July 2006
Pensions Act 2004
The Pensions Act 2004 (PA2004) came into force on 6 April 2005 and affects cases where the insolvency order was made on or after 6 April 2005 and where the company, partnership or bankrupt operated an occupational pension scheme for the benefit of employees.
PA2004 brought into existence;
Pension Protection Fund (PPF)
The PPF is a statutory fund run by the Board of the Pension Protection Fund, a statutory corporation established under the provisions of the PA2004. The PPF became operational on 6 April 2005.
The PPF was established to pay compensation to members of eligible defined benefit pension schemes when there is a qualifying insolvency event in relation to the employer and where there are insufficient assets in the pension scheme to cover PPF levels of compensation.
The PA2004 provisions only affect cases where the winding- up/bankruptcy order was made on or after 6 April 2005, however, where the order was made between 1 January 1997 and 5 April 2005, pension scheme members of an underfunded scheme may be able to receive compensation from the Financial Assistance Scheme (see paragraph 61.55).
The PPF will only assume responsibility for a pension scheme where a qualifying insolvency event has occurred in relation to an eligible pension scheme, and;
Where these conditions are not met the PPF will cease to be involved with the pension scheme once the relevant processes and procedures have been completed.
Where these conditions are met the PPF will assume responsibility for the pension scheme and compensation will then become payable to its members.
Guidance for official receivers on how to interact with the PPF is available at: http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/insolvency_guidance.pdf
61.44 Moral Hazard restoration order
In order to mitigate the moral hazard risk of employers seeking to avoid pension obligations at the expense of the Pension Protection Fund, section 38 of the PA2004 gives the Pensions Regulator power to issue a contribution notice requiring a person to make good the whole or part of the shortfall under a scheme in certain circumstances.
Section 38(3) of the PA2004 provides an exemption for the official receiver thus he/she will not be at risk of incurring liability for a contribution notice in respect of acts which he/she carries out in accordance with his/her duties.
The Pensions Regulator is the new regulatory body for work-based pension schemes in the UK. It became operational on 6 April 2005. It has a defined set of statutory objectives and has wider powers (than its predecessor OPRA) to investigate schemes and take action where necessary. The Pensions Regulator takes a proactive, risk-focused approach to regulation and provides practical support for the regulated community.
61.46 Notification of an insolvency event
If the official receiver is dealing with a company, partnership or bankrupt which/who has operated an occupational pension scheme for the benefit of employees, he/she is required under section 120 of PA2004 to send notice of an 'insolvency event' (i.e. the making of the winding - up/ bankruptcy order) to:
(a) The Pension Protection Fund
Knollys House
17 Addiscombe Road
Croyden
Surrey
CR0 6SR
Tel: 0845 600 2541
http://www.pensionprotectionfund.org.uk/
email: information@ppf.gsi.gov.uk
(b) The Pensions Regulator
Napier House
Trafalgar Place
Brighton
BN1 4DW
Tel: 0870 6063636
Fax: 0870 2411144
http://www.thepensionsregulator.gov.uk/
(c) The pension scheme trustees or managers
The notice is referred to as a 'section 120 notice'.
Insolvency events in relation to bankrupts, companies and partnerships are detailed in section 121(2), (3) and (4) of the PA2004 respectively. The insolvency events which the official receiver is required to notify in addition to the making of a winding - up/bankruptcy order are as follows;
The appointment of a provisional liquidator or an interim trustee is not an insolvency event and notification will only be required if a winding - up or bankruptcy order is made at the substantive hearing of the petition. Change of office - holder in the same procedure, such as the handing over of a case to an insolvency practitioner does not need to be notified.
The official receiver should use form 'section 120 notice' which can be accessed by following this link http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/s120notice.pdf to the PPF's website. This is a suggested pro forma only and not a legally prescribed form.
The official receiver is required to comply with the legal requirements for the notification of insolvency events - although completing the pro forma on the PPF website will cover all of the necessary points. (These are set out in regulation 4(2) of the Pension Protection Fund (Entry Rules) Regulations 2005.)
The section 120 notice asks whether the pension scheme is a defined benefit, hybrid or money purchase scheme. There is no legal requirement to answer this question. The official receiver should therefore not spend undue time trying to establish the precise nature of the scheme.
In accordance with section 120 of the PA2004 the notice must be sent within the notification period (i.e. within 14 days) beginning with the later of;
the winding - up order/bankruptcy order or,
the official receiver becoming aware of the existence of the scheme.
If the company/partnership/bankrupt operated more than one occupational pension scheme, a separate notice will be required in relation to each of the occupational pension schemes involved.
61.48Scheme status notice - notice as to whether the rescue of the scheme has or has not been possible
In the majority of cases dealt with by the official receiver, there will be no prospect of the employer continuing as a going concern. Provided there is no other person willing to assume responsibility for the pension scheme, then, in accordance with section 122 (7) of PA2004, the official receiver should send notice that a scheme rescue has not been possible as soon as reasonably practicable. (See regulation 9 of the Pension Protection Fund (Entry Rules) Regulations 2005.)
No form has been prescribed but a proforma can be accessed by following this link section 122 scheme status notice to the PPF website.
Under section 122(6) of the PA2004, the official receiver is required to send the scheme failure notice to:
Where a pension scheme rescue is not possible, and after the PPF have completed relevant procedures and considered rights of review, the pension scheme will continue to the next stage of the assessment period.
If, for any reason, the official receiver is unable to confirm whether or not a pension scheme rescue is possible he/she should refer to the 'Guidance for insolvency practitioners and official receivers' on the PPF website.
If the official receiver's appointment as liquidator/trustee comes to an end before he/she is able to form a view as to whether support for the pension scheme will continue or not, for example if the winding - up order is rescinded or the bankruptcy order is annulled then he/she is still required under section 122 (4) to issue a scheme status notice.
In cases where the insolvent is trading at the date of the order and the case is handed over to an insolvency practitioner, whether that is with a view to continuing trading or exploring possible rescue procedures such as administration, official receivers should include in the handover notes a copy of the section 120 notice. It will be for the insolvency practitioner to issue any further notices once he/she knows whether the scheme will continue.
An assessment period is the period during which a pension scheme is assessed by the PPF to determine whether it should assume responsibility for the scheme.
When the PPF is satisfied that;
the bankruptcy/winding up order is a qualifying insolvency event within the meaning of section 121 of PA2004 and,
the pension scheme is eligible - according to section 126 of PA2004,
it will issue a validation notice to the official receiver confirming that an assessment period has begun. The start of the assessment period will be the date of the winding- up/bankruptcy order.
During the assessment period the PPF will establish whether or not it will assume responsibility for the scheme. The PPF will undertake a monitoring role in relation to the trustees of the pension scheme. This is to ensure that the trustees maintain the scheme in an appropriate manner for potential entry to the PPF. In certain circumstances, the PPF can issue directions to trustees in relation to areas such as the investment of the scheme's assets, the incurring of expenditure and the bringing or conduct of legal proceedings. During the assessment period the PPF will work closely with the Pensions Regulator, keeping it informed of any relevant developments relating to the scheme.
The situation may be different for pension schemes where there is more than one participating employer. How the situation differs depends on the structure of the pension scheme. More information can be found in the Pension Protection Fund (Entry Rules) Regulations 2005 and on the PPF website. http://www.pensionprotectionfund.org.uk/
61.50 Dealing with requests for information from employees and pensioners during the assessment period
During the assessment period, any enquiries regarding the pension scheme from employees or existing pensioners should be directed to the trustees of the pension scheme rather than the PPF. This is because the trustees retain responsibility for administering the scheme (subject to statutory restrictions) until either the end of the assessment period or the point where it has been determined whether or not the PPF will assume responsibility for it.
If the official receiver receives enquiries from employees or pensioners regarding the PPF or requiring information on what compensation may be payable, he/she can refer them to the leaflet ' An Introductory Guide to the Pension Protection Fund' which is available on the PPF website.
61.51 Pension scheme creditor rights
When an assessment period begins, under section 137 of the PA2004, the PPF assumes the creditor rights of the pension scheme trustees (whether contingent or not) in relation to the insolvency of the employer. This means that the PPF is acting as the creditor of the company/partnership/bankrupt in relation to the money due from them to the pension scheme.
All documents which would normally be sent to creditors e.g. the notice of creditors meeting should be sent to the PPF to enable it to exercise the creditor rights of the pension scheme in the insolvency.
If, during the assessment period, the PPF (not the pension scheme trustees) should receive any sums recovered from the employer, for example a dividend in relation to the pension scheme. The PPF will pay that amount to the trustees of the pension scheme.
If the PPF assumes responsibility for a pension scheme, the pension scheme trustees will cease to have any responsibility for the pension scheme and all rights will pass to the PPF.
If it is determined that the pension scheme should withdraw from the assessment period, the PPF relinquishes its rights in relation to the creditor responsibility for the pension scheme. If this occurs, the pension scheme trustees will resume all rights and responsibilities to act for the pension scheme as creditor and the PPF takes no further part in relation to the scheme.
61.52 Proposals for a voluntary arrangement following a winding - up or bankruptcy order
The official receiver is required to notify each new insolvency event to the PPF, Pensions Regulator and pension scheme trustees or managers. If, therefore, a proposal is made for a voluntary arrangement but the official receiver remains in office while the proposal is considered, notice of that insolvency event should be given by the nominee, and the official receiver should then await the outcome of the meeting of creditors, if the case has not been handed over to the insolvency practitioner. If a voluntary arrangement is put in place, official receivers should include a copy of the section 120 notice with the handover papers and leave it to the insolvency practitioner to file any further notice.
Under the Pensions Act 1995, the official receiver was required to ensure that an independent person was appointed to act as Independent Trustee. Following changes made by Pensions Act 2004, a new regime came into force on 6 April 2005. The new regime applies to all occupational pension schemes (defined benefit, defined contribution, death benefit only, unapproved and overseas schemes) As detailed in paragraph 61.46, the official receiver is obliged to give written notice of the winding-up/bankruptcy order to the Pensions Regulator. The Pensions Regulator then has discretion over whether or not to appoint an Independent Trustee.
In accordance with section 23 of Pensions Act 1995 (as amended by Pensions Act 2004), a person is independent in relation to trust scheme only if he;
The Pensions Regulator selects Independent Trustees from its trustee register. Trustees on the register are rigorously vetted to ensure that they have the appropriate skills to protect member's benefits. The minimum criteria for inclusion on the register are set out in the Occupational Pension Schemes (Independent Trustee) Regulations 2005. Further information regarding Independent Trustee appointments can be accessed via the Pensions Regulator website and the trustee public register can be accessed at www.thepensionsregulator.gov.uk/pdf/TrusteePublicRegister.pdf
The official receiver is still required under section 26 of the Pensions Act 1995 to provide information to pension scheme trustees and this obligation applies whether or not an Independent Trustee has been appointed by the Pensions Regulator.
61.54 Commencement and transitional arrangements.
The Pension Protection Fund applies in general to cases where insolvency commences on or after 6 April 2005. However, it will also apply to cases where insolvency commenced before that date but there is a later insolvency event on or after that date, for example a partnership or company has been in administration but goes into liquidation on or after that date or a voluntary arrangement follows an earlier winding- up or bankruptcy order.
61.55 Financial Assistance Scheme (FAS)
The Financial Assistance Scheme Regulations (2005) were approved by Parliament on 19 July 2005 and the scheme came into operation on 1 September 2005. The Financial Assistance Scheme (FAS) is administered by the Department for Work and Pensions and is managed by a national FAS Operational Unit.
Members of eligible pension schemes, whose employer has entered insolvency proceedings before 6 April 2005 and do not qualify for compensation from the PPF may still be able to receive PPF compensation via the FAS.
The FAS offers help to some people who have lost out on their pension because the scheme they were a member of was under-funded when it started to wind - up, and the employer is insolvent or no longer exists. However, not all members of all qualifying pension schemes will receive assistance from the FAS. The FAS does not attempt to replicate the rules or benefits of any particular scheme but provides assistance to those who have lost out and are in most urgent need.
The FAS provides assistance to members meeting eligibility criteria of certain underfunded schemes which commenced wind - up between 1 January 1997 and 5 April 2005 (inclusive). Eligible schemes will have to satisfy other FAS qualifying conditions, including conditions relating to employer insolvency. The FAS definition of insolvency will be similar to the definition of insolvency used by the PPF but will also include Members’ Voluntary Liquidations and dissolved companies. Schemes will qualify where employer insolvency has occurred some time after, as well as before, wind-up. The cut-off date by which an insolvency event must have been entered is 28 February 2006.
The FAS will need to be satisfied as to claims for eligibility and will investigate the fate of the scheme following the insolvency of the employer. As regards companies, The FAS will attempt to get the information they need from the scheme trustees and, where relevant, concerning companies from the Registrar of Companies.
Further information on the FAS may be obtained at www.dwp.gov.uk/fas
61.55A The Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2007
(May 2008)
The FAS was extended and amended by the The Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2007 (FAS(MA)).
These amendments came in to force on 19 December 2007 to implement the extensions announced in the Chancellor’s Budget Statement of 21 March 2007. Public funding for the FAS has been increased, and this extra funding allows various extensions to the scheme, including giving all eligible members of affected pension schemes a top up level on their pensions equivalent to 80 per cent of the core pension rights they accrued under their particular scheme, subject to a cap. The FAS Operational Unit will recalculate the assistance due to members for whom data has already been supplied and advised them about any change in their entitlement.
Other changes introduced include increasing the cap on assistance to £26,000, scrapping de minimis payments and tapered assistance rates (which were dependant on retirement age) and extending cover to members of pensions schemes that began winding up between 1 January 1997 and 5 April 2005, where a compromise agreement is in place and where enforcing the debt against the employer would have forced the employer in to insolvency.
Further information can be found on the The Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2007 available at : http://www.dwp.gov.uk/lifeevent/penret/penreform/fas/news.htm#act2007
61.55B Further extension to the Financial Assistance Scheme
(May 2008)
As a result of a government review as to whether an alternative treatment of the residual funds in affected pension schemes could supplement the committed government funding of the FAS and bring payments from the 80% nearer to 90% assistance levels, on 17 December 2007 the Government announced a further extension to the FAS. Regulations will be brought forward during 2008 to implement this further extension. The key aims of this further extension are to guarantee all scheme members 90% of their accrued pension at the date of commencement of wind-up, revalued to their retirement date, and to ensure that pensions that would have been revalued under scheme rules will be revalued in line with price inflation capped at 5% per year compounded for the period. These rules will broadly equate to the compensation revaluation offered by the PPF. The cap of £26,000 will be protected, and payment of assistance derived from post 1997 service will be increased in line with inflation (subject to a 2.5% limit).
The Government announcement issued on 17 December 2007 regarding the extension of the Financial Assistance Scheme, and the latest statements issued by the Minister for Pension Reform (most recently on 27 March 2008) announcing draft regulations and a consultation document, supporting the second stage of delivery of the Government commitments can be accessed at: http://www.dwp.gov.uk/lifeevent/penret/penreform/fas/news.htm#act2007
61.56 Notification of release - dissolution to be deferred
The official receiver should notify the PPF, Pensions Regulator and pension scheme trustees and managers when he/she intends to make application for his/her release as liquidator/trustee. Where the winding - up of an occupational pension scheme remains to be concluded, it is imperative that the official receiver makes application for the dissolution of the company to be deferred by the Secretary of State. For further information on the release of the official receiver as liquidator or trustee see Chapter 37
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