Shepherd and Wedderburn LLP
  January 24, 2005 - Scotland

A Pensions Act at Last?
  by Louisa Knox

Despite rumours from Westminster that the Pensions Bill was to be dropped to make room for the anti-fox hunting Bill, it looks certain that the Pensions Bill will finally receive Royal Assent in November. In its final form, the Bill now extends to over 350 pages. Those looking for simplification will be disappointed to say the least. One of the most contentious issues within the Bill continues to be the Government's latest measures to address the pensions crisis ­ the Pension Protection Fund (PPF). It was initially intended to offer increased protection to members of under funded schemes with insolvent employers without retrospective effect. However the Government has now done something of a U turn on its early proposals and Malcolm Wickes, the Pensions Minister announced recently that the fund is to be backdated. This decision has been met with widespread disdain amongst actuaries and employers organisations alike, who see the move as an extra cost burden. The announcement means that schemes that have started to wind up since May but are not fully wound up by the time the fund starts operating in April 2005 could still qualify for compensation. At this late stage, it is still far from clear how the PPF will be funded. The Bill provides for a flat rate levy, no matter the financial soundness of the scheme to start with, but will eventually become "risk based" to reflect the level of scheme under funding and other possible factors to take account of the likelihood of the scheme knocking on the PPF's door. Perhaps equally controversial has been the Government's stance on the so called "moral hazard" rules. Created to protect the PPF from corporate transactions designed to dump pension fund liabilities onto it, the Government was forced to revise the scope of its original moral hazard rules after widespread fears from industry that the newly formed Pensions Regulator would be able to hunt down directors and shareholders to make good pension deficits. In response the new rules have been softened to include a maximum 6 year "look back" period for transactions, and a narrowing of the scope of those caught by them. Perhaps a greater cause of concern for businesses, is the Bill's power to recast statutory debts which arise in schemes. At present, if as a result of a share sale, a company ceases to participate in the Seller's final salary pension scheme a statutory debt under the Pensions Act 1995 may become payable. The Bill introduces a power to change the basis on which any debt is calculated. Presently a small or no debt may be payable, but under the new calculation a much larger sum may be due. Pension scheme deficits have already become a stumbling block in mergers and acquisitions. The list of failed takeovers due to pension deficits includes Marks & Spencer and WH Smith. More companies will undoubtedly be added to that list in the coming months. The much criticised Minimum Funding Requirement (MFR) will disappear in relation to final salary schemes. Undoubtedly motivated by research that suggests that almost half of all private occupational pension schemes are not meeting their minimum funding requirements, the Bill contains a much tougher requirement to replace the MFR. It is envisaged that schemes will be influenced by the test used to determine the PPF risk based levy. Despite there being widespread uncertainty regarding the detail of the Bill at such a late stage, it is clear that the pensions industry is about to receive its greatest make-over yet.

Louisa Knox is a partner specialising in pensions with commercial law firm Shepherd+ Wedderburn 44 (0)131 473 5216