Pensions Bill 2013

Introduction

The Pensions Bill 2013 (“the Bill”) was published on 10 May 2013. While its main purpose is to implement the new single tier state pension, it also contains several key measures for occupational pension schemes.

In this Alert:

• Key points
• Single tier state pension
• Abolition of DB contracting-out
• State pension age
• TPR’s new objective
• Automatic transfers
• Miscellaneous
• Next steps

Key points

• The Bill provides for the new single tier state pension to be implemented on 6 April 2016.
• DB contracting-out will be abolished with effect from the same date, but employers will be able to amend their schemes to take account of increases in their NICs.
• SPA will be increased from age 66 to 67 between 2026 and 2028 (eight years earlier than originally planned).
• When exercising its functions in relation to scheme funding, TPR will be required to consider how it can “minimise any adverse impact” on an employer’s sustainable growth.
• A system of automatic transfers will be introduced for certain members of workplace pension schemes, initially in respect of DC pots of up to £10,000.1
• The ability to make refunds of contributions to members of DC schemes will be removed.

Single tier state pension

The current state pension system comprises the BSP, the additional state pension (commonly known as S2P but formerly SERPS), which is linked to earnings, and the pension credit (a means tested benefit). With the aims of sweeping away complexity and allowing individuals to plan more easily for their retirement, with effect from 6 April 2016 individuals with 35 or more “qualifying years” of NICs will be entitled to a flat rate state pension. However:

• the current state pension arrangements will continue to apply to people who reach SPA before 6 April 2016;
• transitional arrangements will be introduced to ensure that anyone who, at the date of change, would have been entitled to a higher payment than the new flat rate pension will not lose out.

Abolition of DB contracting-out

A key consequence of the move to a single tier pension is that DB contracting-out will be abolished (also from 6 April 2016).

When DC contracting-out was abolished, generally protected rights simply converted into normal DC benefits. In contrast, on the abolition of DB contracting-out, past service contracted-out rights will be retained within schemes and will remain subject to the same statutory requirements as before.

Employers will be given a statutory power, without the need for trustee consent, to amend their scheme rules to adjust members’ future pension accruals or pension contributions to take into account the loss of the contracting-out rebate. However, an actuary will be required to certify that the proposed amendments meet certain statutory requirements.

The power may be used more than once, but will only be available for a limited period of five years.

State pension age

Under plans originally put forward by the Labour Government, SPA was due to increase to age 67 between 6 April 2034 and 5 April 2036. The Bill provides for this timetable to be accelerated and the increase to occur between 6 April 2026 and 5 March 2028.

In addition, the Bill makes provision for SPA to be periodically reviewed by the Secretary of State, in light of changes in life expectancy and other relevant factors. The Secretary of State will be required to prepare and publish a report in relation to the review. The first of these must be issued before 7 May 2017, with subsequent reports due every six years. This timetable builds in some flexibility for the Government as it has already announced its intention to review SPA every five years.

TPR’s new objective

Following a call for evidence from the DWP, the Chancellor announced in this year’s Budget that TPR would be given a new statutory objective.2 The Bill now confirms that, when carrying out its functions in relation to scheme funding, TPR should “minimise any adverse impact on the sustainable growth of an employer”. Of course, how TPR will interpret its new objective remains to be seen. As announced in its annual funding statement (published on 8 May 2013), TPR will consult on a new scheme funding code of practice in the autumn.3

Automatic transfers

The introduction of automatic enrolment is expected to lead to the proliferation of dormant, often small, DC pension pots. In a recent Command Paper , the Government announced that it intends to address this with a system of automatic transfers to a new employer’s scheme. The Bill puts in place a framework for the introduction of this system, but much of the detail will be set out in regulations.

Miscellaneous

The Bill also includes provision for:

• the removal of the ability to make a short service refund from an occupational DC scheme. However, this will only apply to individuals who first become active members of a scheme, or who re-join a scheme having already taken a refund or transfer, on or after the relevant section comes into force (currently expected to be in 2014);
• regulations to be made to prohibit the offering of a financial/similar incentive to an individual to induce them to transfer their benefits out of a salary-related occupational pension scheme. This power will be repealed seven years after it comes into force if it has not been exercised; and
• certain technical changes to the automatic enrolment legislation,4 including a power to make regulations to allow employers to exclude certain types of individual from auto-enrolment.

Next steps

The Bill is expected to receive Royal Assent in spring 2014. With the notable exception of the new state pension and the corresponding end to DB contracting-out, many of its provisions are intended to come into force to coincide with Royal Assent, or soon after.

However, while 6 April 2016 is specified for the state reforms, provision is made for this date to be replaced with a later one. We will watch with interest.

1Please see our Alert: “Automatic transfers for DC Pension Pots” dated 25 April 2013

2 Please see our Alert: “Budget 2013 heralds a new objective for TPR” dated 21 March 2013
3 Please see our Alert: “TPR’s 2013 scheme funding statement” dated 9 May 2013
4 Please see our Alert: “Technical Changes to Automatic Enrolment” dated 28 March 2013