheme. A change to the Pension Schemes Act 1993 (section 1) would be needed, Pitt-Watson argued, as anything which is not “pure DC” is currently treated as DB.

Super-Trusts: NAPF makes the case for large not-for-profit multi-employer DC pension schemes offered on a regional, sectoral or national basis, managed by an expert board of trustees. They would have less direct government involvement than the NEST scheme.

Salary sacrifice: Salary sacrifice arrangements (also known as Salary Exchange or SMART pensions) convert part of wages or salaries into pension contributions before the deduction of National Insurance, effectively by lowering salaries and leaving the employer to make the pension contribution. Unions have differing views on the advisability of this arrangement but it is widely used. Pay-related benefits including DB pension calculations need to be protected, e.g. by use of a “reference salary”, while the impact on state pensions (especially S2P) needs to be kept in view.

DC bargaining issues

DC schemes are unpopular not only because of they tend to receive lower contributions and produce smaller pension. UNISON guidance on the problems of DC pensions highlights the investment risk, annuity rates, charges which are taken from the fund and the way in which individuals are left in effect to fend for themselves: “Individuals often have to select a fund, often from a vast array, and often have no idea what to select”.

Many people take a quarter of their DC pension pot as a tax-free lump sum when they retire. This is clearly an attractive option but one that further reduces the likely value of their annuity pension. The coalition government has indicated that people might be allowed early/flexible access to their pension, to help pay off mortgage arrears and avoid repossession (for example), on the basis that this could be an extra incentive to save.

The new government raised a number of issues in relation to annuitisation. They would allow it to be delayed beyond 75 (although there may be some risk of incurring a dependence on Pension Credit) and want to encourage a more competitive market (there is evidence that many people just stick with the company they’ve saved with and don’t necessarily get as good a pension as they could have).

Nevertheless, if DC is the only scheme on offer it pays to try to negotiate the best possible contribution level from the start. Once established, any increase in DC funding will have to compete with money that might otherwise go into the pay pot. HSBC, which was one of the first banks to close its final salary scheme, found that its DC scheme became increasingly uncompetitive, and was finally persuaded to improve contributions.

Unions at IT company Steria (Unite, Prospect and the CWU) went several steps further, negotiating a legally binding DC pension scheme, which they hope will provide “parity of outcome” with the DB scheme it replaced. Engaging with management at an early stage they negotiated a Group Personal Pension (GPP) scheme which was expected to replicate the level of pensions previously provided by the defined benefits scheme.

The use of a legally binding agreement was seen as giving extra protection, although it can be terminated by collective agreement or by 12 months written notice by any of the parties. In its use of the term “parity”, the agreement indicated that the new scheme would provide pension and lump sum benefits for each affected employee “of the same value” of their previous pension plan but this is all subject to investment performance.

The Steria GPP scheme is contracted into the State Second Pension (S2P) and the anticipated S2P benefits form part of the overall definition of parity. Affected employees are required to pay contributions at a greater level than before and these contributions are to be reduced by the increase in National Insurance Contributions that employees will make as a result of being contracted into S2P.

Personal pensions

The government’s plan to pay compensation to Equitable Life policy-holders is seen as helping to build confidence in saving. Private pensions can be set up by individual employees themselves, or employers can set one up as part of a group scheme. Stakeholder schemes cost less to set up and employees can pay into them as and when they want.

Additional Voluntary Contributions

Additional contributions AVCs are a DC-type top-up members can make to an occupational pension scheme to secure extra retirement benefits. AVC arrangements can be “in-house” (part of the main scheme) or “free-standing” (a separate arrangement between the member and a product provider chosen by the member). AVC arrangements should not be neglected by Trustees.

Governance and pension rights

Pension schemes can be either trust-based or a contract-based personal arrangement. Occupational schemes are usually governed by trustees, while group personal pensions (GPPs) involve an individual contract between the employee and the provider (e.g. an insurance company). DB schemes may be “bought out” by an insurance company, either due to insolvency or where an employer wants to break its links to a scheme (see below).

A scheme can be contract-based even though contributions are made through the employer. A recent survey of pension scheme governance concluded that larger schemes have better governance; management of conflicts of interest is improving; and use of the Regulator’s Trustee toolkit is increasing.

Governance

Most occupational pension schemes are set up as Trusts which ensure that the scheme’s assets are kept separate from the employer’s assets (see below). Where the trustee of the scheme is a company (a corporate trustee), trustees are known as directors, but have the same responsibilities as a trustee. The employer itself may be the corporate trustee. Where there is no Trust, unions should argue for some form of committee or body to oversee the pension scheme and allow members to have a collective say in how it is run, an approach that the Pensions Regulator also seems to approve of

Trustees

Trustees hold assets for the benefit of another group of people and are governed both by the law of trusts and by pension scheme law. Pensions trustees must, under sections 247-248 of the Pensions Act 2004, have knowledge and understanding of the law relating to pensions and trusts as well as the principles relating to the funding of pension schemes and the investment of scheme assets. The Regulator has produced a code of practice on this as well as a Trustee toolkit learning programme.

Under trust law, “Fiduciary duties” trustees must act impartially, prudently, responsibly and honestly in line with trust deeds and rules, in the best interests of scheme beneficiaries (which can include widows/widowers and dependents as well as active, deferred, pensioner and prospective members of the scheme, and those with “credits” e.g. former husbands and wives). They are “personally liable for any loss caused to the scheme as a result of a breach of trust” although scheme rules might protect them. The Regulator’s guidance points out that the list of beneficiaries can in some circumstances be the employer, who “may be able to receive a payment from the scheme if there is a funding surplus or when the scheme is wound up”.

However, the cash flow needs of the employer or negotiations between the employer and workforce representatives about pension benefits are separate issues and must not influence trustees while carrying out their trustee role. Trustees must not let their ethical or political convictions “get in the way of achieving the best results for the scheme”. They can only invest in the employer’s own business in limited circumstances, and not normally more than 5% of the scheme’s assets in employer-related investments, while loans to the employer are prohibited.

The “IORP” EU directive (2003/41/EC) requires a legal separation of funds but it required union pressure and a new set of regulations the LCPS (Management and Investment of Funds) Regulations 2009 to deter local authorities from “borrowing” from their members’ pension funds.

Trustees accept contributions, decide on investments, amend the rules, deal with surpluses and wind up schemes. They must ensure that contribution rates are sufficient to provide the benefits under the rules of the scheme. Employers must hand employee’s pension contributions over to the trustees within 19 days of the end of the calendar month when they were taken from a member’s pay.

Trustees are required to ensure that arrangements are in place, and implemented, that provide for at least one-third of trustees or directors of the trustee company to be member-nominated. Member-nominated trustees are seen as playing an extremely useful role in helping the union and its members keep on top of pension developments in the workplace.

The TUC’s Member Trustee Network has 1,000 participants and provides support to enable them to carry out their duties “professionally and effectively”.

Consultation

Where changes are proposed pension scheme members have rights to be informed and consulted. Changes to future entitlement are covered by the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006 (SI 2006/349). They apply to employers (excluding public services) with 50 or more employees and operate alongside the Information and Consultation of Employees Regulations 2004.

Employers must provide written information and consult both active and prospective members and union/employee representatives (unless the change is to comply with statutory provision or a Pensions Regulator determination), allowing a minimum period of 60 days. Issues listed in the regulations for consultation include closure to new members or for future accruals, contributions and accrual rates, normal pension age and conversion from DB to DC. However, there is no requirement for agreement to be reached (unless contractual changes are involved (see below).

Where changes affect members’ existing (“subsisting”) rights consultation is covered by the Occupational Pension Schemes (Modification of Schemes) Regulations 2006 (SI 2006/759) supplemented by a Code of Practice (Modification of subsisting rights,www.thepensionsregulator.gov.uk/codes/code-modification.aspx). Trustees need to check whether the scheme rules allow them to make the change; whether it is a “regulated modification” under Section 67A(2) of the Pensions Act 1995; and if so whether it is a “protected” or “detrimental” modification.

A protected modification can only be made with the informed consent of each affected member. A detrimental modification can be made by consent or by the trustees ensuring that “actuarial equivalence” is satisfied. The “consent route” should include a period of at least four weeks for members to make representations to the trustees, allowing sufficient time for advice to be obtained where necessary.

Contractual rights

An occupational pension scheme, where there is one, forms part of an employee’s terms and conditions of employment (although until auto-enrolment starts to phase in from 2012, there is no legal requirement for employers to contribute). Its terms must be included in written particulars given to the new employee. Contractual changes usually require agreement and a 90-day consultation period (see the LRD guide Contracts of employment — resisting changes). However, employers often reserve the right to amend or terminate pension schemes without providing a replacement and the union priority may be to fight to keep some form of DB scheme going, even if the accrual rate is worse, or the retirement age goes up, or favourable ill-health benefits have to be sacrificed.

In transfer situations employers taking on a business must offer a minimum level of pension provision to employees joining their scheme as a result of a TUPE transfer. This could be a stakeholder scheme in which the employer matches contributions up to 6% of earnings although there is nothing to stop unions and employers negotiating better terms than this. A series of two-tier workforce agreements require the new employer to offer a scheme “broadly comparable” to public service pensions for outsourced public sector workers, and a reasonable arrangement for new recruits (and on re-tender to a new provider).

Under age discrimination regulations employers can require employees to retire at 65 or above, although the coalition government says it will put an end to this arrangement. Employers can also provide different pension schemes to employees of different ages or with different lengths of service and use minimum and maximum ages for admission to pension schemes and for the payment of pensions.

Under the Disability Discrimination Act any occupational pension scheme has to have a “non-discrimination rule” protecting employees with a disability or serious health condition. This puts Trustees and pension scheme managers under a similar duty as employers. Part-timers should not be subject to discrimination and nor should fixed-term contract workers (unless justified on objective grounds).

The Equality and Human Rights Commission (EHRC) says: “Occupational pension schemes must be provided fairly and without discriminating unlawfully. For example: a pension scheme that offers benefits to married partners must also offer the same benefits to civil partners. If the scheme offers benefits to unmarried couples who live together, it must offer the same benefits to unmarried same-sex couples who live together”.

During Statutory Maternity Leave an employee’s terms and conditions of work “continue as if she were still at work” apart from the right to remuneration: She is entitled to continue to receive her normal pension contributions and if she contributes herself, “her contributions should be based on the maternity pay she actually receives” (EHRC). Maternity leave counts as continuous service for the purpose of assessing pension rights. Periods of adoption leave also count for assessing pension rights.

2012 reforms

If an employer has at least five employees they already have a duty to offer them access to a pension scheme but that could be (and often is) a stakeholder pension scheme to which the employer contributes nothing. That will begin to change from 2012 as a result of the Pensions Acts of 2007 and 2008. Between them the Acts:

• established the Personal Accounts Delivery Authority (PADA) to establish a low-cost DC occupational pension scheme originally known as Personal Accounts (from 5 July 2010 PADA is replaced by NEST Corporation);

• it has an annual contribution limit and a ban on transfers in and out of the scheme, and will be open to self-employed people as well as employees;

• will require all eligible job-holders aged between 22 and state pension age to be automatically enrolled into a qualifying workplace pension scheme. They will be able to opt out but they will be automatically re-enrolled every three years or if they change jobs; and

• once workplace pension reforms have been phased in between 2012 and 2017 employers providing DC pensions including employer-sponsored personal pensions will have to contribute a minimum of 3% of employee earnings on a band £5,035-£33,540 (in 2006/07 earnings terms, the amounts to be up-rated by annual earnings growth) while employees contribute 4% and receive around 1% in tax relief (8% in all).

A suite of new regulations introduced by the last government in January 2010 set out rules on timing and staging, enrolment and re-enrolment, opting in and out, and quality standards. However, a review of the 2012 private pension reforms was set up within days of the June 2010 Budget.

Under existing arrangements auto-enrolment is due to be phased in between October 2012 and September 2016 which means it will be some time before all employees are covered by the provisions. Large employers will be brought into the duties first, followed by medium and then small firms, with new businesses brought in at the end. The minimum contribution levels will be phased in too.

For defined contribution schemes, the minimum contribution requirements are as follows: During the staging period (October 2012 to September 2016), the total contribution level (including tax relief) will be two percent with a minimum of one per cent coming from the employer. For a year following the end of staging (from October 2016 to September 2017), the total contribution level will be five percent with a minimum of two percent coming from the employer. From October 2017 the total contribution level, will be eight percent with a minimum of three percent coming from the employer.

The gradual phasing of contributions is not possible for defined benefit and hybrid schemes. Instead, employers providing these types of scheme will be able to delay their automatic enrolment duty for prescribed jobholders until after the staging period (October 2016). These jobholders will be able to opt into the scheme if they wish during this transitional period.

Employers may choose to automatically enrol their workers into the personal accounts scheme, or they may choose another scheme that meets the criteria (section 23, Pensions Act 2008). For DC schemes these follow the 3% employer/8% in all pattern. For DB schemes the minimum requirement is 1/120th of average qualifying earnings in the last three tax years multiplied by years of pensionable service (up to 40).

The charging structure is expected to include a 0.3% annual management charge, plus a charge on contributions of around 2%. PADA (NEST), which will be self-financing, described the charges as “comparable to those currently enjoyed by members of many large workplace schemes”.

NEST will be one of the qualifying pension schemes employers can use to fulfil their new duties, giving them option of simply meeting their minimum legal duties or using a customised approach to meet specific business need). There will be no fees for employers using the scheme (except in exceptional circumstances).

There is some concern that low-paid workers will be putting in too little for the scheme to be worthwhile (potentially less than they’d get through means-tested benefits). Some, like the National Pensioners Convention, see a risk that someone joining the scheme won’t be significantly better off, or might lose out on means-tested benefits

A GMB report (Public sector pensions) dismisses the idea that an 8% contribution on band earnings “will provide a sufficient income in retirement”. However, the TUC was pleased that the scheme will be focusing on the “needs and attitudes of low to medium earners”; and that NEST will be a supplier that has a public-duty obligation to provide pensions to every employer who does not make alternative arrangements.

Shortly after the election in May 2010, the new pensions minister Steve Webb, talked about making sure the structure of the system is right and that “we’re auto-enrolling the right people”. There could be further changes before the scheme is rolled out and union reps will need to be alert to these issues when discussing NEST and auto-enrolment with members and co-workers.