Pension Regulatory Framework

• Topic 01

  Pension Regulatory Framework

  28 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. What are the two components of the PPF levy?

   • A
     The investment levy (charged on scheme assets) and the contributions levy (charged on total annual contributions)
   • B
     The scheme-based levy (a flat charge per scheme) and the risk-based levy (based on the probability of employer insolvency multiplied by the estimated scheme shortfall)
     Correct answer
   • C
     The annual guarantee levy (a fixed amount) and the deficit repair levy (charged when the scheme is in deficit)
   • D
     The member levy (charged to each active member) and the employer levy (charged as a percentage of payroll)
   Explanation

   The PPF levy has two components: (1) the scheme-based levy — a flat charge applied to all eligible DB schemes regardless of their risk profile; and (2) the risk-based levy — calculated by reference to the probability of the sponsoring employer's insolvency multiplied by the estimated underfunding in the scheme. Schemes can reduce their risk-based levy by providing contingent assets (e.g., bank guarantees, charges over property) registered with the PPF.

2. What is a contribution notice and in what circumstances can TPR issue one?

   • A
     A contribution notice requires the scheme to accept member contributions regardless of scheme rules
   • B
     A contribution notice is issued by trustees to require the employer to increase contributions when a deficit arises
   • C
     A contribution notice sets the minimum contribution rates that all employers must pay into DC schemes
   • D
     A contribution notice requires a specified person to pay a sum to a DB pension scheme; TPR can issue one where an act or deliberate failure has materially detrimented the scheme
     Correct answer
   Explanation

   A contribution notice (CN) is one of TPR's anti-avoidance powers under the Pensions Act 2004. TPR can issue a CN requiring the recipient (the employer or a connected/associated person) to pay a sum into the pension scheme where an act or deliberate failure to act has been materially detrimental to the likelihood of accrued scheme benefits being received. The Pension Schemes Act 2021 expanded the scope of this power.

3. What is a 'pension credit' and a 'pension debit' in the context of a pension sharing order on divorce?

   • A
     A pension debit is a tax charge imposed on the scheme when it creates a pension credit; both are paid from the same pension fund
   • B
     A pension debit and pension credit are alternative names for the same thing: the percentage of pension transferred to the ex-spouse
   • C
     A pension credit is a lump sum cash payment made to the ex-spouse at the time of the order; a pension debit is the resulting reduction in the scheme's annual contributions
   • D
     A pension debit reduces the member's pension entitlement by the shared percentage; a pension credit is the corresponding amount the ex-spouse receives as an independent pension right
     Correct answer
   Explanation

   Under a pension sharing order, the order specifies a percentage of the member's pension rights to be transferred. This creates a 'pension debit' on the member's record (reducing their pension entitlement by the specified percentage) and a 'pension credit' in favour of the ex-spouse (an equivalent pension right). The pension credit gives the ex-spouse independent pension rights — they can transfer the credit to another registered pension scheme or remain in the original scheme if the rules permit.