Many pension savers have lost out over the years due to a lack of proper protection of their pension savings.
I started working in pensions several years after the Robert Maxwell scandal in 1991, where he stole £460m from the Mirror Group pension funds. Given the enormity of the sums stolen from the ‘Maxwell schemes’, the government helped bail out the pension funds.
This incident shone the spotlight on the importance of member protection in pensions. As a result, the regulatory landscape for defined benefit (DB) pensions has been through several changes since the Maxwell scandal. Various legislation and regulatory bodies have been introduced to better protect pension savers.
The establishment of The Pensions Regulator (TPR)
The Goode Report was commissioned following the Maxwell scandal. The report presented the results of three surveys on the public’s perceptions and experience of occupational pensions. When it was issued in September 1993, the recommendations included:
- A new Pensions Act to replace the complex and unstructured legislation which was currently in place.
- Clarifying the rights and duties of employers, employees, trustees and professional advisers.
- A new regulator be set up with wide-ranging powers to monitor and intervene in the running of pension schemes, replace the current Occupational Pensions Board.
- The introduction of member nominated trustees (MNTs), who should make up at least one third of a pension fund’s trustees.
- Pension schemes should have to ensure a minimum level of solvency and provide an annual certificate of solvency along with accounts to the pensions regulator.
- The government establish a compensation fund to cover pension scheme deficits arising from fraud, theft or other dishonesty (although this did not include incompetence or bad investment performance). Compensation should be limited to the lesser of 90% of the value of the misappropriated assets or 90% of the scheme deficit.
The Pensions Act 1995 was issued, leading to the establishment of the Occupational Pensions Regulatory Authority (OPRA) whose role was to oversee the running of pension schemes. However, ultimately OPRA’s powers weren’t deemed to be strong enough to ensure good governance of DB pension schemes.
The government passed new legislation in the Pensions Act 2004, introducing The Pensions Regulator (TPR) to replace OPRA. TPR was set up in 2005 to provide stronger protection for workplace pension schemes in the UK.
A new era
The establishment of the Financial Assistance Scheme (FAS) quickly followed. Soon after, the Pension Act 2004 also introduced the Pension Protection Fund (PPF), who are accountable to Parliament through the Secretary of State for the Department for Work and Pensions.
Both the FAS and PPF are funded by:
- annual levies raised from eligible pension schemes;
- assets transferred from pension schemes for which they have assumed responsibility;
- recoveries of money from assets of the insolvent employers; and
- investment returns on the assets held.
FAS began to operate in September 2005 and helps members of DB schemes who lost all or part of their pension following the sponsoring employer becoming insolvent between 1 January 1997 and 5 April 2005. Pension schemes at that time were required to be wound up. The FAS currently looks after 145,000 members.
Under FAS rules, members were entitled to a maximum of 90% of what they would have been entitled to under the rules of their pension scheme, subject to a cap. Pension increases were also restricted to a maximum of 2.5% a year in respect of pension built up after 5 April 1997.
The PPF was established in April 2005 to accept any new pension scheme not eligible for the FAS. The key difference between FAS and the PPF is schemes are not required to wind up before entering the PPF assessment period. The PPF currently looks after over 288,000 members.
If a member is under normal retirement age at the assessment date, they will receive 90% of their pension. Pension increases are restricted to only those benefits built up after 6 April 1997 and are subject to an increase of up to 2.5% a year.
The PPF also manages the Fraud Compensation Fund, again set up following the Pensions Act 2004. They pay compensation to trustees or pension scheme managers of eligible occupation pension schemes, where the employer has become insolvent and the scheme assets have been reduced due to an offence involving dishonesty. Compensation can only be paid out to pension scheme trustees, not directly to scheme members.
Achieving full member protection
With increased regulation over more recent times, and particularly the introduction of the FAS and PPF, protection for members with DB pensions has never been greater. However, I’m cautious that ever-increasing requirements moving forward may lead to over-regulation, resulting in inefficiencies in the running of DB pension schemes as they gear towards buy-out – ie achieving the greatest degree of member protection possible – and ultimate wind-up.