Better late than never – The Pensions Act 2011

Introduction

Having run out of time in the summer session, the Pensions Bill 2010-11 finally received Royal Assent today. The Pensions Act 2011 (the “Act”) brings into force several important changes, including the controversial increase in SPA, amendments to the automatic enrolment regime and, in a last minute addition, changes to the definition of “money purchase benefits” following the Bridge Trustees decision.1

Key points

The definition of “money purchase benefits” is set to be amended so that it excludes benefits which could give rise to a funding deficit.
SPA will be equalised between men and women by 2018, and will increase to 66 for both sexes by October 2020.
Schemes which specify RPI for calculating pension increases or revaluation in deferment may continue to use this measure without providing a CPI underpin, provided certain conditions are met.
The deadline for trustees to take action to preserve a power(s) to pay surplus to employers from an ongoing scheme is extended to 6 April 2016.

“Money purchase benefits”

After the decision in Bridge Trustees, the DWP announced that it would legislate to ensure that benefits which may create a funding deficit may not be classified as “money purchase”. It has therefore introduced last minute amendments to the Act to deal with this. The changes made will be retrospective, with the main definition of “money purchase benefits” (set out in the Pension Schemes Act 1993) being amended with effect from 1 January 1997.

The Secretary of State is also given powers to make transitional provisions and to legislate further by regulation which will hopefully help to clarify the inevitable grey areas resulting from the new definition. So the story does not end here!

Acceleration of increase in SPA

The Act will accelerate the former Labour Government’s planned rise in SPA so that it reaches 66 in 2020 (rather than 2026). As a result, men’s and women’s SPAs also equalise faster, with women’s SPA hitting 65 in 2018 instead of 2020.

Following pressure for changes to this timetable, to decrease the impact on women in their late 50s, the increase of SPA to age 66 is to be delayed by six months from April to October 2020.

Auto-enrolment

The Act brings into force certain changes to the automatic enrolment regime. For example:

a jobholder2 will only be eligible for automatic enrolment into a qualifying scheme if, in addition to compliance with certain other conditions, they earn in excess of £7,475 per annum (the “earnings trigger”); and
employers may choose to defer the automatic enrolment date of a worker for up to three months, subject to certain notice requirements.3

Indexation and revaluation

The Act deals with the finer detail of the switch from RPI to CPI as the basis for statutory increases, including changes to introduce CPI as the measure for calculating increases to PPF compensation.

Pension Increases

Schemes may increase pensions in payment by reference to RPI, CPI, or a combination of the two, depending on the requirements of the scheme rules. Where the rules require RPI increases and have done so continuously since the beginning of 2011 (or when a pension first comes into payment, if later), the scheme need not operate a CPI underpin for years in which CPI exceeds RPI.

Provided it would have applied to the transferring scheme, this easement now extends to pensions in payment which are transferred to another occupational pension scheme. The aim is to prevent these measures “acting as a disincentive to business mergers and acquisitions”.

Revaluation in deferment

No CPI underpin is required if:

a scheme provides full uncapped revaluation of deferred pensions (including GMP rights) and maintains “in the opinion of the Secretary of State, the value of pensions by reference to the rise in the general level of prices in Great Britain”; or
a scheme’s rules require it to meet statutory revaluation requirements but using RPI rather than CPI.

Cash balance benefits

The requirement to increase cash balance benefits by Limited Price Indexation4will be removed. However, this does not apply to benefits which come into payment prior to the provision coming into force or to contracted-out schemes.

Preserving powers to refund surplus

Section 251 of the PA04 provides trustees with a transitional power to pass a resolution to confirm or amend powers in their scheme rules to make payments to the employer after A-Day (6 April 2006).5 The Act will now give trustees until 6 April 2016 to take action to preserve such powers.

It also carves out several payments from section 251, aiming to make clear that it applies only to payments made to employers under section 37 of the PA95 (essentially payments of surplus from ongoing schemes).

TPR’s powers

Finally, TPR will be given more time to determine whether to issue a Contribution Notice and/or a Financial Support Direction (part of its anti-avoidance powers). Once the provisions come into force, it will only have to issue a warning notice (as opposed to a final determination) within the statutory timescale.

1 Please see our Alert “Bridge too far? DWP set to legislate” dated 28 July 2011
2 An eligible worker in Great Britain between the ages of 22 and SPA
3 Please see our Alert “The Road to 2012: Final Preparations Underway” dated 22 July 2011
4 RPI capped at 5% prior to 6 April 2009 or 2.5% from 6 April 2009
5 Please see our Alert “Preserving powers to refund surplus – DWP clarification” dated 19 October 2010