What are the main changes proposed by the Bill?
- Reduces the rate of revaluation for deferred pensions from 5% Limited Price Indexation (LPI) to 2.5% LPI.
- Simplifies certain requirements relating to pension sharing on divorce.
- Provides for Pension Protection Fund (PPF) compensation to be shared on divorce.
- Provides more detail in relation to personal accounts, including automatic enrolment and the definition of qualifying schemes (an employer with a qualifying scheme does not have to provide access to personal accounts).
Revaluation of deferred benefits
Currently benefits in deferment accrued from 1 January 1986 (other than guaranteed minimum pensions) must be revalued (broadly speaking) in line with LPI. LPI increases the benefits in line with the cost of living expenses over a given period subject to a maximum of 5% per annum.
The Bill provides that revaluation in deferment in respect of service on and from the implementation date will be reduced to LPI capped at 2.5% per annum. There is no indication as to when this change will come into force. This change brings revaluation of deferred benefits in line with the statutory increases which apply to pensions in payment.
Pension sharing on divorce etc: safeguarded rights
Pension rights may be shared on dissolution of a marriage/civil partnership. Where any shared rights include contracted-out benefits, legislation currently treats those contracted-out rights in a different way from other shared rights. These shared contracted-out rights are known as "safeguarded rights".
The Bill abolishes safeguarded rights. This means that shared rights deriving from contracted-out rights will be treated in the same way as other shared rights. There is no indication as to when this change will be brought into force.
PPF compensation and the consequences of divorce
Currently PPF compensation cannot be shared or subject to an attachment order on dissolution of a marriage/civil partnership. The Bill remedies this.
The requirements for both pension sharing and attachment orders of PPF compensation basically mirror the provisions which apply to pension benefits generally. The exception to this is in relation to pension sharing and transfers. The Bill makes it clear that an ex-spouse will not be able to transfer shared PPF compensation from the PPF into another arrangement. This is in line with the fact that members with PPF compensation cannot transfer that compensation out of the PPF. There is no indication as to when this change will be brought into force.
Personal accounts: a quick reminder
The Government's policy is that all employees, unless the employer provides auto-enrolment to a qualifying scheme, must be auto-enrolled into a pension scheme, to be known as personal accounts. Contributions of set rates must be paid by both the employer and employee into the employee's personal account. Personal accounts are going to be introduced with effect from 2012.
The Pensions Act 2007 introduced provisions to pave the way for their development by establishing the Personal Accounts Delivery Authority (PADA). The PADA, chaired by Paul Myners, will be the independent authority charged with doing what it thinks is appropriate to prepare for the implementation of, or advising on the modification of, proposals relating to personal accounts.
Personal accounts: an overview to the provisions in the Bill
The Bill provides more information about personal accounts. In particular:
- Details on the scheme and trustee structure.
- Details on which employees must be auto-enrolled and when.
- What test schemes must satisfy in order to be "qualifying schemes" with the result that the sponsoring employer does not have to provide a personal account for employees.
- What earnings will be used to determine contributions to personal accounts.
- How personal accounts will be regulated.
Personal accounts: scheme and trustee structure
As the Government had previously announced, the Bill provides that the personal accounts scheme will be a registered occupational pension scheme. The detailed rules of the personal accounts scheme (including the contribution rates) will be set out in an Order which must be approved by both Houses of Parliament.
The scheme's trustee will be a trust corporation. All processes relating to trustee governance must be published. In addition, the trustee must make arrangements for consulting members and participating employers about the ongoing operation, development and amendment of the scheme. These arrangements must include the establishment of members' and employers' panels. The panels (which are designed to be in the spirit of the member-nominated trustee arrangements for occupational pension schemes) will be representative bodies since it would not be possible to canvass the (probably) diverse opinions of all members and employers.
Personal accounts: auto-enrolment
As previously announced, the Bill provides that a jobholder in receipt of qualifying earnings (see below) who is at least age 22 and has not reached State pension age must be automatically enrolled from the first day of employment in the personal account scheme unless the jobholder is a member of the employer's qualifying scheme (see below).
Jobholders are able to opt-out of the personal account scheme within a prescribed time (there is no indication as to the period within which the jobholder must opt-out). Jobholders who have opted-out are treated as if they have never been a member of the scheme. This means that both member and employer contributions will be refunded. Further detail concerning contribution refunds will be set out in regulations.
Where a jobholder has opted-out, the jobholder must be automatically re-enrolled in the scheme every three years. However, the automatic re-enrolment requirement does not apply if the jobholder has been an active member of a qualifying scheme but chose to end that membership within a prescribed period before the re-enrolment date.
A jobholder who:
- Is between 16 and 22 or over State pension age but aged less than 75 and who is not a member of a qualifying scheme, or
- Has previously opted-out of a personal accounts scheme
- Can give notice to his or her employer to be enrolled into a personal account scheme.
Personal accounts: qualifying schemes
A qualifying scheme is a registered occupational or personal pension scheme which meets the quality requirements with the result that the employers do not have to provide a personal account for employees.
The quality requirements are as follows:
- Occupational defined benefit scheme: a scheme which is contracted-out satisfies the quality requirement by virtue of being contracted-out. A scheme which is not contracted-out must satisfy the test scheme standard. A scheme satisfies the test scheme standard where it provides benefits that are broadly equivalent to or better than benefits provided by the model test scheme for all jobholders who are active members. The test scheme provides a pension for life based on no more than 40 years of accruals at an annual rate of 1/120th.
- Occupational defined contribution scheme: the quality requirement for defined contribution schemes is that the employer must contribute at least 3% of qualifying earnings (see below) and that total contributions paid by the employer and the jobholder are at least 8% of qualifying earnings.
- Occupational hybrid scheme: the quality requirement for hybrid schemes is either the defined benefit or defined contribution standard. The Bill comments that employers will be directed by scheme rules as to which quality standard they should use.
- Personal pension scheme: the quality requirement for personal pension schemes is that the scheme should only provide defined contribution benefits. In addition, the employer must contribute by direct payment at least 3% of qualifying earnings (see below) and the jobholder must be required to make up any shortfall in contributions up to 8% of qualifying earnings. Agreements must be in place between the provider, the employer and the jobholder to confirm the contributions required.
Personal accounts: qualifying earnings
The Bill provides that pension contributions to personal accounts as well as to ascertain if an employer's scheme satisfies the relevant quality requirement will be calculated by reference to a jobholder's qualifying earnings. In addition, since qualifying earnings is part of the definition of jobholder it is a factor used to determine whether or not a person is to be automatically enrolled in a personal accounts scheme.
Qualifying earnings include wages/salary, commission, bonuses, overtime and certain statutory benefits between £5,035 and £33,540 (in line with the primary threshold and upper earnings limit for National Insurance Contributions (NICs) in 2006/7). The Bill provides that the qualifying earnings limits will be reviewed annually and should be amended to maintain their value. Detail on the period for ascertaining whether or not an individual has or is likely to have qualifying earnings will be set out in regulations.
Personal accounts: regulation
The Bill provides that the Regulator will monitor compliance with the personal accounts regime. In particular, it gives the Regulator a new statutory objective to maximise compliance with the new duties imposed on employers.
Personal accounts: delivery authority
The delivery authority was established under the Pensions Act 2007. The Bill gives the authority powers to take forward the work to implement personal accounts. In particular, the authority is given a set of guiding principles to consider when carrying out its functions including:
- Employer participation in qualifying schemes should be encouraged.
- Burdens to be imposed on employers should be minimised.
- Adverse effects on qualifying schemes should be minimised.
The Government commissioned Chris Lewin and Ed Sweeney to conduct a de-regulatory review to identify areas of pensions regulation which could be simplified. The review reported in October after which the Government consulted on its proposals as a result of the review. The simplification aspects of the Bill relating to revaluation in deferment and abolition of safeguarded rights are a consequence of the de-regulatory review exercise.
It is interesting that the de-regulatory review which was focused on simplification has resulted in only two simplification measures in the Bill. Pensions legislation is extremely complicated and it would be an enormous job to cut through the current provisions to produce a simpler regime: indeed, the report's authors could not agree with each other in relation to their recommendations. As we have seen with the development and introduction of the new tax regime, straightforward ideas have led to yet further complicated legislative provisions. That being said, the Government has said that it is committed to principles-based legislation where possible. To that end it hopes to adopt this approach in relation to the disclosure requirements.
The majority of the provisions in the Bill relate to the introduction of personal accounts. Whilst much of the detail will be set out in secondary legislation, the new scheme, and related requirements, is beginning to take shape. As previously announced, the personal accounts scheme will be an occupational scheme. Presumably this is in order to get round the problems caused by the Distance Marketing Directive with automatically enrolling employees into contract-based schemes.
This briefing note is based on the provisions of the Pensions Bill (as introduced into the House of Commons on 5 December 2007) and explanatory notes to the Bill.