The draft Contracting-out (Transfer and Transfer Payment) (Amendment) Regulations 2018 – Sackers’ response to consultation

Background

The DWP is consulting on draft regulations which are designed to enable bulk transfers of contracted-out rights to take place in certain circumstances without member consent, to schemes that have never been contracted-out.

In this response

• General comments
• Draft regulation 2(8): transfer of section 9(2)(B) rights
• Draft regulation 2(12): further conditions for transfers of GMPs

General comments

The inability to transfer contracted-out rights without consent to a new scheme since the abolition of DB contracting-out on 6 April 2016, is a long-standing issue. We therefore welcome the DWP’s efforts to address this.

However, in our view, some areas of concern remain. It also appears that in some respects, the regulations seek to introduce additional tests, perhaps inadvertently.

By way of example, paragraph 9 of the consultation document explains that “the conditions will be that the rights of the member are not adversely affected by the transfer and that the same protections must be provided by the new scheme, for example revaluation and indexation that would have been afforded to members if the transfer were to a formerly contracted-out scheme.” In our view, this could be more clearly defined so that a streamlined framework for the benefit of both formerly contracted-out schemes and those which have never been contracted-out would be created to fit the intended purpose of protecting any contracted-out element of benefit.

We have a number of practical comments on the draft regulations, which are set out below.

As legal advisers to trustees, employers and providers of workplace pension schemes, our comments relate to those aspects of the consultation which are relevant to our practice. We have not sought to answer every question in the consultation.

Draft regulation 2(8): transfer of section 9(2)(B) rights

Draft regulation 8A applies in respect of “accrued” section 9(2B) Rights. It is not clear whether that applies to just deferred members with 9(2B) Rights or whether it is intended to cover pensioners as well. Based on the wording of existing Regulation 7 (and by analogy with the provisions for GMPs) we would have said “accrued” means active and deferred only. However, schemes will want to transfer all members, including existing pensioners with pensions in payment, when they undertake scheme mergers (without members’ consent).

Draft regulation 8A(1)(a) requires that “the transfer will not adversely affect the rights of the earner or person concerned”. In relation to this, draft regulation 8A(2) provides that for this purpose “a transfer would adversely affect a person’s rights if it would alter those rights so that the benefits, or future benefits, to which they relate would or might be less generous”. However, exactly how this is to be measured is unclear. We appreciate that the requirement that applies for formerly contracted-out schemes (in 8(c)) provides that a transfer payment must be provided in accordance with the receiving scheme’s rules applicable to contracted-out earners (and you might ask what those rules are and how they will be relevant if a mirror image benefit is being provided). Of course, a scheme which has never been contracted-out will not have any such rules.

However, the requirements for schemes which have never been contracted-out need to be clear. We question whether anything additional is needed in light of the fact that an actuarial certificate also needs to be given (as mentioned below). If it is felt that something in addition to the certificate is needed, would assistance be provided by Regulation 17 of the Occupational Pension Schemes (Schemes that were Contracted-out) (No 2) Regulations, which contains minimum requirements around changing 9(2B) rights?

Draft regulation 8A(1)(b) seeks to apply the requirement for an actuarial certificate contained in regulation 12(3) of the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991 to connected employer transfers of accrued section 9(2B) rights. As mentioned above, “accrued” is not defined here, but we understand it to refer to deferred members.

However, we note that regulation 12(3) applies to Short Service Benefit only. As we understand the proposals are intended to enable any salary-related occupational pension scheme rights to be transferred to newly established schemes that have never been contracted-out, how does this provision apply to those members with Long Service Benefit? This comment also applies to existing regulation 9, which is in our view capable of allowing a transfer of both deferred and pensioner members. In other words, is the certificate which the actuary provides intended to cover Short Service Benefit members, and also Long Service Benefit members?

Regulation 9 of the Contracting-out (Transfer and Transfer Payment) Regulations has not been amended to restrict that paragraph to formerly contracted-out schemes. This may be because non-contracted out schemes could not meet the requirements of Regulation 8(c), but it would make sense to make the amendments for consistency with regulation 4, which concerns GMPs.

Draft regulation 2(12): further conditions for transfers of GMPs

Draft Schedule 1, paragraph A1

In paragraph (c) compliance is required with certain provisions of the 1993 Act in respect of transferred “accrued rights” (i.e. notional GMP as defined in Section 20(6) of the 1993 Act). Should that not also include GMP increases, once that GMP comes into payment, under section 109 of the 1993 Act?

Draft substitute paragraph 6 of Schedule 1

To the extent that it applies to schemes which have never been contracted-out, the reference in the third line of draft paragraph 6(b) should be to the transferring scheme rather than the receiving scheme.

In relation to draft paragraph 6(c), we question the need to go further than the existing protections for GMPs and this appears to repeat the requirement in A1(a). An alternative would be to require schemes that have never been contracted-out to treat contracted-out benefits as if the contracting-out rules which applied immediately before the abolition date applied to such schemes. This could be done by cross-reference to the former contracted-out provisions and may make things simpler to follow. A requirement like this could apply equally to formerly contracted-out schemes and schemes which have never been contracted-out alike.