The end of contracting-out on 6 April 2016 is now just over five months away and whilst some of the legislative amendments required to give effect to this are in place, as we reported in a Pensions Alert in July 2015, there are a number of areas for further consultation and regulations.
Some of those outstanding issues are addressed in a consultation on draft regulations that was issued earlier this week. In this Pensions Alert we provide an overview of that consultation including an update from the DWP about the issues that remain outstanding. We also provide a brief summary of some of the points that employers and trustees need to start to consider in preparation for the end of contracting-out.
An overview of the consultation
The consultation relates to the draft Pensions Act 2014 (Abolition of Contracting-out for Salary Related Pension Schemes) (Consequential Amendments) Order 2016 (Draft Order).
The DWP states that the Draft Order contains "for the most part minor and technical changes" to other secondary legislation. For example, amendments are proposed to a variety of regulations to ensure that references to contracting-out are in the past rather than the present tense.
Other areas that the Draft Order covers which are of particular note include the following.
The Disclosure Regulations contain obligations on trustees to provide certain information (referred to as "basic information") to scheme members. One of the items of "basic information" is which relevant employment is, and which is not, contracted-out employment.
The consultation proposes that this item of basic information will be removed from the list with effect from 6 April 2017. The DWP considers this timing to be appropriate because by April 2017 trustees will have notified members of any changes to contracted-out employment under the scheme in accordance with their obligations to inform members of material alterations to the basic information.
Existing regulations set out requirements that apply when contracted-out rights are transferred to another contracted-out scheme. The Draft Order updates these regulations:
- to remove certain provisions relating to transfers between schemes which are both contracted-out although with some savings for provisions to continue to have effect in relation to transfers made prior to 6 April 2016, and
- to ensure that, following the end of contracting-out, where a transfer takes place between two formerly contracted-out salary-related schemes, the contracted-out rights which are being transferred must be protected.
The consultation also explains that the existing regulations will continue to allow transfers of contracted-out rights from formerly contracted-out schemes to schemes that were never contracted-out provided certain conditions are met including that the member accepts that the benefits to be provided by the receiving scheme may be in a different form and of a different amount to those which would have been payable by the transferring scheme.
The record-keeping requirements in the automatic enrolment legislation include that if an employer is using a contracted-out scheme to comply with its automatic enrolment duties for any jobholders, the employer must keep a copy of the contracting-out certificate for a period of six years.
From 6 April 2016, the quality requirement can no longer be met simply by virtue of the scheme being contracted-out. However, the Draft Order provides that where a contracting-out certificate had to be kept under the record-keeping requirements as they had effect before 6 April 2016, that certificate must be kept until 5 April 2022.
The consultation closes on 16 November 2015 and the DWP will publish a report in early 2016 summarising the responses and the action that it will take as a result of them. Whilst the amendments are therefore currently only in draft form, it is worth employers and trustees being aware of the proposals and how they might impact administration requirements for their scheme.
Further consultation and regulations
In July the DWP reported that it needed more time to develop a solution to address a concern that the legislation would not preserve the Reference Scheme Test underpin for certain DC schemes contracted-out on a DB basis. The DWP states that it will communicate the outcome of this issue when it publishes the response to the consultation on the Draft Order.
Other areas that were previously identified as potentially needing further regulations were the alteration of scheme rules in relation to post-6 April 1997 contracted-out rights, and how certain provisions about trivial commutation and GMPs fit with the way trivial commutation is dealt with in HMRC legislation. The DWP has now stated that these issues will be the subject of separate consultation in due course.
An overview of key action points
Action points for employers and trustees in relation to the end of contracting-out include:
- deciding whether any amendments will be made to the scheme to offset the increased National Insurance cost and, if so, consulting members
- reviewing the scheme rules to assess whether any rule amendments will be needed to reflect the requirements that will apply from 6 April 2016 about administering accrued contracted-out rights
- ensuring that any changes required to administration processes are made
- reconciling GMP data with HMRC
- communicating with members, and
- if the scheme will continue to be used to meet any automatic enrolment duties, checking that an alternative quality requirement will be met.