In this September issue of Pensions E-bulletin we highlight two significant legislative changes impacting in October. The first of these is the change to the calculation of transfer values, which will be of particular interest to trustees and the second is the change to maternity rights. The maternity changes are of interest because there is some debate as to the impact of these changes on pension rights. Both topics are considered below.

Changes to the Calculation of Transfer Values
As originally mentioned in our November 2007 edition of Pensions Extra, changes to calculation of pension transfer values come into effect in October 2008. As you will be aware, pensions legislation gives members leaving occupational pension schemes before normal retirement age a statutory right to have the "cash equivalent" of their pension benefits transferred to another pension arrangement in certain circumstances.

Currently, responsibility for calculating "cash equivalent transfer values" (CETVs) rests largely with the scheme actuary who calculates CETVs in accordance with actuarial guidance note GN11. The Government has, however, amended the transfer value regulations, changing the way in which CETVs are calculated. The changes apply to CETV statements issued on or after 1 October 2008. From this date, trustees will be responsible for the calculation of CETVs and the scheme actuary will no longer be required to certify that the basis of calculation is appropriate. The Pensions Regulator has published draft guidance but we understand, however, that this guidance is unlikely to be finalised until the end of October.

The new legislation requires a "scheme specific" approach to calculating CETVs, requiring them to be at least the best estimate of the cost to the scheme of providing the member's benefits within the scheme. There are, however, provisions allowing the basic CETV to be reduced in certain circumstances, e.g. where the scheme is underfunded. The key aspects of the new regime are outlined below:-

Calculation of CETVs
There are two methods of calculating the CETV set out in the new legislation:-

1. best estimate basis – based on a best estimate of the expected cost of providing the member's benefits in the scheme – this is the minimum level for CETVs; and 
2. alternative method – which gives the trustees scope to pay CETVs at above the minimum level, subject to any restrictions / requirements applying under scheme rules.

It is a matter for the trustees to decide which method is to be used, although the trustees will be guided by the scheme actuary in the decision making process.

What should trustees be doing now?
The expected publication of the Regulator's guidance on the new regime after it has come into force, makes it difficult for trustees looking to plan ahead and we will be happy to provide more tailored advice if required. Nevertheless, trustees should consider:-

• taking advice from the scheme actuary on the basis and assumptions for calculating CETVs post 1 October 2008 and then formally deciding what will apply; 
• informing scheme administrators of any changes to the calculation of CETVs; 
• the additional disclosure requirements which have been included in the amended transfer value regulations; and 
• deciding on an approach to deal with any transfer value requests received before 1 October 2008.

Changes in maternity and adoption leave rights: Impact on pensions
In our first E-bulletin of 2008, we summarised the statutory position as regards maternity leave and pensions. Currently, the law provides for a more limited range of rights to apply during Additional Maternity Leave (AML) than during Ordinary Maternity Leave (OML). However, changes to the Sex Discrimination Act mean that for those whose expected week of childbirth, or expected week of placement with a child (in the case of adoption), is on or after 5 October 2008, the terms and conditions that exist during OML (weeks 1-26) will be extended to AML (weeks 27-52). The same will apply in respect of Ordinary and Additional Adoption Leave periods.

This means that those affected will be entitled to the same contractual benefits during AML as well as OML, but this entitlement does not extend to "remuneration" itself. There has been significant debate surrounding whether pension rights are or are not "remuneration" for this purpose.

The Government has indicated that the changes will not affect the treatment of pensions during unpaid AML, the implication being that employers will not have an obligation to provide pension rights during unpaid AML. However, recent European Court decisions do not follow this line and it is possible that the UK legislation will have to be further amended to make it accord with the European position. Whilst the new provisions could still be open to challenge, it is likely that this would be in the form of a challenge in relation to the adequacy of the legislation.

Moreover, if the UK Government extends statutory maternity pay to 52 weeks (in the future) as intended, then the impact on pension schemes should become somewhat academic, as the existing legislation is clear that all paid periods of maternity leave must be pensionable.

Practical consequences
Pension schemes should already provide for accrual and employer contributions, based on the pay the employee would have been receiving had she been working normally, to continue during paid maternity leave. Notwithstanding the Government's guidance, there is, however, scope to follow a more cautious line in light of the legal uncertainty in this area, by choosing to allow continued accrual or to continue employer contributions throughout maternity leave, including the unpaid part of AML. This may require amendments to a scheme's governing documentation.

See previous editions of the Pensions E-bulletin.

15 September 2008

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