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lindagray

Occupational pensions

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There are three "pillars" of the UK pension system, which aim to ensure dignity and a fair income in retirement. The first pillar is the state pension, administered by the government, and funded by National Insurance contributions. The third pillar is private, or "personal pensions", which individuals buy themselves. The second pillar, and deriving from the contract of employment, is occupational pensions. Traditionally, these came from a collective agreement, or from an employer setting one up. The Pensions Act 2008 gives every "jobholder" (defined as a worker, age 16 to 75, with wages between £5,035 and £33,540) the right to be automatically enrolled by the employer in an occupational pension, unless the jobholder chooses to opt out. This is a simple "defined contribution" scheme: whatever the jobholder contributes, they get out. Although collectively invested, benefits are individualised, meaning the risk of living longer and running out of money grows. To reduce administration costs, a non-departmental trust fund called the National Employment Savings Trust was established as a "public option" competing with private asset managers. Employers set aside an agreed percentage of jobholders' wages, and negotiate how much they will contribute. This is particularly important for people who have not created a union and collectively bargained for an occupational pension. Collectively bargained pensions are often better, and historically had "defined benefits": on retirement, people receive money based either on their final salary, or a career average of earnings for the rest of their lives. Living longer does not become an individual risk, but is collectivised among all contributors. In principle, the rules for pension trusts differ from ordinary law of trusts as pensions are not gifts and people pay for their benefits through their work. Pensions operating through contracts also engender mutual trust and confidence in the employment relationship. An employer is under a duty to inform their staff about how to make the best of their pension rights.  Moreover, workers must be treated equally, on grounds of gender or otherwise, in their pension entitlements. The management of a pension trust must be partly codetermined by the pension beneficiaries, so that a minimum of one third of a trustee board are elected or "member nominated trustees". The Secretary of State has the power by regulation, as yet unused, to increase the minimum up to one half. Trustees are charged with the duty to manage the fund in the best interests of the beneficiaries, in a way that reflects their preferences, by investing the savings in company shares, bonds, real estate or other financial products.

Because pension schemes save up significant amounts of money, which many people rely on in retirement, protection against an employer's insolvency, or dishonesty, or risks from the stock market were seen as necessary after the 1992 Robert Maxwell scandal. Defined contribution funds must be administered separately, not subject to an employer's undue influence. The Insolvency Act 1986 also requires that outstanding pension contributions are a preferential over creditors, except those with fixed security. However, defined benefit schemes are also meant to insure everyone has a stable income regardless of whether they live a shorter or longer period after retirement. The Pensions Act 2004 sections 222 to 229 require that pension schemes have a minimum "statutory funding objective", with a statement of "funding principles", whose compliance is periodically evaluated by actuaries, and shortfalls are made up. The Pensions Regulator is the non-departmental body which is meant to oversee these standards, and compliance with trustee duties, which cannot be excluded. However, in The Pensions Regulator v Lehman Brothers, the Supreme Court concluded that if the Pensions Regulator issued a "Financial Support Direction" to pay up funding, and it was not paid when a company had gone insolvent, this ranked like any other unsecured debt in insolvency, and did not have priority over banks that hold floating charges. In addition, there exists a Pensions Ombudsman who may hear complaints and take informal action against employers who fall short of their statutory duties. If all else fails, the Pension Protection Fund guarantees a sum is ensured, up to a statutory maximum.

wikipedia.org

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