Pensions Act 1995 - Overview

Overview

The main features of the Act included:

• The establishment of the Occupational Pensions Regulatory Authority;
• The Minimum funding requirement to ensure that all pension schemes had a minimum amount of money;
• A compensation fund for pension schemes in the event of fraud;
• Protection for existing pension scheme benefits so that they couldn't be reduced in the future without member consent having been obtained;
• A requirement for pension schemes to have member nominated trustees;
• Greater disclosure of information to members;
• The introduction of clear documentation showing what should be paid into a scheme, and monitoring of those contributions;
• A minimum rate of increases to apply to pension earned after the date on which the Act came into force, once in payment.

Many of the features introduced by the Act were abolished or amended by the Pensions Act 2004. The MFR was heavily criticised in the Myners' Report (2001) which was a HM Treasury sponsored report into institutional investment in the UK. The Myners' Report identified three problems with the MFR: a) For some pension funds, the level of assets under the MFR were insufficient to provide the benefits promised by the scheme; b)regulatory costs for sponsoring firms increased without any reduction in the risks of fund insolvency; and c) sponsoring firms focused on meeting the narrow requirements of the MFR, rather than on ensuring that the scheme was appropriately funded. The Pensions Act 2004 replaced the MFR from September 2005 with a new scheme-specific ‘statutory funding objective’ (SFO), allowing more flexibly to individual schemes' circumstances whilst at the same time protecting members' benefits. The Act established the Pension Regulator with the powers to require sponsoring companies to fully fund their pension liabilities, by adopting an appropriate recovery strategy consistent with the SFO. Liu and Tonks (2012) examine the effect of a company’s pension commitments on its dividend and investment policies, assessing the impact of funding rules under the MFR, and also under the funding requirements introduced under the Pensions Act 2004. They find a strong negative relationship between a firm’s dividend payments and its pension contributions, but a weaker effect on investments. They found that dividend and investment sensitivities to pension contributions were more pronounced after the introduction of the Pensions Act 2004.