The abolition date of the second tier State pension is approaching rapidly. From 6 April 2016:
- members of defined benefit pension schemes will cease to accrue contracted-out rights (ie the element of the state pension which has been linked to earnings); and
- all defined benefit pension arrangements will cease to have contracted-out status.
Most employers have already considered how they will address the additional national insurance contributions which will be payable from this date (by absorbing the cost, changing benefits or increasing contribution rates).
Employers and trustees may still need to consider the following three key issues.
1. State pension offsets
The benefit design of your scheme may reflect the current two-tier structure of the State pension, which may not work following the introduction of the single-tier State pension. Employers and trustees should consider whether this is a problem and whether any action is needed to address it.
2. GMP Revaluation
There is a risk that, without further action, employers may be forced to provide an underpin for members who cease contracted-out employment on 6 April 2016 but continue in pensionable service, in relation to how they revalue guaranteed minimum pensions (GMPs).
Many scheme rules reflect current statutory rules which allow schemes to use fixed revaluation to revalue GMPs once members leave contracted-out service. However, from 6 April, the requirements for early leavers will change, so that fixed revaluation can only be used once members with GMPs leave pensionable service.
From 6 April, employers could therefore find themselves “on the hook” for both the statutory requirements which apply to active members with GMPs (ie section 148 revaluation1) and additional requirements under their scheme rules to use fixed revaluation.
We can review the governing documents of your scheme to advise whether this issue will apply to you, what steps you need to take to comply with the new requirements and whether you can amend your scheme to prevent an underpin arising.
3. Automatic enrolment
If your pension scheme currently uses the Reference Scheme Test to satisfy quality requirements for automatic enrolment schemes, you will need to establish a different basis from 6 April. We can advise on what alternative quality requirements you could use (eg meeting certain money purchase quality requirements or "cost of funding" requirements, which reflect the cost of funding future accruals).