Abolition of DC contracting-out: final regulations published

Introduction

With effect from 6 April 2012, contracting-out on a DC basis (protected rights) will be abolished.1 On 29 February 2012, the DWP published its response to consultation, together with regulations aimed at assisting trustees in making rule amendments to remove references to protected rights (the “Regulations”).

In this Alert:

• Key points
• Background
• Removing protected rights from scheme rules
• Next steps

Key points

• The Regulations will introduce an easement to enable trustees to remove “special provisions” relating to protected rights from their rules.
• Trustees may pass a resolution under the Regulations from 6 April 2012 but before 6 April 2018, and more than one resolution may be passed within this period.
• Amendments made under the Regulations may be retrospective to 6 April 2012.

Background

Currently, protected rights are subject to certain statutory restrictions. For example:

• protected rights have to be separately identified from non-protected rights; and
• annuities derived from protected rights must provide for a survivor’s benefit where the member is married or in a civil partnership.

On 6 April 2012, any protected rights which are in payment will retain their current status. Those not yet in payment will become ordinary scheme benefits and all the statutory restrictions will fall away.

Removing protected rights from scheme rules

Schemes which are currently contracted-out on a DC basis will need to consider removing protected rights provisions from their trust deed and rules, as they will not be removed automatically.

The Regulations introduce an easement allowing trustees, by resolution, to remove “all or part of a scheme rule which makes special provision in relation to the protected rights of members”, and which no longer reflects a statutory provision. Schemes will have until 5 April 2018 at the latest to make changes and may make amendments retrospective to 6 April 2012.

Responding to concerns raised in the consultation on the draft regulations, the easement has been broadened and may now be of assistance to schemes which have embedded the protected rights provisions into their rules (making them an integral part of the scheme design), as well as those which set out protected rights provisions in a separate schedule. However, the easement only allows the protected rights restrictions to be removed from the scheme’s rules; the benefits themselves must remain money purchase benefits. This means, for example, that former protected rights underpins will become money purchase underpins.

Next steps

Trustees should seek legal advice on whether any changes they require are covered by the Regulations. Any changes which do not fall within the scope of the Regulations will need to be made using the scheme’s amendment power, subject to section 67 of the Pensions Act 1995. In addition, employers should consider whether any proposed amendments amount to a “listed change” and, if so, trigger a duty to consult with affected members.

1 For details, please see our Alert: “Abolition of DC Contracting-Out: The Final Countdown” dated 23 February 2012