Pensions continue to be subject to legislative change. After what was at times a somewhat acrimonious Parliamentary process, the Pensions Act 2007 (PA07) finally received Royal Assent at the end of July.
The PA07 makes various miscellaneous changes to pensions legislation as well paving the way for the new personal accounts in 2012. This briefing note considers the details of the new provisions.
What are the main changes made by the PA07?
- Allows guaranteed minimum pensions (GMPs) to be converted into main scheme benefits.
- Allows occupational pension schemes to opt to have a one-stage internal dispute resolution procedure.
- Abolishes contracting-out for defined contribution pension schemes.
- Provides for the establishment of the Personal Accounts Delivery Authority.
- Makes changes to the financial assistance scheme (FAS).
- Reduces the National Insurance contribution requirements to obtain a full state pension.
- Amends the way the basic state pension is increased.
- Increases state pension age to 68.
- Simplifies State Second Pension (S2P) accrual rates.
Conversion of Guaranteed Minimum Pensions (GMPs) to main scheme benefits
The PA07 allows trustees of contracted-out defined benefit schemes to convert GMPs in main scheme benefits subject to certain safeguards. The conditions which must be fulfilled before conversion may take place are that:
- The post-conversion benefits are at least actuarially equivalent to the pre-conversion benefits.
- If the member was entitled to a pension immediately before conversion. The amount of that pension immediately postcompletion must not have been reduced.
- The post-conversion benefits must not include defined contribution benefits. Except for any defined contribution benefits provided under the scheme immediately before conversion.
- The converted scheme provides the requisite survivors’ benefits.
In addition the trustees must satisfy the following procedural requirements, before conversion might occur:
- The employer must consent in advance to GMP conversion.
- The trustees must take all reasonable steps to:
(a) Consult the earner in advance, and
(b) Notify all members and survivors affected by the conversion before, or as soon as reasonably practicable after the conversion date.
- HM Revenue & Customs (HMRC) must be notified on or before the conversion date that:
(a) GMP conversion will or has occurred, and
(b) It affects the earner.
Not all schemes will have an amendment power which would enable the trustees to affect conversion. The PA07 gives trustees the power to amend the scheme by resolution, to achieve GMP conversion and to make any other consequential amendments they consider necessary. The PA07 also confirms that amendments to achieve GMP conversion are not ones which would adversely affect a member’s subsisting rights for the purposes of section 67 of the Pensions Act 1995.
Where the Regulator does not consider that the conditions have been satisfied it can make an order declaring that the amendment, modification or adjustment is void.
Internal dispute resolution procedure
The PA07 provides that schemes can, but are not required to adopt a single stage internal dispute resolution procedure, which is considered by the trustees rather than the current two-stage process.
This amendment will come into force on 26 September 2007.
Abolition of contracting-out for defined contribution schemes
Contracting-out for defined contribution schemes is going to be abolished. However, abolition will only apply to accruals after the commencement date and will be achieved by cancellation of the scheme’s contracting-out certificate. Once a scheme’s contractingout certificate has been cancelled the scheme will have to comply with the regime for formerly contracted-out schemes.
No commencement date has been announced for this amendment.
Personal Accounts Delivery Authority
Personal accounts are going to be introduced with effect from 2012. In order to facilitate their development, the PA07 establishes the Personal Accounts Delivery Authority. This 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.
The Government has announced that Paul Myners will be the chair of the Authority.
The provisions relating to the Authority come into force on 26 September 2007.
Changes to the Financial Assistance Scheme (FAS)
The PA07 makes further amendments to FAS:
- FAS compensation must not be less than 80 per cent of the member’s expected pension, subject to the cap (which will be £26,000 a year).
- Regulations will be made as soon as possible to temporarily prevent trustees of schemes which are eligible for FAS, from buying-out benefits with an insurer. This is unless they have entered into a binding commitment to purchase the annuities, or the Secretary of State has given permission, before the relevant date.
NI contributions and the State pension
The PA07 makes various changes to the NI contributions requirements before contribution-related benefits might be paid. The key changes are:
- The number of years of NI contributions required to obtain the full state basic pension is reduced from 44 years for men and 39 years for women, to 30 years for both men and women.
- Carers will be credited with NI contributions to enable them to be eligible for a category B state pension.
These amendments will come into force on 26 September 2007.
Increases to the basic State pension
The basic state pension is currently increased in line with prices. The PA07 amends this so that it will be increased in line with earnings. It is not clear when this amendment will come into force. However, the government has pledged that the change will apply by 2012 or by the end of the next Parliament.
Increase to State pension age
State pension age is to increase from age 65 to 68 between 2020 and 2050.
The first increase, from 65 years to 66 years, takes effect between April 2024 and April 2026. The second, from 66 years to 67 years, takes effect between April 2034 and April 2036. The third, from 67 years to 68 years, takes effect between April 2044 and April 2046.
These changes affect anyone born after 5 April 1959 - that is anyone below the age of 47 on 5 April 2006 (who would therefore reach the age of 65 on or after 6 April 2024).
Changes to S2P
The PA07 makes changes to S2P (the earnings-related element of the state pension).
Firstly, from 2010 amendments are made which will increase the number of people who are deemed to have earnings equivalent to the lower earnings threshold, and so accruing an amount of S2P.
Secondly, the S2P accrual rate is going to be simplified so that a flat rate accrual is in place by 2030.
No commencement date has been announced for this amendment.
Review of the PA07
The Secretary of State must prepare a report on the operation of the PA07. This review must be conducted before the end of 2014.
The passage of the PA07 was acrimonious. Arguments about FAS were the main reason for this. The opposition wanted FAS to provide the same level of benefits as the Pension Protection Fund. In addition they sought a “lifeboat” scheme to secure additional funding for FAS from various unclaimed assets. The Government disagreed. This led to the PA07 “ping ponging” between the Commons and the Lords until the Government deemed the issues public spending which the House of Lords have not right to discuss so leading to Royal Assent.
Despite the fact that there was animosity at the end of the Parliamentary process, the amendments to the occupational pension scheme regime will be welcomed by many schemes. Particularly useful for schemes which were contracted-out on the final salary basis before 6 April 1997 might be the ability to convert GMPs into main scheme benefits. However at the same time, the PA07 does not set out how GMP conversion is to occur and, in particular, how (and whether) the issue of GMP equalisation should be resolved. Instead, it merely provides that the postconversion benefits are at least actuarially equivalent to the preconversion benefits. Regulations will set out further requirements in relation to actuarial equivalence: there is no indication as what these regulations will say. It is likely that the current uncertainties in relation to equalisation (unless dealt with in the regulations) will mean that few schemes will go down the conversation route.
The other change to the contracting-out regime is the future abolition of defined contribution contracting-out. However, this change will not greatly simplify scheme administration because these schemes will still have to comply with the regime for formerly contracted-out schemes.
The piece of real simplification in the PA07 relates to internal dispute resolution procedure. Government in the Pensions Act 2004 first attempted to these requirements. Since this attempt was not successful, the Government has tried again. The PA07 gives schemes the ability to adopt a single stage internal dispute resolution procedure instead of the current two-stage approach. The ability to adopt a one-stage process seems sensible, as it is very rare for a second stage decision by the trustees to go against a first stage decision by the appointed person. However, despite the fact that schemes will be able to adopt procedures best suited to them, some large schemes have indicated to us that they are happy to retain a two stage process.
The remaining provisions of the PA07 relate to changes to the state pension regime. Apart from the amendments to S2P and the increases to the state pension age etc, the other provisions pave the way for the establishment of personal accounts from 2012. We are expecting a second pensions bill, probably to be published in November. This bill will set out further paving measures for personal accounts.
This briefing note is based on the provisions of the Pensions Act 2007 which received Royal Assent on 26 July 2007