Modification of subsisting rights
Amendments to Section 67 of the Pensions Act 1995
- The new provisions will give schemes greater freedom to amend their rules to adapt to changing circumstances and reduce administrative costs and complexity.
- Schemes will be able to modify member’s subsisting pension rights either by obtaining the consent of each affected member or by replacing existing rights with other rights of actuarially equivalent value.
- There will be appropriate safeguards for members: they must be consulted about a change; all changes must be approved by the trustees’ and, where changes are made under the actuarial equivalence provisions:
- the actuarial value of each affected member’s rights must be maintained
- defined benefit rights cannot be converted into defined contribution rights, and
- there can be no reduction in the amount of any pension already in payment.
Background
Section 67 of the Pensions Act 1995 was enacted as a result of one of the recommendations of the Goode Report published in September 1993. Prior to this members of occupational pension schemes relied on trustees acting in their fiduciary capacity under trust law to protect their interests.
In July 2002 Alan Pickering’s review of occupational pension regulation suggested that section 67 is a contributory factor in the move by employers from defined benefit to defined contribution pension arrangements. He recommended that schemes should be allowed to make rule changes affecting accrued rights so long as the overall value of a member’s benefits are expected (but not guaranteed) to be equivalent in value – this is referred to as “actuarial equivalence”. The actuarial value of any rights removed or reduced as a result of a rule change, are replaced by some other rights or enhancement of, at least, equivalent actuarial value.
- Read the Pickering report (224KB)
in our Publications section.
In the Green Paper of December 2002 Simplicity, security and choice: Working and saving for retirement the Government proposed amending section 67 to allow schemes to make changes as long as the accrued rights being changed did not amount to more than a certain percentage of a member’s total accrued rights – 5% was suggested as the “de minimis” limit.
In June 2003 the Government advised in Working and saving for retirement: Action on occupational pensions that the pensions industry had rejected the Green Paper proposal on the grounds that it was too complex and administratively difficult to operate; the 5% limit was insufficient. Instead the Government proposed an amendment along the lines of Pickering but with additional safeguards for members (members must be told about the effect of a proposed change and given the opportunity to make representations about it, no defined benefit to defined contribution changes, and no reduction in the amount of a pension already in payment).
How will the actuarial value of affected member’s accrued rights be calculated?
The actuarial valuation of members accrued pension rights in defined benefit pension schemes has been a long-standing feature of pensions legislation. For example, when a member wishes to transfer his rights from one scheme to another, or when members are transferred in bulk following corporate mergers, the rights accrued need to be valued.
The Government will ensure, in conjunction with the actuarial profession, that an appropriate methodology is put into place to ensure that members’ subsisting rights at the point of any change are appropriately valued.
Will anyone be worse off from a scheme conversion?
The actuarial equivalence requirements will mean that, at the point of conversion, the actuarial value of each affected scheme member’s subsisting rights will be maintained.
- Find out more about the Government's pension reform plans.