In this February edition of the Pensions E-Bulletin, we look at the key provisions of the Pensions Bill 2011, which began its journey through Parliament on 12 January 2011. We also consider briefly the Government's response to its consultation on the abolition of the default retirement age.

Pensions Bill 2011: summary of key provisions

The Pensions Bill 2011 was introduced into the House of Lords for its first reading on 12 January 2011. It is not expected to become law until the summer when we will update you on any significant amendments which have been made to the provisions of the Bill on its passage through Parliament. We have summarised the key provisions of the Pensions Bill below.

State Pension Age (SPA) - The Bill will bring forward the rise in the SPA from 65 to 66 for both men and women to 2020 (6 years earlier than planned). As a result, the equalisation of women's SPA has also been accelerated so that women's SPA will reach 65 by 2018. For schemes which provide bridging pensions, the changes may have funding implications if payment of these pensions is linked to SPA and the wording of scheme rules should be checked to determine any impact.

Automatic enrolment - From October next year, new laws will require employers on a staged basis between 2012 and 2016 to automatically enrol eligible workers in a qualifying pension scheme. In implementation of the recommendations of an independent review, the Pensions Bill makes various changes to the legislation on auto-enrolment to give employers more flexibility.

Change from RPI to CPI as basis for revaluation and indexation - As set out in our December 2010 E-Bulletin, the Government is currently consulting on the impact of using CPI (rather than RPI) as the inflation measure used for revaluation (of deferred pensions) and indexation (of pensions in payment). The amendments introduced by the Pensions Bill on this issue reflect the Government's proposals set out in the consultation paper and as such may change depending on the outcome of the consultation. Key features of the changes are as follows:

  • Schemes which provide full uncapped revaluation of deferred members' benefits (including GMPs) may continue to do so, without reference to the statutory requirements, provided they maintain (in the opinion of the Secretary of State) the value of pensions by reference to the rise in the general level of prices (previously this was the RPI) in Great Britain.
  • Schemes will be able to continue increasing pensions in accordance with scheme rules rather than under the statutory requirements. In place of increasing by RPI, schemes will be able to increase by RPI, CPI or a combination of the two, depending on the rules of the scheme. Where schemes continue to increase by RPI and have done since January 2011 (or when the pension first came into payment, if later), schemes will not need to carry out an annual comparison of the RPI under scheme rules and CPI under the statutory requirements and pay the higher of the two.
  • The Bill removes the requirement (in most cases) for cash balance benefits to be indexed. Pensions already in payment when the change takes effect will be unaffected.

 As per the consultation, the Bill does not contain a statutory override which will impose CPI on all schemes or a modification power to allow schemes to amend their rules to substitute CPI for RPI. The Government's intention to make indexation/revaluation changes a "listed change" requiring employers to consult affected employees has not been reflected in the Bill but Regulations implementing this change are likely to follow in due course. Trustees and employers who have not already carried out a review of their scheme rules to determine the impact of the RPI/CPI changes on their scheme should take advice on this now as the terms of individual scheme rules is key to how the changes will affect that scheme.

Repayment of surplus - Section 251 of the Pensions Act 2004 requires trustees to pass a resolution to retain any power contained in their scheme's rules to make repayments to the employer prior to a deadline of 6 April 2011. Although the legislation was clearly intended to apply to surplus payments from ongoing schemes, there was some ambiguity in the pensions industry as to whether payments to an employer on a winding up and other payments to an employer eg. administrative payments would also be caught. The Pensions Bill clarifies that it is only surplus payments from an ongoing scheme that are covered and extends the deadline for passing a resolution to April 2016. Although they now have more time to address this issue, trustees should consider progressing this once the Bill is finalised rather than delaying and risking this issue being overlooked in five years time.

Contribution notices and financial support directions - In order to give the Pensions Regulator a bit more time to make its determinations, the Bill extends the "look back" period for the issue of a financial support direction (FSD) or a contribution notice (CN) (two years and six years respectively). Currently the look back period ends with the Regulator's determination (imposing the FSD or CN) but the Bill will extend this so that it ends on the date when the Regulator issues a warning notice, allowing the determination process to commence at that time.

Phasing out the Default Retirement Age (DRA)

The Government's response to the consultation on phasing out the DRA (covered in our November 2010 E-Bulletin) was published on 13 January and confirms that the DRA will be abolished from 1 October 2011. This means that employers will no longer be able to require employees to retire at age 65.

The Government has agreed an exemption to the principle of equal treatment on grounds of age for group risk insured benefits (eg. income protection, death in service benefits and health insurance). The Government has also confirmed that the absence of a DRA does not affect the setting of a normal retirement age for the purposes of occupational pension schemes. While this is to be welcomed, trustees and employers should still consider the terms of their scheme rules to determine if amendments are required to deal with members who remain in service beyond the scheme's normal retirement date.