Consultation on miscellaneous amendment regulations

Introduction

The DWP has published a consultation on changes to regulations which affect contracted-out DB schemes and bulk transfers without consent.

In this Alert:

• Key points
• DB contracting-out
• Amending contracted-out schemes
• The Government’s proposal
• Bulk transfers without consent
• Next steps

Key points

• The DWP proposes to make changes to certain regulations to:

• make the restrictions on amendments to certain contracted-out DB schemes appropriate for schemes which have ceased to contract-out; and

• extend the circumstances in which schemes may make bulk transfers of members without consent.

DB contracting-out

Since 6 April 1997,1 DB schemes that opt to contract-out of the state additional pension (currently S2P) must meet the “reference scheme test” (RST). The RST is a statutory standard which prescribes certain minimum levels of benefit. The DB contracted-out benefits which members accrue on and from April 1997 are known as section 9(2B) rights.

To protect members’ accrued contracted-out rights, such schemes must comply with the Contracting-out Regulations,2 even if they cease to contract-out.

Amending contracted-out schemes

Section 37(1) of the PSA93 states that contracted-out schemes cannot alter their rules, except in specified circumstances. This restriction is extended to schemes which have ceased to contract out:

• as long as there are members with accrued contracted-out benefits in the scheme; or
• there are members receiving contracted-out benefits from the scheme.

This section is supplemented by regulation 42 of the Contracting-out Regulations which requires specific steps to be taken before scheme rules can be altered. For example, the scheme actuary must have considered the proposed alteration and confirmed to the trustees that the scheme will continue to meet the RST if the alteration is made.
The intention underlying regulation 42 is two-fold:

• following any prospective rule change, to ensure that members’ benefits will continue to satisfy the RST going forward; and
• following any retrospective change, to ensure that members’ accrued benefits still meet the RST.

The latter requirement provides protection to members’ section 9(2B) rights over and above that already afforded to past service rights under section 67 PA95.

The Government’s proposal

It has been brought to the DWP’s attention that, as currently worded, the regulation is unworkable. This is because, owing to other provisions of the Contracting-out Regulations, in practice scheme actuaries can only certify that changes to prospective rights meet the RST for the following three years. The Government therefore proposes to clarify the drafting of regulation 42 to reflect the prospective nature of the RST.

As regards amendments to past service, under proposed changes to the Contracting-out Regulations, certain aspects of section 67 of the PA95 will be brought into play. The Government’s intention here is that no protected modification3 can be made to accrued section 9(2B) rights, but a detrimental modification4 may be made provided that the “actuarial equivalence test”5 under section 67 is met.

Bulk transfers without consent

DB schemes that do not hold accrued contracted-out rights may arrange a bulk transfer of their members from one scheme to another without consent, provided that the so-called “connected employer” test is satisfied. Broadly, this means that:

• the two schemes must apply to employment with the same employer; or
• where the schemes apply to employment with different employers, the proposed transfer must be a bulk transfer of members, and the employers must be either involved in a takeover or merger or be part of the same group of companies.

Contracted-out DB schemes have to meet an additional test before a transfer without consent is permitted; the scheme to which the members are being transferred must be an active contracted-out scheme. This often necessitates costly additional action, such as re-opening a former contracted-out scheme for a limited period.

The Government therefore proposes to amend the legislation to enable bulk transfers to be made to both current and formerly contracted-out schemes. In addition, certain changes will be made to clarify when such transfers without consent are possible and to allow transfers to be made to pension funds / schemes in EEA states outside of the UK.

Next steps

The consultation, to which we will be responding, closes on 13 September 2012, although the amending regulations are unlikely to be in force until 6 April 2013.

1 Different requirements apply to schemes which contracted-out prior to 6 April 1997
2 The Occupational Pension Schemes (Contracting-out) Regulations 1996
3 A change to an occupational pension scheme which would or might either convert subsisting rights which are DB into DC or reduce pensions in payment
4 A change to an occupational pension scheme which would or might adversely affect any subsisting right (accrued right) of any member or survivor of the scheme
5 Broadly, this test will be met if the “actuarial value” of section 9(2B) rights immediately after a change is equal to or greater than it was immediately before