The Bill will introduce Personal Retirement Savings Accounts,provide for better pension scheme terms and regulation, and establish a Pensions Ombudsman

The Pensions (Amendment) Bill 2001 is expected to be enacted before Easter. Late changes include restrictions on existing employees transferring into the proposed Personal Retirement Savings Accounts (PRSAs) and the rules on PRSA providers.

While the Bill does not go as far as many would like to remove inequities between people in occupational pension schemes and self-employed people, including the annuity trap, it promises important improvements for employees.

It introduces PRSAs, provides for better pension scheme terms and regulation, and establishes a statutory Pensions Ombudsman.

PRSAs: PRSAs will be low-cost, easy-access, portable and flexible, long-term personal accounts in which people can save for retirement. Savers will own their accounts. Charges on standard PRSAs will be capped at 5 per cent of contributions and 1 per cent of assets.

Employers who do not offer an occupational pension scheme will have to offer employees access to a standard PRSA.

Employee contributions qualify for tax relief. The maximum contribution (including employer contribution) allowed for tax relief is based on age. Up to the age of 30 tax relief will be allowed on contributions of up to 15 per cent of earnings; age 30 to 40: 25 per cent; and age 40 plus: 30 per cent.

At retirement a PRSA holder can take up to 25 per cent of the funds in a tax-free lump sum and invest the balance in either Approved Minimum Retirement Funds or Approved Retirement Funds.

A retiree will not be required to buy an annuity - they retain ownership of their funds and can pass on any remaining funds to their dependants when they die, unlike occupational scheme members who must buy a personal annuity that largely dies with them.

PRSAs will be very attractive because of the flexibility and fund ownership allowed. However, they will not be available to all employees - employees with more than 15 years of service who are leaving occupational schemes cannot transfer their funds into PRSAs.

Improvements in occupational schemes: The Bill will bring new benefits for members of both defined-benefit and defined-contribution schemes:

•Reduction of the statutory "vesting period" from five years to two years for people leaving service after June 1st, 2002. Once an employee has two years' pensionable service, he/she will have their pension benefits preserved on leaving service. Five years service is currently required.

As a corollary, employees with two to five years' service will lose the right to contributions refunds.

•People leaving service after June 1st, 2002 will have the value of their pre-1991 service preserved for pension purposes - currently this applies only to service from January 1st, 1991.

•Members leaving occupational schemes can transfer to PRSAs if they have less than 15 years' service or to unfunded schemes.

•Employers must pay pension contributions into the scheme within 21 days of the end of the month in which they were deducted.

•Wide-ranging consultation will be required before certain changes can be made, including the distribution of surpluses.

Improvements for members of defined-benefit schemes:

•All pre-1991 benefits will be revalued annually in line with the lower of 4 per cent or the Consumer Price Index from June 1st, 2002.

•Strengthening of the minimum funding standard to ensure schemes can pay the enhanced benefits. By June 1st, 2012, schemes will have to have full funding for the new preservation and revaluation benefits.

•Members leaving within five years of retirement will have a minimum value contributory retirement benefit on a sliding scale of 100 per cent to 120 per cent of their contributions plus interest. This is important for low-income earners in schemes where pension benefits are integrated with social-welfare pension payments.

•New mandatory review and disclosure procedures on the indexation of pensions - trustees will have to consider how increases can be provided.

Additional voluntary contributions (AVCs) will be ring-fenced from main occupational schemes to ensure that, in winding-up situations, AVC contributors can get their funds back.

Pensions Ombudsman: Protection will be improved by the appointment of a statutory Pensions Ombudsman, who can investigate the management of occupational pension schemes and PRSAs.

The Ombudsman can issue binding decisions, including financial redress on complaints alleging financial loss, seek any information relevant to the investigation and compel persons to attend before him.

Other issues in the pensions market: Employers in Britain have started to change from defined-benefit to defined-contribution schemes, partly driven by the new accounting standard (FRS 17) and poor investment returns.

In defined-benefit schemes, employees are guaranteed a pension based on salary and years of service - typically, two-thirds of final salary after 40 years' service. The employer takes the investment risk that the pension fund will be able to meet the payouts required.

In defined-contribution or money purchase schemes that investment risk is transferred to the employee whose pension will depend on fund performance. The Bill does not deal specifically with this issue.