From 1 October 2013, trustees of schemes that provide bridging pensions will have wide new powers to modify their bridging pension rules in light of changes to state pension age ("SPA"). Employer consent will be required in all cases.
Many schemes contain "bridging pension" rules designed to give members a higher scheme pension till SPA and a lower scheme pension afterwards. These were intended to give members broadly the same total pension income before and after their state pension starts.
But SPA is going up – female SPA will have risen to 65 by 2018, and further increases are planned for both sexes after that. As a result, bridging pension rules often no longer work as intended. Depending on how a scheme’s bridging pension rule is worded, members may find that there is a gap between when the scheme pension drops and when their state pension starts, or employers and schemes may find themselves continuing to pay bridging pensions for longer than they bargained for.
Trustees and employers may therefore wish to amend the age until which bridging pensions are paid and/or the reduction which is made to a member’s pension when their bridging pension stops, to reflect the increases to SPA.
The new powers
Under new legislation, if their scheme contained a bridging pension rule on 5 April 2010, trustees will have a statutory power from 1 October 2013 to modify their schemes by passing a resolution. Different modifications will be allowed depending on how the scheme’s bridging pension rule was worded on 5 April 2010:
- If the rules said that bridging pensions would stop at an age between 60 and 65, the rules can be amended so that bridging pensions stop instead at any age between 60 and SPA (the "first permitted period").
- If the rules said that bridging pensions would stop at SPA, the rules can be amended so that bridging pensions stop instead at any age between 60 and 65 (the "second permitted period").
Additionally, trustees will be allowed to change the reduction that applies when a bridging pension ends. The new reduction can be higher or lower than the one that would otherwise have applied, and can be made at any time during the relevant permitted period.
The new powers will be very flexible, and the usual restrictions in contracting-out legislation and s67 Pensions Act 1995 ("s67") on changes to accrued rights will not apply to amendments made using them. However, there will be some restrictions:
- the amendment must not affect pensions in payment;
- the reduction made when the bridging pension ends must be reasonable in light of the SPA changes;
- the new powers are available only if the scheme rules on 5 April 2010 provided for a bridging pension payable either until SPA or until an age between 60 and 65; and
- the amendment can be made only with employer consent. (In a multi-employer scheme a person nominated by the employers to be their representative must consent or, if there is no such nominee, all the employers must consent unless they have waived their right to consent.)
Tax rules are also being changed to let schemes stop bridging pensions at SPA (or 65 if later) without incurring a tax charge.
The regulations will be welcomed by trustees and employers since they offer a means of making reason able adjustments to schemes to reflect the SPA changes that might not otherwise have been possible using the scheme amendment power, and without the need to comply with the burdensome s67 regime.
However, the new legislation is less helpful than one would wish where a bulk transfer has taken place after 5 April 2010. This is because the new powers are only available to schemes that contained a bridging pension rule on that date. Where the transferring scheme contained a bridging pension rule on 5 April 2010 and the receiving scheme has replicated it, there is no obvious reason why the trustees of the receiving scheme should not be allowed to use the new powers to modify the rule. Unfortunately, as the legislation is currently worded, the new powers do not seem to be available to the receiving scheme. It is to be hoped that the Government will recognise this problem and amend the legislation appropriately.