Employment Alert No: 115 - Occupational Pension Scheme (Cross-border Activities) Regulations 2005
March 3, 2006
| What is the Issue? |
The UK has recently implemented certain aspects of the EU Pensions Directive. These Regulations affect UK pension schemes with active members working outside the UK, but within the European Economic Area (i.e. the 25 EU Member States plus Norway, Iceland and Liechtenstein). Under the Regulations, a UK occupational pension scheme will be regarded as a cross-border arrangement if on or after 30 March 2006 the trustees accept contributions from a participating employer in the scheme in respect of workers employed in the EEA, except for individuals who are “seconded workers” (i.e. those who are posted abroad but where there is an intention for them to return to the UK in the future). There is no guidance as to maximum duration for such overseas secondments to fall within this definition, but it is certain it should not be a permanent posting abroad. However, it is envisaged that overseas secondments up to 5 years would satisfy this definition.
| What will this mean for employers with UK Pension Schemes and employees posted in the EEA? |
In broad terms, if a UK pension scheme accepts contributions from employers in respect of EEA workers and is not exempt, then the Regulations will apply. The Regulations apply to final salary (defined benefit) schemes as well as money purchase (defined contribution) schemes and impose certain restrictions on the pension scheme, especially with regard to its future funding levels.
| What do the regulations actually say? |
Where an occupational pension scheme is operating cross-border:
- the trustees must apply to the Pensions Regulator for authorisation and approval as a cross-border arrangement on or before 29th March 2006;
- all cross-border pension schemes must be “fully funded” (by reference to the new scheme-specific funding objective introduced under the Pensions Act 2004);
- fully funded status must be attained by 22 September 2008 at the latest; and
- annual valuations must be conducted and any deficit made up within approximately one year of the deficit being identified.
A pension scheme will continue to be treated as a cross-border arrangement for as long as it has a liability to pay benefits to or in respect of a member who has a period of cross-border service.
Where an application is not made (on or before 29th March 2006) the trustees will not be able to accept contributions in respect of that worker from 30 March 2006 - with the result that those employees will cease to accrue benefits under that pension arrangement.
| Comment |
The Regulations impose a number of stringent legal requirements including potentially serious adverse financial consequences for UK employers not only in the short term but also in the long run. In particular, pension schemes to which the Regulations apply will have to be fully funded on an annual basis. This will require a funding assessment to be carried out each year as opposed to every 3 years as is currently the case.
The introduction of the Regulations at the end of this month requires all employers urgently to review their pension arrangements for workers who are based in the EEA and who, as part of their current terms and conditions, remain active members of a UK pension scheme, to which contributions are received by the UK pension scheme on behalf of these EEA workers. If such individuals are “seconded workers” under the Regulations, then the UK pension scheme will be exempt, but we would advise that due diligence is undertaken to ensure that such EEA employees meet this definition. We would be happy to assist you in this exercise.
Due to the limited time available before 29 March 2006, some employers may take the view that they should register their UK pension scheme as a cross-border scheme initially, carry out thorough due diligence on such EEA workers and then possibly de-register after the completion of the due diligence exercise if these workers fall within the exemption. An alternative is to register and do nothing, but this does impose the potentially onerous obligations under the Regulations. Other options may be considered including setting up a mirror image scheme or an international pension arrangement for such overseas workers to join.
