EC Meeting July 2017

Practicality: from a legal perspective

There is no reason in principle why an occupational pension scheme cannot have a DC section that sits alongside a defined benefit (DB) section. An arrangement such as this is relatively common, where a DB scheme has been closed to new entrants and new employees are offered DC benefits (although it should be noted that it is also common for employers to take a second step, and to transfer the DC section assets and liabilities to a stakeholder pension scheme or master trust in order to remove administrative costs and burdens).

Adding a DC section to the GFTU Scheme requires a few practical considerations to be dealt with.

Practicality: administration

(i)

Process

The simplest way to create a scheme with a DB section and a DC section would be to create a new shell scheme and to transfer the assets and liabilities of the predecessor DB and DC schemes into it. That was the method that was originally discussed with the General Secretary and Chair. Since then the law relating to contracting out has changed, following the introduction of the single-tier State pension which led to the abolition of contracting out. One of the consequential effects is that it is not currently possible to transfer the assets and liabilities of a former contracted out scheme to another scheme which is not contracted out. The GFTU Pension Scheme was contracted out, but the putative shell scheme would not be.

This prohibition is likely to change, but any change is not likely to be made in the near future.

To create a scheme with a DB section and a DC section, at present it would be necessary to amend the rules of the current DB Scheme to add a DC section to it. That would require the consent of the trustees and the consent of PCS. Properly structured, there is no reason to think that consent would not be forthcoming, but it means that the process would not be entirely in the GFTU’s hands.

(ii)

Status

The Pension Schemes Act 2017 was enacted just before the general election to provide greater regulation for master trusts. It is framework legislation, with the detail to be supplied by regulations which have not yet been made. A master trust is defined as a scheme which (a) provides DC benefits, and (b) is used or is intended to be used by two or more employers which are not “connected”. Two employers are connected if one owns the majority of the shares of the other, or both are have a common parent company. This definition will be extended in regulations which have yet to be made.

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