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Protecting early leavers
The introduction of the Social
Security Act 1973 (SSA 73), saw a significant improvement
in the members retirement benefits within an employers pension
scheme. Prior to this Act members had no statutory rights to
any benefits accrued in an occupational
pension scheme for early leavers. When the Act was introduced
on 6 April 1975 it allowed for the preservation of a members
pension rights, known as preserved benefits, after 5 years of
service and would include both employee and employer contributions.
For less than 5 years service the scheme member was entitled
to a refund
of contributions that they had personally made to the scheme.
This term was reduced in the Social Security Act 1986 to 2 years
and a refund of contributions being made with less than 2 years
service. However, Tax and a contribution to purchase membership
of the state pension scheme will be deducted from the refund
before payment. The Finance Act 1981 introduced the first pension
transfer product in the form of section 32 policies, allowing
the early leaver an opportunity to transfer out of an occupational
pension scheme.
Where a final
salary pension scheme has contracted out of the state scheme
the guaranteed minimum pension (GMP) relates to the earnings
component of the state
pensions that the member would have earned while in the
employer's scheme, had the member not contracted-out. GMPs ceased
to accrue after 5 April 1997. For early leavers from January
1985 the Health and Social Security Act 1984 allowed the revaluation
of GMP to be separate from that of preserved benefits.
Prior to January 1985 the practice was to absorb GMP
into the preserved pension and this was known as franking. As
a result, the accrued entitlement to the member increased significantly
as this includes the members pension transfer value. From January
1986 the Social Security Act 1985 allowed the member the right
to transfer from an occupational pension scheme rather than
leave the preserved
benefits. This Act also introduced revaluation of preserved
benefits other than the already revalued GMP for leavers from
1986 in line with the retail price index (RPI) to a maximum
of 5.0% a year up until retirement
age.
The Social Security Act 1986 introduced legislation to prevent
employers from making membership of their occupational pension
scheme compulsory and also approved personal
pensions to receive pension transfers. The Social Security
Act 1990 extended the revaluation of preserved benefits by allowing
early leavers of final salary schemes from January 1991 to have
preserved benefits in addition to GMP to rise by RPI with a
ceiling of 5.0% per annum up until retirement age.
Pension Schemes Act 1993
Pensions are subject to detailed legislation found in various
Acts and brought into force through subordinate legislation
called Statutory Instruments laid before Parliament by the Lord
Chancellor. The Pension
Schemes Act 1993 (PSA 93) had many of its regulations brought
into force from 1997 and covers many aspects of an occupational
pension scheme and personal pensions.
Part III of the Act
is concerned with certification of pension schemes and the
effects on a members state
scheme rights as well as issues of contracting out. Part
IV of the PSA 93 refers to protection for early leavers and
the preservation of benefits under occupational pension schemes.
Chapter II of Part IV deals with revaluation of deferred
pensions whereas Chapter III involves the protection of
increases in the guaranteed minimum pension resulting in the
banning of anti franking and Section 94 of Chapter IV is concerned
specifically with the calculation of the cash equivalent transfer
value (CETV).
Part V refers to the annual increases of
pension in payment for a final salary pension or GMP and Part
VI introduces disclosure of information by the scheme to the
scheme member and this part was strengthened later by the
Pensions Act 1995. In Part IX the PSA 93 is concerned with
the modification and winding up of a scheme and Part X with
the investigations made by the Pensions
Ombudsman.
Pensions Act 1995
Further to the PSA 93 the Pensions
Act 1995 represents a framework whereby much of the detail
is left to be implemented through statutory instruments. The
Pensions Act 1995 received Royal Assent on 19 July 1995 and
most of the contents were implemented from 6 April 1997.
Part I of the Act is concerned with occupational pension schemes.
Section 1 outlines the introduction of the regulatory authority
the Occupational Pensions Regulatory Authority (OPRA)
protecting all scheme members and section 3 to 15 deals with
the powers of OPRA. Section 16 to 46 is concerned with the
activities of trustees whereas 47 and 48 deal with professional
advisers including whistle
blowing. Section 51 to 55 relate to indexation and require
pensions in payment accrued from 6 April 1997 to be increased
by limited price indexation (LPI).
Section 56 to 61 require that all defined benefit schemes
such as a final salary pension meet the minimum funding requirement
(MFR)
and section 62 to 66 deals with equalisation rules for men
and women. Section 73 to 77 relates to the winding up of an
occupational pension scheme including action to be taken for
underfunded
or surplus
schemes, section 78 to 80 covers the Pensions Compensation
Board and section 87 to 90 deals with money purchase schemes.
Part II relates to state pensions and includes section 126
for the equalisation of the state pension age as wellas revising
the arrangements to contract out of the state earnings related
pension scheme (SERPS).Part
III relates to the certification of pension schemes and the
effect on a members' state scheme rights including protected
rights. Part IV covers section section 156 to 160 dealing
with the Pensions Ombudsman and including section 166 to 167
for pensions on
divorce.
WRPA 1999
Continuing the evolution of pensions, the Welfare
Reform and Pensions Act 1999 (WRPA) introduced a number of
important developments in pensions. Part I of the WRPA made
provision for stakeholder
pensions which came into force from 6 April 2001.
Part II deals with pensions and bankruptcy and is important
as section 11 of the WRPA
provides statutory protection for an approved scheme, whether
being an occupational pension scheme, personal pension or
retirement annuity policies (RAPs) by excluding members
pension rights from their estate on bankruptcy. Part III
and IV relates to the introduction of pension sharing.
Pension law and divorce
For divorce cases prior to the Pensions Act 1995, the
pension scheme member would be directed to pay to their spouse
a greater share of the matrimonial property (other than pensions)
compared to a case where no members pension rights existed.
In practice, the members pension rights could not be divided
so the former spouse would be left with no retirement benefits
and instead offsetting
would be used against other matrimonial property, such as
the family home.
The courts generally had no power to order
payments to the former spouse from retirement benefits. Section
166 of the Pensions Act 1995 inserted sections 25B to 25D
in the Matrimonial Causes Act 1973 (MCA
73) that gave the courts the power of pension earmarking,
which has applied to all divorces petitioned since 1 July
1996 where couples in divorce
were unable to reach an out-of-court settlement. The Pensions
Act 1995 permits earmarking of the death in service benefit,
tax free
lump sum at retirement, death benefits post retirement
and pensions in payment.
However, there is no provision for earmarking
of the spouses pension rights as this potentially could be
paid to someone else on the death of the pension scheme member.
The Pensions Act 1995 provides a statutory method for calculating
a value of the retirement benefits in today's terms in the
form of a cash equivalent transfer value. This was contrary
to the preferred method of family solicitors in Scotland of
using the past
service reserve.
The WRPA 99 received Royal Assent on 11 November 1999
and introduced pension
sharing, applying to a divorce petition and nullity of
marriage from 1 December 2000. The WRPA amended earmarking
legislation that was introduced by section 166 of the Pensions
Act 1995 by requiring the court to apply the earmarking
order as a percentage to the retirement benefits. Part
III contains the new pension sharing framework that amends
existing family law, specifically section 19 amends the Matrimonial
Causes Act 1973 (MCA 73) and allows the court in England and
Wales to make a pension
sharing order.
Section 21 amends the MCA 73 section 25B
to 25D to allow a pension sharing order attachment of a specified
pension arrangement or state
scheme rights. Part IV deals with how pension sharing
is effected and the result in relation to the pension arrangement
and state earnings related pension scheme (SERPS). The WRPA
also repealed section 16 of the FLA 96 that introduced the
concept of pension
splitting.
Exceptional pension laws
The Armed
Forces Pension Scheme is a final salary, contracted out,
unfunded occupational pension scheme and its rules are set
out in prerogative instruments. These documents are not subject
to approval, annulment or amendment by parliament, they derive
their authority directly from the Queen.
Under the Naval and Marine Pay and Pensions Act 1865, the
prerogative
instruments for the Royal Navy and Royal Marines is by
an Order of Council, for the Army it is the Pensions Warrant
1977 and for the RAF it is the Queen's Regulations for the
Royal Air Force.
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