Pensions

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Resources

We provide a range of know-how materials about pensions law for lawyers and others doing business in the UK, including:

Current awareness

Practical legal updates delivered to subscribers by e-mail and published on our website.

A comprehensive bank of practice notes

The law applied to situations you face daily. Containing clear and detailed explanations of law and practice, updated to reflect developments as they occur.

Standard documents

A bank of standard documents (including clauses) for use in commercial transactions. These are continually updated to reflect any change in law or practice.

Checklists and flowcharts

Simplify complexity. Ensure you have everything covered with quick reference guides to the law.

Hot topics and market practice

Practical Law Pensions tracks the latest developments in market practice in the occupational pensions field. Among other areas, we cover the impact of the Pensions Regulator on corporate transactions, developing practice in dealing with the employer debt legislation, and key developments regarding buyouts, buy-ins and longevity swaps.

Legislation and case trackers

Legislative and regulatory developments trackers providing a quick and user-friendly way of checking on significant new consultations, pensions legislation, regulatory guidance, pensions-related court cases and determinations made by the Pensions Ombudsman.

Coverage

Occupational and personal pensions

  • Administering pension schemes
  • Cross-border
  • Discrimination
  • Employers
  • Funding and investment
  • Members, benefits and pension sharing
  • Miscellaneous
  • Pension Protection Fund
  • Pensions and employment
  • Pensions Regulator
  • Policy and reform
  • Reorganisations and outsourcing
  • Sales and acquisitions
  • Scheme documents
  • Schemes in the public sector
  • Tax and accounting
  • Trustees
  • Winding-up and insolvency

Pensions disputes

  • Court proceedings
  • Ombudsmen and tribunals
  • Internal dispute resolution procedures
  • Challenging the Pensions Regulator
  • Common issues in disputes

Our team

Loreto Miranda

Loreto Miranda is Head of Practical Law Pensions. She joined Practical Law from Hogan Lovells, where she worked in the dispute resolution department since qualifying in 2001. She specialised in pensions-related disputes and is an associate member of the Association of Pension Lawyers. She also acted in a range of other commercial disputes, including cases involving alternative dispute resolution, and obtained Higher Rights of Audience. She is currently a non-practising solicitor.

Nick Sargent joined Practical Law in May 2006 from Denton Wilde Sapte (now Dentons UKMEA LLP), where he was a senior solicitor in the pensions department. Nick qualified in 1996 at Reynolds Porter Chamberlain. In 1999 he moved to Denton Hall (as it was). During 2003, Nick spent six months as a professional support lawyer in the pensions department at Slaughter and May, before returning to a fee-earning role at Denton Wilde Sapte. Nick is a member of the Association of Pension Lawyers and a former assistant editor of the Occupational Pensions Law Reports. Nick was the first head of Practical Law Pensions and launched the service in December 2006. He is currently a non-practising solicitor.

Graeme Simpson joined Practical Law from Shoosmiths’ pensions department where he was a partner, recommended as “excellent” in the Legal 500 directory (2009). He qualified in 1997 and has experience of providing advice on a wide range of pensions matters, in particular, to pension scheme trustees and on public sector outsourcing issues. A member of the Association of Pensions Lawyers, he is a previous speaker on the APL "Beginners" training course. Graeme is also a past editor of Tottel’s "Pensions Law Handbook" and has provided comment on pensions issues for various national news broadcasters. Graeme is a non-practising solicitor.

Rachel Brown

Rachel Brown is a former solicitor. She joined Practical Law Pensions in July 2008 from the Pensions Regulator, where she was a solicitor in the corporate risk management department advising on regulatory matters. Rachel qualified in 2000 at Allen & Overy, where she advised trustees and employers on pensions issues before moving to the Pensions Regulator in 2005. Rachel is a member of the Association of Pension Lawyers.

Jennie Clarke

Jennie Clarke graduated with an LLB (Hons) in Law from the University of Southampton in 2013. She went on to study the BPTC at the University of Law, Bloomsbury and was called to the Bar in July 2014. Jennie worked at the Financial Ombudsman Service as an Adjudicator before joining Practical Law as an Assistant Editor in July 2016.

Sample resources

To provide you with examples of the high quality precedents and practice notes available through Practical Law Pensions, we have made a sample of our popular content to view online. To view any of this content in full, request a free trial of PLC Law Department using the form to the right.

Pensions in the employment contract

This practice note looks at the typical provisions in an employment contract that relate to pensions and the legal issues that arise when employers want to make changes to pensions terms.
Faith Dickson, Sacker & Partners LLP
Contents

Overview of this practice note

Employment contracts must contain certain basic information about an employee's pension rights. Employers usually ensure that the wording gives them scope to change an employee's pension terms at a future date. Depending on the wording used, employees may claim they have a contractual right to receive future pension benefits at a particular level or of a specific kind.

Changing accrued pension rights is much harder. There are restrictions in pensions and trust law that restrict detrimental changes to accrued rights unless the members agree to them.

There are also statutory consultation requirements, covering certain defined changes to both accrued and future pension rights.

Employment contracts

Employment lawyers will usually draft most of the provisions of an employment contract. Pension lawyers often find themselves being asked to advise on the parts relevant to the employee's pension entitlement. They should therefore ensure they are aware of the basic legal position about the contents of an employment contract.

The Employment Rights Act 1996 (ERA 1996) requires that employers must give employees certain basic information about pensions in a statement of employment particulars. In practice, it is advisable to include more information than this in the employment contract in order to protect the employer (see Advising an employer: basic points below).

For points to note when acting for an employee, see Advising an employee: basic points below.

For standard-form wording to use in an employment contact, see Standard document, Pensions clauses (www.practicallaw.com/4-200-2104).

Advising an employer: basic points

The ERA 1996 requires the following basic information regarding pensions to be included in the written statement of particulars or employment contract:

  • A statement of particulars of any terms relating to pensions and pension schemes, unless the employee's pension rights depend on the terms of a pension scheme established under statute, and they are employed by a body or authority required under statute to give information concerning pension rights to new employees (section 1(4)(d)(iii) and section 5, ERA 1996).

  • A statement regarding whether the employee's employment is contracted-out of the state second pension (S2P) (www.practicallaw.com/1-200-3464) (section 3(5), ERA 1996).

Employers may include details of pension terms by reference to another document. In practice, this will normally be the pension scheme booklet, which is written in a manner that is reasonably accessible to employees (section 2(2), ERA 1996).

To avoid any argument over the scope of the contractual rights conferred on employees relating to pensions, employers should ensure that the wording used in the statement of particulars gives the employee only a right to join whatever pension arrangements are operated by the employer from time to time. Employers should avoid using wording that confers on the employee a right to receive pension benefits in a particular scheme at a particular level. If the employer does this, it will be difficult for it to make changes to the pension scheme at a later date (see Changing pensions terms below).

For standard-form wording for a statement of particulars, see Standard document, Section 1 statement (www.practicallaw.com/2-200-2039).

Advising an employee: basic points

If acting for an employee entering into an employment contract, it follows that the employee would be best protected by limiting the scope for the employer to change the pension terms at a future date. Therefore, consider:

  • Including a contractual right to a given level of benefit.

  • Making any express contractual right to vary or discontinue an employee's pension arrangements subject to the employee's express consent and to the employee being provided with membership of a replacement scheme with a comparable level of benefits.

A further protective measure for the employee would be to include pension benefits within the payment in lieu of notice (PILON) (www.practicallaw.com/2-200-3406) clause.

Particular issues arise if...

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Consulting with employees on pension changes

This practice note considers the requirement on employers to consult with their employees before making certain changes to their pension schemes. The requirement covers a number of prescribed changes that are set out in regulations. These include an employer deciding to close a scheme to new members, stop existing members accruing further benefits, or change the basis on which members accrue benefits.

PLC Pensions
Contents

Overview of this practice note

This practice note considers the requirements on employers to consult with their employees before making certain changes to their pension schemes. The requirements cover a number of prescribed "listed changes" that are set out in regulations.

Listed changes include an employer deciding to close a scheme to new members, stop further benefit accrual by existing members, or change the basis on which members accrue benefits. Changes to pensionable earnings made on or after 6 April 2010 will also be a listed change. Whether the requirement applies will depend on how many employees an employer has, not how many members there are in the relevant pension scheme.

If the Pensions Regulator (www.practicallaw.com/9-201-5137) (the Regulator) decides to take action against an employer who has breached the statutory requirements, it has the power to:

  • Impose a civil penalty of up to £5,000 against an individual, or £50,000 against a company, if the employer has failed, without reasonable excuse, to comply with the statutory duty to consult.

  • Issue an improvement notice, specifying particular steps that an employer must take (section 13, Pensions Act 2004 (www.practicallaw.com/8-383-2509) (PA 2004)).

  • Order a civil penalty of up to £5,000 against an individual, or £50,000 against a company, if the employer does not comply with an improvement notice (section 10, Pensions Act 1995 (www.practicallaw.com/0-383-2508) (PA 1995)).

The Regulator does not have the power to reverse a change that an employer has made without meeting the consultation requirements. Indeed, the legislation expressly provides that an employer's failure to comply with the requirements does not invalidate any such change (section 259(3) and 260(2), PA 2004).

Background to the pensions consultation requirements

In June 2003, the UK government indicated a commitment to introducing legislation that would require employers to consult with their employees before making significant pension changes. The measures would apply to an occupational pension scheme (www.practicallaw.com/8-107-6900) that an employer participates in and a personal pension scheme (www.practicallaw.com/4-107-7001) that it contributes towards.

Sections 259 to 261 of the PA 2004 empowered the Department for Work and Pensions (DWP) to make regulations that require employers to consult their employees before making certain changes to their pension schemes. The relevant regulations are contained in:

Both sets of regulations came into effect on 6 April 2006 (see PLC Employment Legal update, Pensions: information and consultation regulations published (www.practicallaw.com/8-201-8589)).

The government has introduced the duty to inform and consult against...

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Pensions in the UK: overview

An overview of the pensions system in the United Kingdom. The note summarises the different types of pension arrangements available in the UK and looks at the legal and regulatory framework, as well as the tax rules applying and the regime for contracting-out of the state second pension. Typical provisions seen in a pension scheme's governing deed are discussed, along with brief details of the pensions aspects of corporate transactions. Finally, the note comments on key legislative materials and reforms in the pipeline.

PLC Pensions
Contents

Introduction to the basics

There are two types of pension provision in the UK:

  • State pension.

  • Private pensions.

The two systems run in parallel. In recent years, the government has taken measures to reform both types of pension. The main legislative changes have been enacted in the Pensions Act 2007 (PA 2007) and the Pensions Act 2008 (PA 2008).

Workers in the public sector are entitled to additional pension benefits through their membership of one of the various public-sector pension schemes such as the Local Government Pension Scheme or the Principal Civil Service Pension Scheme. Traditionally, these and other public-sector schemes provided generous pension benefits related to members' final salaries (for an explanation of the different types of benefits offered in pension schemes, see Types of benefit provision), but this is due to change. In March 2011, the report of the Independent Public Service Pensions Commission headed by Lord Hutton of Furness recommended that public-sector schemes should move to a career-average benefit structure by 2015 (see Legal update, Final Hutton report recommends switch to career-average benefits for all public-sector pension schemes (www.practicallaw.com/3-505-0818)).

For more about public-sector pensions, see Practice note, Overview of pension schemes in the public sector (www.practicallaw.com/8-383-4688).

State pensions

The state pension currently comprises two parts:

Basic state pension

Individuals will be eligible to receive the basic state pension (www.practicallaw.com/4-375-9148) if they have paid sufficient National Insurance contributions (www.practicallaw.com/8-201-8297) (NICs) during their working life (see Checklist, Current allowances, rates and limits (www.practicallaw.com/5-207-5072) for the current rate). The basic state pension can be claimed from state pension age (www.practicallaw.com/2-200-3500) (SPA). For individuals retiring at the moment, SPA is 65 for men and 60 for women, but SPA for women is rising gradually from age 60 to 65 between 2010 and 2018. Further changes under the Pensions Act 2011 increase SPA for both sexes to age 66 by April 2020. Eventually, SPA is due to reach age 68 for those born after 6 April 1978. For a table explaining these changes, see Practice note, Pensions Act 2007: Summary of key points: Increases to state pension age (www.practicallaw.com/8-375-9429).

SPA may not be the same as an employee's contractual retirement age, or the normal pension age (www.practicallaw.com/0-376-5467) under an employer's pension scheme.

State second pension (S2P)

There is also an additional state pension called the state second pension (S2P) (www.practicallaw.com/1-200-3464). Until April 2002, this was called the state earnings-related pension scheme (SERPS) (www.practicallaw.com/9-200-3498).

S2P is based on the NICs that an individual has paid. It aims to provide a more generous additional state pension for low and moderate earners and certain carers and long-term disabled people, by treating such people as having made the necessary minimum NICs. In some circumstances individuals can choose to contract out of S2P (see Contracting out of the state second pension).

With the PA 2007, the government began to implement various reforms to the basic state pension and S2P. Key changes include the following:

For more information about these reforms, see Practice note, Pensions Act 2007: summary of key points (www.practicallaw.com/8-375-9429).

In the 2012 Budget, the government confirmed its long-term intention to move to a single-tier state pension, combining the basic state pension and state second pension. A white paper is due to be published on this topic later in 2012 (see Legal update, 2012 Budget: key pensions issues (www.practicallaw.com/1-518-5564)).

Private pensions

Private pensions have developed in part because of the low level of provision made by the state. Private pensions can either be arranged on an individual basis, or through a scheme set up by an employer, and contracted in or out of S2P.

For a quick guide to the main legislation concerning private pensions, see box, Key legislative materials.

Employer-sponsored arrangements: occupational pension schemes

An occupational pension scheme (www.practicallaw.com/8-107-6900) is a scheme set up directly by employers for the benefit of their employees. To qualify for favourable tax treatment it must be registered with HM Revenue & Customs (HMRC) (www.practicallaw.com/6-200-6399) (see Registered pension schemes).

Occupational schemes are administered by their trustees (although in practice trustees will usually delegate day-to-day administration to professional administrators or an in-house team). The assets of the scheme are kept separate from those of the employers that participate in the scheme. The employer and trustees have ultimate liability for administering the scheme and providing benefits under it. Only employees (and not the self-employed) can join occupational pension schemes under the current tax regime.

For more about how occupational schemes are run, and the role of the scheme trustees, see Pension scheme governance and Trustees' duties.

Before 22 September 2005 a so-called death-benefits-only scheme (also referred to as a life-assurance-only scheme) counted as an "occupational pension scheme" under section 1 of the Pension Schemes Act 1993 (PSA 1993), even though such a scheme provides only lump-sum death benefits for members and no pension benefits.

The position changed from 22 September 2005 under amendments to the PSA 1993 made by section 239 of the Pensions Act 2004. Certain regulatory consequences followed from this change in the law and the Pensions Regulator examined the main issues in its Lump-sum death benefits guidance (www.practicallaw.com/1-204-1423).

Individual arrangements: personal pension schemes

A personal pension scheme (www.practicallaw.com/4-107-7001) is an individual pension arrangement. It is set up through a contract between a pension scheme provider (normally an investment firm) and an individual. Both employees and the self-employed can have personal pensions. Employers may choose to make contributions to an employee's personal pension scheme (but are not obliged to do so).

Employers can make arrangements with personal pension providers (normally investment firms) to facilitate the provision of individual pensions to their employees (known as a group personal pension plan (www.practicallaw.com/7-107-6670) (GPPP)). Under these arrangements, it is the provider rather than the employer that has the ultimate liability for administering the scheme and providing benefits under it.

Wealthy individuals often set up a self-invested personal pension (SIPP) (www.practicallaw.com/2-201-6475), in which they set the plan's investment strategy, rather than the scheme managers.

Widening access to pensions: stakeholder pension schemes

Historically there has been no requirement in UK law for employers to contribute to a pension scheme for employees, although this is changing later in 2012 when auto-enrolment comes into effect (see Pension reforms: auto-enrolment and NEST).

Since October 2001, however, employers have been required to ensure that employees have access to a low-cost form of pension called a stakeholder pension (www.practicallaw.com/6-107-7302), and arrange for employees' contributions to be deducted and paid to the scheme. The key exceptions to this requirement are if the employer offers an occupational pension scheme, or contributes an amount equal to at least 3% of employees' salaries to a GPPP, or if the employer employs fewer than five employees.

Stakeholder pensions can be set up under trust, but are normally contract-based arrangements, and are effectively run as personal pension schemes. They must satisfy a number of minimum government standards:

  • A stakeholder pension scheme cannot charge more than 1% a year of the value of the member's fund for administration and investment expenses.

  • Members must be able to transfer into or out of a stakeholder pension, or stop paying for a time, without facing any extra charge.

  • All stakeholder pension schemes must accept contributions of £20 or more a year, although some may accept lower payments.

Stakeholder pension schemes must be run in the interest of their members. For more information, see Practice note, Stakeholder pensions (www.practicallaw.com/2-336-4954).

Under the PA 2008, most of the stakeholder pension requirements will be abolished when the new auto-enrolment requirements start coming into force. Employers which have designated existing stakeholder schemes (whether or not they contribute to them) can continue with these after abolition if they wish, provided they satisfy the criteria for qualifying schemes under the new system (see Pension reforms: auto-enrolment and NEST).

Types of benefit provision

Private pension schemes can also be described by the type of benefits they provide to their members. There are two basic types:

Personal pension schemes are always DC schemes, but occupational pension schemes can either be DB or DC, or a combination of both (known as a hybrid scheme (www.practicallaw.com/7-206-1984)).

DB schemes

In a DB scheme, the benefit that the member will eventually receive from the scheme is fixed at the outset. The most common type of DB scheme is a final salary scheme (www.practicallaw.com/2-107-5748). In a final salary scheme, the member's pension is calculated as a percentage of pensionable salary (www.practicallaw.com/6-200-3409) for each year of service as a contributing member of the scheme (typically a pension scheme might provide a pension of one-sixtieth of final pensionable salary for each year of pensionable service). A DB scheme could also provide a pension based on the average salary of the member over their working life (known as a career-average revalued-earnings (CARE) scheme (www.practicallaw.com/8-235-6985). Equally, death-benefit schemes providing a multiple of the member's salary on death are also DB schemes.

Historically, DB schemes in the UK have been set up under trust. For more about the scheme's governance and the role of the trustees in running the scheme, see Pension scheme governance: the trust deed and rules and Trustees' duties.

DC or money purchase schemes

In a DC scheme, the eventual benefits are not known until retirement, but a specified level of contributions are payable to the scheme from the employer and (normally) the employee. The contributions are invested, and a notional account of these is kept for each member's investments in the scheme. When the member comes to retire, the total of the contributions paid and the investment returns on these is applied to buy an annuity (www.practicallaw.com/1-107-6404) that will provide a pension. The benefit that the employee gets at retirement is therefore dependent on the level of contributions paid in, investment returns during the period of membership and the rates for buying annuities at retirement. Therefore, the employee takes the ultimate risk of the investment performance of the scheme.

For a more detailed look at money purchase schemes, see Practice note, Money purchase pension schemes: overview (www.practicallaw.com/8-422-1664).

Pension scheme governance: the trust deed and rules

An occupational scheme can be established by trust or by contract. Traditionally, DB schemes were set up under trust to gain tax approval, although...

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Pension sharing on divorce: an overview

This practice note provides an overview of the effect of pension-sharing orders on tax-registered occupational pension arrangements. For a full discussion of these issues, and detailed legislative references, see Practice note, Pension sharing on divorce: a practical guide for trustees.

Stephen Moore and Kris Weber, Squire Sanders
Contents

Key features of a pension-sharing order

In December 2000, legislation came into effect that allowed pension sharing on divorce. There is no obligation on the courts to insist on pension sharing. It is simply one of several options available, along with earmarking and the traditional method of offsetting pension rights against other matrimonial assets. As a result, not every divorce will result in a pension-sharing order (www.practicallaw.com/4-205-8983).

The advantage of pension sharing is that it allows the member's benefits to be divided at the time of the divorce rather than waiting for the benefits to come into payment. A pension-sharing order provides the parties with a "clean break" solution to sharing pension benefits, which will often be a valuable part of the divorce settlement.

A pension-sharing order will specify that the member's benefits are reduced by a pension debit (www.practicallaw.com/5-205-8987) and the former spouse is given a pension credit (www.practicallaw.com/2-205-8984) of equal value. This credit can then be used to provide benefits for the former spouse from the scheme itself, or it can be transferred to another scheme or arrangement.

Most of the legislation relating to pension sharing derives from the Welfare Reform and Pensions Act 1999 (WRAPA 1999), but much of it takes the form of amendments to other legislation, primarily the Matrimonial Causes Act 1973 (MCA 1973).

When will pension sharing apply?

Pension debits

Calculating the pension debit

A pension-sharing order, made in England or Wales, must specify what percentage of the value of the member's rights is to be transferred to the former spouse rather than specifying a fixed amount (section 21A(1)(b), MCA 1973). This percentage must then be applied to the cash equivalent (www.practicallaw.com/7-107-5859) of the member's benefits, whether the member is an active, deferred or pensioner member of the scheme (section 29(2), WRAPA 1999). This produces a monetary amount which is the pension debit.

If the order is made by a court in Scotland, it may instead specify the amount to be transferred, rather than the percentage value (section 27(1), Family Law (Scotland) Act 1985). This amount will then be the pension debit. In Scotland, pension sharing is also possible by means of an agreement between the parties to the marriage.

Giving effect to the pension debit

If a member's pension rights are subject to a pension debit, each benefit must be reduced by the percentage value specified in the pension-sharing order (section 31(1), WRAPA 1999).

  • In a defined contribution scheme (www.practicallaw.com/6-107-6072), it is relatively straightforward to give effect to a member's pension debit. The pension debit will normally take the form of a once-and-for-all reduction in the member's account at the time when the order is implemented.

  • The position is less straightforward under a defined benefit scheme (www.practicallaw.com/0-107-7545). For example, in the case of an active member of a salary-related scheme, calculations will be required not only at the time of the divorce but also when the member's benefits come into payment.

Pension credits

A pension credit is a monetary amount equal to the amount of the corresponding pension debit (section 29(1)(b), WRAPA 1999).

In exceptional situations, the former spouse's pension credit may be...

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Are you up to speed with workplace pensions reforms?

For the first time, all UK employers will need to automatically enrol eligible workers into a pension scheme and make minimum contributions on their behalf. The new laws are being implemented gradually from 1 October 2012, but employers should take early action to prepare.

Use Practical Law resources to:

  • Familiarise yourself with the new employer duties and timings
  • Assess the impact on the workforce
  • Consider qualifying auto-enrolment requirements
  • Implement opting-in and out processes
  • Understand compliance issues

Resources now available:

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- Tim Cox, Partner, Linklaters LLP

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