Last week the Government published its response to three consultations. The responses relate to consultations on draft regulations relating to:
- the employer debt regime;
- bulk transfers of defined contribution (DC) pensions without member consent; and
- bulk transfer of contracted-out pension rights without member consent
Employer Debt Regime
Regulations effecting the changes will come into effect on 6 April 2018. The main change the regulations will make is the introduction of the Deferred Debt Arrangement (DDA) which will enable an employer in a multi-employer scheme to defer the payment of the section 75 debt when it ceases to have any active members (an employment-cessation event) and remain an employer for the purposes of the scheme (albeit a “deferred employer”). A key concern which came to light as a result of the consultation was what happens when the DDA ends and whether a debt will be triggered. In response, the Government has introduced a new regulation which sets out a list of events that will end the DDA and whether a debt will be triggered in each of those circumstances.
Most respondents to the consultation felt that the introduction of the DDA would be a helpful and sensible way forward. The Government has also expressed the view that the DDA is of particular help to smaller employers and multi-employer schemes for non-associated employers (for example industry-wide schemes). Although the DDA requires the agreement of the trustees, this is another option that can be considered for employers trapped in multi-employer schemes who wish to end defined benefit accrual but are not in a position to pay a section 75 debt that would be triggered. Concerns had been raised that small employers in non-associated multi-employer schemes were effectively being forced to allow benefits they might not be able to afford to continue accruing because the alternative of triggering a section 75 debt would be even worse. The option of a DDA will relieve the burden of an immediate section 75 debt.
DC Bulk Transfers without Member Consent
Following the response to the call for evidence which we wrote about last year, the Government published draft regulations for consultation. Legislation will come into force on 6 April 2018 which will remove the requirement to obtain an actuarial certificate for bulk transfers of occupational pure DC to DC pensions without member consent, and replace it with an alternative test. On consideration of the consultation responses, the Government has made some alterations around the requirement for the trustees to seek advice. An additional qualifying situation where independent advice will not have to be obtained has been introduced which would apply in corporate restructurings. Feedback also highlighted that the independence test for financial advisers was too stringent which limited the opportunity for trustees to find an adviser who met the requirements. Taking the feedback on board, the Government has made several amendments including reducing the period of time that the adviser must not have provided advisory, administration or investment services to the receiving scheme, service provider or sponsoring employer from five years to one year. Other changes include:
replacing “suitably qualified person” with “appropriate adviser” so as to remove the inference that the adviser needs professional qualifications; and
removing the option which would have allowed schemes to revert back to the actuarial certificate route.
There were no amendments made to the proposal to remove the requirement for there to be an existing relationship between the ceding and receiving schemes and the charge cap will remain in place for auto-enrolment members.
The removal of the requirement to obtain an actuarial certificate will remove the unnecessary burden associated with DC to DC transfers while ensuring that members are adequately protected. This change is also a step towards removing a barrier to achieving economies of scale in the DC landscape.
Bulk Transfers of Contracted-out Rights without Member Consent
After the response to a consultation that was launched in April 2017, the Government published a further consultation on transfers of contracted-out rights without member consent. The original consultation related to the transfer of pensioners’ contracted out rights to schemes that have never been contracted-out, in limited circumstances. The Government then published draft regulations for consultation. These new regulations will come into force on 6 April 2018 and will enable transfers of contracted-out rights without member consent to a newly established salary-related scheme that has never been contracted-out – the regulations apply to all members, not just pensioners.
As a result of the comments received, amendments have been made to ensure that the receiving scheme can convert guaranteed minimum pension benefits into ordinary scheme benefits. Several paragraphs have been removed including a regulation creating an obstacle to the receiving scheme of having to comply with rules “covering commutation, suspension and forfeiture”. A few other changes have been made to provide consistency with existing legislation such as the definitions of “connected employer” and “connected employer transfer payments”. The Government did not agree with proposals for the rules to apply to non-salary related receiving schemes but has said that it will be taking comments away and considering what further changes might be required to legislation.
This is a welcome move and will be of great assistance to trustees and employers who wish to restructure schemes in which there are contracted-out rights.