In his Budget Statement of 21 March 2007, the Chancellor announced an increase in total public funding for the Financial Assistance Scheme (FAS) from £2.3 bn to £8 bn in cash terms over 60 years (£1.9 bn in net present value). The objective is to top up the pensions of all eligible members of affected pension schemes to a level "broadly equivalent to 80% of their core pension rights". The DWP yesterday launched a 6-week consultation - also available from the FAS microsite - on draft regulations designed to achieve this goal.

Key points of The Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2007 [PDF] are:

1. all members of qualifying pension schemes, regardless of how far they were from retirement when their scheme began to wind up, will be eligible to be qualifying members;
2. the tapered assistance levels that currently apply will be removed so that 80% assistance is available to all eligible qualifying members at age 65, regardless of their scheme pension age;
3. the cap on maximum assistance will be increased from £12,000 to £26,000;
4. the de minimis rule that excludes those whose FAS payment would be £10 or less a week will be removed;
5. initial payments may be redetermined where the interim pension being paid by the scheme has changed;
6. as the Government announced on 18 April 2007, the scheme will be extended to cover members of 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 into insolvency (this will help around 8000 members of some 16 schemes); and
7. the cut-off date for employer insolvency of 31 August 2007 announced by the then Minister of State for Pensions Reform on 27 February 2007 will not be enforced. Instead, the time period by which an employer must have an insolvency event in order for their scheme to be eligible for FAS assistance will be extended indefinitely, subject to a link being established between the insolvency event and the winding up of the scheme.

Under the current scheme only 40,000 of the estimated 125,000 people who have suffered losses stood to benefit. The extension means that all should now receive at least 80% of their expected "core pension" from either the FAS or their scheme (subject to the raised cap).

Note that "core pension" is not a term defined in the Regs. In essence, however, it is the annual rate of the pension which would have been in payment to the qualifying member as at the certification date if the scheme had not started to wind up; or in the case of active and deferred members, their entitlement under the rules had they reached NRA when pensionable service ended (plus revaluation as appropriate). It takes no account of pension increases beyond the certification date or other features of the member's scheme, such as the level of survivors' benefits in determining the 'expected pension'. The DWP's FAS microsite provides further details of the calculations.

The Government has also set up a FAS Review of Pension Scheme Assets [PDF], led by Andrew Young from the Government Actuary's Department and advised by industry experts, to look at whether better use can be made of the assets remaining in failed pension schemes and whether those funds could be used to pay for even higher levels of benefit. The review has been asked to deliver its final report in November 2007 but it published interim findings on 16 July 2007.

These findings suggest that some of the cost of extending the FAS towards 90% of expected core pension could be met by an alternative use of the assets remaining in pension schemes. The review reported there are £1.7 bn of assets in occupational pension schemes that qualify for help from the Financial Assistance Scheme (FAS). It said that the current practice of each scheme purchasing annuities for their members, which are then topped up by the Government, may not offer the best use of these assets. To further assist movement towards 90%, the Government has committed to match the extra funds that the review identifies.

In the meantime, the Government has written to trustees to urge them to consider carefully whether purchasing annuities, thereby depleting scheme funds, is in the best interests of all of their members. It is also bringing forward regulations* as required by section 19 of the Pensions Act 2007 prohibiting the trustees of relevant pension schemes for a period of 9 months from purchasing, or agreeing to purchase, annuities on behalf of qualifying members without the FAS scheme manager's approval.

The final report of the review will be published by the end of November. Any changes to primary or secondary legislation arising from the findings of the Young Review will then be brought forward. They do not form part of these regulations.

The proposed regulations amend provisions in the Financial Assistance Scheme Regulations 2005 (SI 2005/1986), as amended by SI 2005/3256 and SI 2006/3370; and the Financial Assistance Scheme (Provision of Information and Administration of Payments) Regulations 2005 (SI 2005/2189).

The consultation period runs until 9 October 2007. It is intended that the Regs will come into force by the end of the year.

*Update 4 September 2007