Miscellaneous Amendment Regulations – The Government Responds

Introduction

The DWP has issued its response to two 2012 consultations, together with draft legislation. Since all the changes will come into force on 1 April 2013, it has merged all the amendments into one set of regulations (the “Regulations”).

Key points

With effect from 6 April 2013, the Regulations will:

make the restrictions on amendments to certain contracted-out DB schemes apply appropriately for schemes which have ceased to contract-out; and
extend the circumstances in which schemes may make bulk transfers of members without consent.1

The Government has decided to undertake a further informal consultation on a limited power for trustees to modify their scheme rules, by resolution, to change provisions in relation to bridging pensions. It has therefore removed this provision from the Regulations.2
The Regulations also make various minor and technical changes to the indexation and stakeholder requirements which we do not cover in this Alert.

Contracting-out on a DB basis

Since 6 April 1997, 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.

Amending a contracted-out DB scheme

Background

Certain steps must be taken before amendments can be made to current and most formerly contracted-out schemes.3

Because this test is forward looking, it causes difficulties for actuaries where contracted-out benefits have ceased to accrue.

New test for changes to accrued benefits

The Regulations aim to provide the actuary with a more suitable test.

Where future contracted-out benefits may be affected by an alteration the actuary will still need to certify that the scheme will continue to meet the RST. However, for accrued rights, an amendment will not be permitted unless:

the benefits to be provided (including survivors’ benefits) are actuarially equivalent to, or better than, the current benefits;
section 67 of the Pensions Act 19954 (which protects “subsisting rights”) does not apply; and
the alteration is not a “protected modification”5 or a “detrimental modification”6 or, if it is a “detrimental modification”, the actuarial equivalence test7 is met.

Bulk transfers without consent

Currently, contracted-out DB schemes may only arrange a bulk transfer of members without their consent to 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 Regulations will enable bulk transfers without consent to be made to both current and formerly contracted-out schemes. In addition, the Regulations will allow transfers to be made to pension funds / schemes in EEA states outside of the UK.

Bridging pensions

Some DB schemes pay members who retire before SPA a higher pension at the outset, which is then reduced at SPA to take account of State Pension coming into payment. The aim is to allow the member to receive a similar overall level of income in retirement, regardless of when State Pension actually starts.

Although often referred to as bridging pensions, these arrangements are also known by a variety of other names including “level pensions”, “step-up pensions” and “State Pension offsets”.

Changes to SPA

SPA was initially due to equalise between men and women in 2020 and to increase, in increments, from 65 to 68 by 2046. However, this timetable has been accelerated by the Pensions Act 2011.8 SPA will now be equalised between men and women by 2018, and will increase to 66 for both sexes by October 2020.

When most schemes introduced bridging pensions it is unlikely that the possibility of SPA equalising or, indeed, increasing beyond age 65 was contemplated. Some rules therefore tied the cessation of a bridging pension to SPA, while others stated that it would end at 60 (for women) or 65 (for men).

The potential impact of the changes to SPA on a scheme depends on the terms of its bridging pension. In some schemes, the payment of a bridging pension is intended to be cost neutral; the member receives a higher pension prior to SPA but the cost of this is accounted for in the level of pension paid to the member after SPA. Other schemes pay an amount in addition to the member’s pension, in which case paying bridging pensions for a longer period than anticipated will have an impact on the scheme’s funding.

Statutory power to make changes?

Restrictions in scheme rules may prevent changes being made to bridging pensions. For this reason, the DWP considered providing trustees with a limited power to modify the terms of any bridging pension offered to people who have not yet retired.

Although responses to the consultation were largely supportive, the Government is still considering the issues raised and has therefore decided to remove the provisions from the Regulations to allow for a further informal consultation at a later, as yet unspecified, date.

Window of opportunity

The Finance Act 2013 is set to align the tax rules with the changes to SPA, with the result that reducing a bridging pension after age 65 will no longer be an unauthorised payment. Until the Finance Act comes into force (expected to be July 2013), schemes in which unauthorised payments are payable at the trustees’ discretion have a window of opportunity to amend their rules so that bridging pensions cease at a specific age, rather than SPA.

1 Alert: “Consultation on miscellaneous amendment regulations” dated 31 July 2012
2 Alert: “Consultation on draft legislation – bridging pensions” dated 8 October 2012
3 The same restrictions apply 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.
4 Alert: “Changing scheme benefits – the all new section 67” dated 12 July 2005
5 A change to an occupational pension scheme which would or might either convert subsisting rights (accrued rights) which are DB into DC or reduce pensions in payment
6 A change to an occupational pension scheme which would or might adversely affect any subsisting right or any member or survivor benefit
7 Broadly this test will be met if the “actuarial value” of the contracted-out rights immediately after a change is equal to or greater than it was immediately before
8 See our Alert: “Better late than never – The Pensions Act 2011” dated 3 November 2011