New Year, New Pensions Bill

Introduction

Published on 13 January 2011, the Pensions Bill (the “Bill”) deals with several of the changes to pensions policy announced by the Coalition Government last year; primarily the increase in SPA, amendments to the automatic enrolment regime, and the switch from RPI to CPI as the basis for calculating increases to occupational pensions.

Key points

SPA will be equalised between men and women by 2018, and will increase to 66 for both sexes by 2020.
Many of the recommendations made by the independent review1 into the introduction of NEST and auto-enrolment from 2012 are to be implemented.
Schemes which currently specify RPI for calculating pension increases may continue to use this measure without providing a CPI underpin, subject to certain conditions being met.
Section 251 of the PA04 will be amended to apply only to payments made to employers under section 37 of the PA95 (essentially, a payment of surplus from an ongoing scheme).

Acceleration of increase in SPA

The Labour Government planned for SPA to rise to age 66 between 2024 and 2026. The Bill accelerates this timetable so that SPA will begin to rise in December 2018 and will reach 66 by April 2020. As a result, men’s and women’s SPAs will also equalise faster. Women’s SPA will therefore now reach 65 by 2018 (rather than 2020).

Schemes with bridging pensions (or indeed other benefits linked to SPA) will need to consider the impact of these changes with their advisers.

Auto-enrolment

In October 2010 an independent review (the “Review”) into “Making automatic enrolment work” was published.2 Its recommendations form the basis for the following measures.

Earnings trigger

A jobholder3will 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”). This will align the earnings threshold for automatic enrolment with the personal allowance for income tax.

Waiting period

The Bill will introduce an optional waiting period into the automatic enrolment process. Employers will be able to defer the automatic enrolment date of a worker for up to three months, subject to certain notice requirements. However, jobholders will still have the right to opt in during this period, although there will be no obligation for the employer to contribute.

Certification process

Employers wishing to use their existing scheme for automatic enrolment purposes will need to certify that the scheme meets the quality requirement.

Following the Review’s conclusion that the certification process for qualifying DC schemes was unnecessarily complicated, the Bill includes provision to allow for alternative self-certification arrangements. The details of these alternatives will ultimately be set out in regulations, although the Review made specific recommendations here.

Indexation and revaluation

The Bill fleshes out the details of the change from RPI to CPI for statutory increases.

It will be possible for schemes to make increases to pensions in payment by reference to RPI, CPI, or a combination of the two, depending on the requirements of the rules. Where a scheme’s rules require RPI increases and have done so continuously since the beginning of 2011 (or when a pension first comes into payment under the scheme, if later), it will not be necessary for the scheme to operate a CPI underpin for years in which CPI exceeds RPI.

Corresponding changes are made to PPF legislation to allow CPI to be used as the measure for calculating increases to PPF compensation.

Preserving powers to refund surplus

As announced by the DWP in October 20104, the Bill puts forward changes to clarify the operation of section 251 of the PA04.

Section 251 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). The Bill provides for the extension of the deadline by which trustees need to take action to preserve such powers from April 2011 to April 2016.

Although section 251 was intended to apply only to payments made to employers under section 37 of the PA95 (essentially payments of surplus from ongoing schemes), this was not clear from its drafting. For this reason, the Bill carves out a number of payments from section 251, including: compensation payments5; authorised employer loans; and scheme administration employer payments. However, it does not specifically exclude powers to pay surplus on winding-up, but aims to do so by implication.

TPR’s powers

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

1 “Making automatic enrolment work”
2 For further details see our Alert: “NEST comes home to roost!” dated 28 October 2010
3 Eligible workers in Great Britain between the ages of 22 and SPA
4 For further details see our Alert “Preserving powers to refund surplus: DWP clarification” dated 19 October 2010
5 Payments made in respect of a member’s liability to a sponsoring employer in respect of a criminal, fraudulent or negligent act or omission by the member (i.e. liens)