Section 262: Modification of subsisting rights
959.This section replaces section 67 of the Pensions Act 1995 (restriction on powers to alter schemes).
960.The new sections are designed to enable schemes to make rule changes that could affect member’s subsisting rights, provided certain provisions and restrictions are met, for example trustees must agree to a modification being made and members must be informed about proposed changes. The rights which are protected are referred to as ‘subsisting rights’ – this covers accrued rights and pensions or benefits which are in payment.
961.Two categories of modification are created, ‘protected modifications’ and ‘detrimental modifications’. A protected modification (for example a change that would convert accrued defined benefit rights into defined contribution rights) can only be made with the informed consent of the member concerned (the consent requirement – see section 67B). A detrimental modification can be made with the informed consent of an affected member (see section 67B). Where this is done without such consent, the actuarial value of that member’s accrued rights at the time the modification takes effect must be maintained (the member must not suffer a reduction in the actuarial value of those rights as at the date the modification is put into effect) (see sections 67C and 67D). The actuarial equivalence requirements will enable schemes to restructure the ‘package’ of a member’s accrued rights without his consent (subject to the rules governing ‘protected modifications’) whilst ensuring that the actuarial value of those rights are maintained.
962.Where a detrimental modification or protected modification is made the trustees must give their approval and they cannot do so unless the relevant requirements concerning consent or actuarial equivalence have been satisfied (see section 67E).
963.Once a detrimental or protected modification has been made the trustees must notify members who were required to consent. Where actuarial equivalence applied they must take reasonable steps to notify affected members (see section 67F).
964.The Regulator shall have power to declare a detrimental or protected modification void and may make incidental orders such as requiring the trustees to take certain steps or declaring rights granted with the modification void (see sections 67G and 67H). The Regulator may also impose civil penalties on trustees and any persons who incorrectly make scheme modifications (see section 67I).
965.Section 67 – The subsisting rights provisions
966.This section sets out the scope of the ‘subsisting rights’ provisions and refers to the requirements that must be satisfied when making a change to a scheme that would or might have a detrimental effect on any member’s subsisting rights, or where the change is one that falls within the definition of a ‘protected modification’ at section 67A(3). A detrimental modification is one which would or might adversely affect subsisting rights. A protected modification is where defined benefit rights are converted to defined contribution rights or where a pension in payment is reduced.
967.Subsection (1) provides that the subsisting rights provisions apply to any power that any person has under the scheme to modify an occupational pension scheme. It does not apply to a power conferred on a public service pension scheme or a prescribed scheme or scheme of a prescribed description. This power will for example be used to exclude scheme which have less than two members.
968.Subsection (2) provides that a modification may be declared void by the Regulator (under the powers contained in section 67G) unless the following requirements are satisfied:
where the modification is a protected modification, the consent requirements at section 67B have been satisfied in respect of each affected member;
where the modification is a detrimental modification, either the consent requirements at section 67B or the actuarial equivalence requirements at section 67C are satisfied for each affected member;
the trustees of the scheme have met the trustee approval requirement at section 67E and the reporting requirement at section 67F.
969.Subsection (3) provides that the subsisting rights provisions do not apply when a modification is made for a purpose connected with debits under section 29(1) of the Welfare Reform and Pensions Act 1999 (which covers the treatment of pension rights on divorce) or in a prescribed manner.
970.Subsections (5) and (6) cover situations where a member dies after the trustees have begun the process leading up to making a detrimental or protected modification (as defined in section 67(A)(2)) so that the trustees need not repeat steps which had already been satisfied in relation to the member when he died.
Section 67A – The subsisting rights provisions: interpretation
971.This section defines a number of terms used in these provisions. Subsection (2) defines “regulated modification” as a ‘protected modification’ or a ‘detrimental modification’ or both.
972.Subsection (3) defines the term ‘protected modification’ as meaning a modification that:
on taking effect, would or might result in any subsisting rights of a member, or a survivor of a member, which are defined benefit rights becoming, or being replaced by, defined contribution rights;
would or might result in the reduction in the amount of any pension currently in payment;
is a modification of a prescribed description.
973.Modifications that fall within the definition of a ‘protected modification’ cannot be made without the consent of the affected member (see section 67C).
974.Subsection (4) defines the term “detrimental modification” as meaning a modification which, at the time the modification comes into effect, would or might adversely affect any subsisting rights of a member or survivor (see subsection (10)(b) which explains when a modification might have an adverse affect). Subsection (5) defines the term “affected member” as either being a member or a survivor.
975.Subsection (6) defines the term “subsisting rights” as any right which, at the time of the modification, has accrued to or in respect of the member to future benefits under the scheme rules, or any entitlement to the present payment of a pension or other benefit which a person has at the time of the modification under the scheme rules. Subsection (6)(b) provides that, in relation to the survivor of a member of the scheme, the definition covers any entitlement to a survivor’s benefit in payment, or right to any future benefits. Subsection (6) also provides that a pension credit right is included in the definition of ‘subsisting rights’.
976.Subsection (7) provides that the subsisting rights of an active member are to be determined as if the member had opted, immediately before the modification takes effect, to terminate his service in the pension scheme. Therefore any benefits to which the member would not be entitled on leaving service will not be included as subsisting rights. This will mean that benefits like death in service benefits will not be subsisting rights.
977.Subsection (8) defines the term “scheme rules” as meaning the rules of the scheme and relevant legislative provisions, and subsection (9) defines the term “relevant legislative provision” and the circumstances when these legislative provisions are to override any of the provisions of the scheme.
978.Subsection (10)(a) defines the term “survivor” for the purposes of this section as meaning the widow or widower of a member of a scheme, or a person who has survived the member and who has any entitlement to a benefit or to benefits payable in the future, under the scheme rules in respect of the member. Subsection (10)(b) also provides that a detrimental modification would or might have an adverse effect on that person’s subsisting rights if it would alter the nature or extent of those entitlements or rights, in a way that would or might result in less generous benefits or future benefits being less generous.
Section 67B – The consent requirements
979.Subsections (1) to (3) set out the requirements that must be met when a modification is being made which requires the consent of the affected member. The requirements are the informed consent requirement and the timing requirement.
980.Subsections (4) and (5) set out the conditions which must be met in order to satisfy the informed consent requirement. The trustees must, before the modification is made, inform the member that the consent requirements apply; give the member information in writing explaining the modification and the effect it would have on him; advise the member that he may make representations to the trustees about the modification if he wishes and that he will have a reasonable opportunity to make such representations. Once these provisions have been complied with the modification may proceed only if the affected member gives his written consent.
981.Subsection (5) allows trustees to use the actuarial equivalence requirements (see section 67C) where consent has not been given to a detrimental modification. If this provision is used, the trustees will not have to undertake a second information exercise should they fail to obtain member consent.
982.If the trustees do not make this clear to the member at the outset when asking for member consent to a detrimental modification they will have to comply with the information requirements contained in the actuarial equivalence provisions (section 67C(4)) and provide the information a second time.
983.Subsection (6) sets out the timing requirement. Its effect is that a member’s consent to a modification lapses unless the modification is made within a reasonable time after the consent is given.
Section 67C – The actuarial equivalence requirements
984.Subsection (2) provides that these requirements apply to detrimental modifications and where the trustees of a scheme have determined that they propose to make a modification under these provisions in respect of any affected members.
985.Subsection (3) notes the three elements that make up the actuarial equivalence requirements – the information requirement, the actuarial value requirement, and the actuarial equivalence statement requirement. Subsection (4) provides that in order to satisfy the ‘information requirement’ the trustees must, before the modification is made, inform the member that the actuarial equivalence requirements apply; give the member information in writing explaining the modification and the effect it would have on him; advise the member that he may make representations to the trustees about the modification if he wishes and afford him a reasonable opportunity to make such representations.
986.Subsection (5) places a duty on trustees to take appropriate action before making the modification to secure that the actuarial value of each affected member’s subsisting rights will be maintained.
987.Subsection (6) provides that the actuarial equivalence statement requirement is satisfied in respect of an affected member if the trustees have, within a reasonable period following the date when the modification has taken effect, obtained an actuarial equivalence statement relating to that member in respect of the modification.
988.Subsection (7) provides that an “actuarial equivalence statement” under subsection (6) is a written statement provided by the scheme actuary (appointed to the scheme under section 47(1)(a) of the Pensions Act 1995). Provision may be made in regulations prescribing that a person other than the scheme actuary may give this statement. Subsection (8) defines how, for the purposes of subsections (5) and (7), actuarial value is maintained. It provides that this is achieved if the actuarial value of the member’s subsisting rights immediately after the time when a modification takes effect (i.e. under the scheme rules as amended by the modification), is equal to or greater than the actuarial value of his subsisting rights immediately before that time (i.e. under the scheme rules prior to the modification).
Section 67D – The actuarial equivalence requirements: further provisions
989.Subsection (2) provides that the information requirement already undertaken can still satisfy the requirements in section 67C(4) if it is proposed to revise the modification so long as the revised modification does not differ from the original modification in any material respect.
990.Subsection (3), which is a corollary of section 67B(5), will allow trustees to inform members that they are proposing to make a detrimental modification and to seek the member’s consent but, if that consent is not given, they will proceed with the modification using the actuarial equivalence provisions. If this provision is used, the trustees will not have to undertake a second information exercise.
991.Subsection (4) provides a power to prescribe that specific requirements must be met when calculating the actuarial value of an affected member’s subsisting rights. Subsection (5) enables the prescribed requirements in subsection (4) to provide that the actuarial equivalence calculations may be in accordance with guidance prepared by a prescribed body and that that guidance may be approved by the Secretary of State.
992.Subsection (6) clarifies that an actuarial equivalence statement can be given in respect of two or more affected members, or in respect of members of any particular description. The actuary may, for example, provide a single statement relating to all of the active scheme members.
Section 67E – The trustee approval requirement
993.The trustees must approve a detrimental or protected modification. Subsection (1) provides that where the trustees do not have power to make the modification they must give their consent. Where a modification is made (whether or not by the trustees) the trustees cannot approve it unless they are satisfied that the consent requirements (section 67B) or actuarial equivalence requirements (section 67C), as relevant, have been satisfied. Therefore approval cannot be given until after the consent requirements or actuarial equivalence requirements have been complied with.
994.Subsection (3) provides that the trustees must approve a modification within a reasonable period after the date the first member gave his consent. Trustees must therefore not proceed with, or agree to a modification, where there has been an unreasonable delay following receipt of consent.
Section 67F – The reporting requirement
995.The effect of subsection (1) is that when the trustees determine to make, or give consent to, a modification, they must, within a reasonable period notify each member who consented to a modification that they have done so; taken all reasonable steps to notify each affected member to whom the actuarial equivalence requirements apply that they have done so.
Section 67G – Powers of the Authority: voidable modification
996.Where the exercise of a power to modify is voidable by virtue of section 67A-67H, the Regulator may make an order under subsection (2) that subsection (6) applies to a detrimental or protected modification. The order can declare that a modification or grant of rights under the scheme is void to the extent specified. It will be void in respect of specified people. The modification will be void from the date it was to take effect.
997.The modification may have made additional modifications or granted extra rights so as to balance any detrimental affects. These modifications will also have to be declared void so that members will not benefit from the Regulator’s order. Subsection (3) allows the Regulator to make an order to secure this does not happen.
998.Subsection (4) gives the Regulator flexibility to apply the order to one or more affected members - “the specified persons”. The order may therefore name the individual or individuals concerned, or may refer to them by describing the members covered by the order, for example by specifying that the order applies to all the active members of the scheme.
999.Subsection (5) provides that the Regulator may when declaring a modification void require the trustees to take the steps specified in the order, and to do so within the specified time. The Regulator may also ratify things done by the trustees which would otherwise have been in breach of the scheme rules (i.e. subsection (7) applies).
1000.Subsection (7) allows the Regulator to order that anything done by the trustees (as described in subsection (5)(b)) does not contravene the scheme rules.
1001.Subsection (8) provides that an order made under this section may be made either prior to or after the time when the modification or grant would, but for the order, have taken effect. This enables the Regulator to take action before and after the date when a modification is to take effect.
Section 67H – Power of the Authority to intervene
1002.The Regulator may under subsection (2)(a) direct a person not to make a detrimental or protected modification. This may be done only where the Regulator has reasonable grounds to believe a modification will be made which will be voidable.
1003.The Regulator may under subsection (2)(b) require the trustees to take any steps required to comply with the requirements in section 67(2). This order can be made before or after a detrimental or protected modification is made.
1004.Subsection (3)(a) provides that if a person makes a detrimental or protected modification in contravention of an order not to do so, the Regulator can declare that modification void using section 67G. Subsection (3)(b) provides that if the trustees fail to comply with an order to take steps under subsection (2)(b), the Regulator can declare the modification void using section 67G.
Section 67I – Subsisting rights requirement: civil penalties
1005.This section covers the circumstances when the Regulator may impose a civil penalty for a failure to comply with the subsisting rights provisions.
1006.Subsection (1) provides that subsections (2) and (3) apply where a detrimental or protected modification is voidable by virtue of section 67(2). Subsection (2) provides that where a modification is made either by the trustees of a scheme exercising a power vested in them, or by any other person in circumstances that are not provided for in subsection (3), section 10 of the Pensions Act 1995 (civil penalties) applies to any trustee who has failed to take all reasonable steps to secure that the modification is not so voidable.
1007.Subsection (3) provides that section 10 of the Pensions Act 1995 (civil penalties) applies to people who are not trustees who, without reasonable excuse, exercise a power to make a modification if either:
the trustees have not given their consent to the modification as required under section 67E(1) or,
the timing requirement in section 67B(6) has not been complied with.
1008.Subsection (4) provides that section 10 of the Pensions Act 1995 applies to any trustee who has failed to take all reasonable steps to secure compliance with any requirements imposed under subsection (5)(a) of section 67G requiring trustees to take specified steps within the time specified.
1009.Subsection (5) provides that where a detrimental or protected modification is made by the exercise of a power in contravention of an order made by the Regulator not to make the modification (section 67H(2)(a)) section 10 of the Pensions Act 1995 applies to:
any trustee who fails to take all reasonable steps to secure compliance with the order (where the power in question is exercised by the trustees), and
any other person who, without reasonable excuse, exercises the power in contravention of the order.
1010.Subsection (6) provides that where the trustees fail to comply with any requirement specified in an order made by the Regulator to take certain steps in the time specified, either before or after the regulated modification is made (section 67H(2)(b)), section 10 of the Pensions Act 1995 applies to any trustee who fails to take all reasonable steps to secure such compliance.