Two major new sets of DWP regulations appeared on the web today, following the eighth Pensions Act Commencement Order.

(A) The Occupational Pension Schemes (Investment) Regulations 2005 (SI 2005/3378)
With effect from 30 December 2005 (over three months later than the Government planned when it consulted on a draft in March this year), these regulations are to replace the Occupational Pension Schemes (Investment) Regulations 1996 (SI 1996/3127), which are wholly revoked.

The Regulations supplement changes made to the Pensions Act 1995 by the Pensions Act 2004. They largely transpose certain requirements of EC Directive 2003/41/EC, in particular of Articles 12 ("Statement of investment policy principles") and 18 "Investment rules").

The Regulations impose requirements on trustees of occupational pension schemes in relation to the statement of investment principles required under PA 1995 s. 35 and in relation to the choosing of investments. Wholly-insured schemes are not exempted where they have 100 or more members in total, though all trustees have to do is to state the reasons for investing solely through insurance policies.

Restrictions are imposed on borrowing and the giving of guarantees by trustees and in respect of employer-related investments. The draft regulations have been amended to clarify that the trustees, or delegated fund manager may not guarantee the liabilities of another person. Another amendment permits the transitional provisions for employer-related assets invested pre-6.4.97 to continue beyond 2010.

The existing exemptions for SSASs, particularly relating to the restrictions on employer-related investments, are effectively maintained although "SSAS" is replaced by the new term "small scheme", which the DWP warns in its response to the consultation "will appear throughout pensions legislation" (DWP argues this is necessary because "SSAS is a tax concept which will disappear from 6 April 2006").

The DWP has also taken advantage of the exemption provided in Article 5 of the Directive to exempt schemes with fewer than 100 members in total from much of the requirements, notably concerning investments and the prohibition on trustees borrowing and acting as guarantors. The regulations, in effect, ensure that, where appropriate, such schemes continue to be governed under the original requirements at PA 95 ss. 35 - 36.

(B) The Occupational Pension Schemes (Cross-border Activities) Regulations 2005 (SI 2005/3381)
When the DWP launched a consultation on a draft version of these regs in August 2005 it was keen to emphasise it was a "work in progress". A substantial response from firms directly involved with schemes operating in more than one EU Member State has produced more amendments than are often seen to DWP draft regulations. For example the key definitions of "European employer" and "seconded worker" have been revised; the latter to permit, in effect, a rolling 5-year contract involving secondment abroad before a member will be treated as being located in another EU Member State.

This was important because there is one reason in particular why a UK scheme would wish to avoid inadvertently becoming treated in this way as a Cross-border scheme, under the EU Occupational Pensions (IORP) Directive 2003/41.

The Directive requires cross-border schemes to be "fully-funded at all times" (= have sufficient assets to cover their technical provisions, ie their liabilities: the scheme funding requirement as defined by PA 2004 s.222). This is an extremely onerous requirement, especially in the current situation of most UK defined benefit schemes. From 30 December 2005, where a valuation of a UK domestic defined benefit scheme shows that it does not meet the statutory funding objective, it will be allowed to put in place a recovery plan over a time limited period to make good the shortfall. UK cross-border schemes, however, will be required to obtain annual valuations and will not be allowed to have a recovery plan.

Any existing UK cross-border schemes wishing to continue cross border activity will have a maximum time period of one year from the date of introduction of the new legislation in which to choose their first effective date, and a further two years (originally, one) to produce the valuation, in order to establish that they are "fully-funded". This means that some scheme sponsors will have to bring forward funding to ensure schemes meet the requirement in a short time frame.

Any established UK schemes wishing to become cross border schemes (i.e. to take on members from another EU State) will face an immediate requirement to demonstrate that they are "fully-funded" before they can operate on a cross border basis.

Any brand new schemes wishing to become cross border schemes will be authorised to operate cross border but will be required to show that they are "fully funded" within 2 years.

Member States were required to have transposed the provisions of the Directive into national law before 23 September 2005. The UK will be compliant "slightly later in the Autumn": 30 December 2005, to be precise, is the date the Regs come into force.

The DWP’s expressed intention is to support schemes wishing to operate cross-border. The Pensions Regulator is consulting on guidance on the process schemes will need to follow to become cross-border schemes.

The possibility of an exemption from the regulations for Anglo-Irish schemes was explored but has been denied: the Directive doesn’t permit it. Anglo-Irish schemes will be allowed until 30 March 2006 to apply to be authorised and approved to receive contributions as Cross-border schemes; and until 22 September 2008 to meet the Directive’s "fully-funded" requirements.

Another question raised during the consultation was can a scheme cease to be a Cross-border scheme and revert to being a UK scheme? The Government has amended regulations 8 and 13 (revocation of general authorisation; and revocation of approval) so that schemes may revert to domestic status where there are no members or survivors of members within a scheme with existing or future rights to benefits (accrued whilst a European member) under the scheme rules.

The DWP has also decided to extend the right to approach the Pensions Ombudsman to European members of UK based schemes, but not to UK members of schemes based elsewhere in the EU.

These Regs are not the last word. The SPC, in its response to the condoc, asked for clarification as to how the regulations were intended to apply in respect of section 615 schemes (existing schemes set up under s.615 ICTA 1988 to provide for UK expatriates working entirely outside the UK). The DWP is going to talk about this with the industry during the first few months when these Regulations are in force.