Powers to introduce automatic transfers, to cap pension plan charges and to introduce additional governance requirements for pension plans are contained in the Pensions Act 2014 (the Act), which finally received Royal Assent on 14 May 2014. The Act also introduces the new state pension system which will apply from 6 April 2016 and sets out more detail on the statutory amendment power which employers can use to offset the loss of their national insurance rebate when DB contracting-out comes to an end.
This article summarises the key elements of the Pensions Act 2014 which pave the way for radical changes to be made to the private and state pensions landscape in the UK.
- Automatic transfers
The Secretary of State has been given the power to introduce regulations to provide for an individual’s DC pension fund to be automatically transferred into their new employer’s pension plan when they move job. This requirement will only apply to funds below a certain value (likely to be £10,000).
The onus will be on the pension provider or trustees that run the new employer’s plan to find out if a new member has any pension saving in another pension plan that is covered by this requirement. As a minimum, the Act requires that an individual must be given the right to opt-out of any automatic transfer.
A formal consultation on draft regulations setting out the details of the automatic transfer requirement is now expected, with a view to the regulations being made before the next general election.
- Cap on charges
The Government has previously confirmed that it intends to introduce:
- a cap on charges of 0.75% of funds under management for default funds under qualifying schemes from April 2015, and
- a ban on active member discounts.
The Act gives the Secretary of State the power to do this and to require pension plans to publish more information on their transaction costs and to disclose this to members.
- More stringent governance requirements
The Government is currently consulting on its plans to introduce additional governance and administration requirements for pension plans, such as:
- requiring all contract-based schemes to have an independent governance committee,
- removing any constraints that might prevent trustees of a master trust from changing service provider, and
- placing a greater responsibility on a plan’s chair of trustees to ensure that all relevant quality requirements are met.
A wide power enabling the Secretary of State to introduce these requirements is contained in the Act. This power could also be used to introduce additional measures in future should this be necessary.
- End of DB contracting-out – Statutory amendment power
The introduction of the new single tier state pension (see below) will lead to the abolition of contracting-out for defined benefit (DB) pension plans. As expected, the Act contains a power which will enable employers of private sector DB occupational pension plans to amend their plan to offset the loss of their national insurance rebate by:
- increasing member contributions, and/or
- reducing future benefit accrual.
An actuary will be required to certify that the value of the increase in member contributions and/or the reduction in future benefit accrual in respect of the relevant members is equal to or less than the annual increase in the employer’s national insurance contributions in respect of those members before this power can be exercised.
The Government is currently consulting on draft regulations which, amongst other things, will set out how this calculation should be carried out and address the way in which this power applies to multi-employer schemes and schemes that have different rules for different members. The draft regulations also identify the protected persons in respect of whom this power cannot be used.
Sponsors of contracted-out DB plans, that have not already done so, should start planning now for the abolition of DB contracting-out because any changes that they want to make to their plan will take time to implement and require careful planning.
- Regulator’s new statutory objective
The Act introduces a new statutory objective for the Pensions Regulator requiring it “to minimise the impact on the sustainable growth of [a plan’s] employer(s)” in the exercise of its scheme funding functions. This new objective comes into force on 14 July 2014.
The Regulator has already consulted on an updated version of its DB Funding Code of Practice in response to this new objective. The draft revised Code makes clear that the Regulator expects trustees to have regard to an employer’s business plans and to make use of the flexibilities within the scheme funding regime when agreeing funding arrangements for their plan with the plan sponsor. The new Code is expected to come into force later this summer.
- Short service refunds from money purchase plans
Where an individual is entitled to money purchase benefits only the Act provides for their rights to vest after 30 days’ qualifying service. This provision is not yet in force, but when it comes into force by Order of the Secretary of State, it will mean that money purchase plans and money purchase sections of hybrid plans will no longer be able to pay short service refunds where an individual has been in the plan for 30 days or more.
- PPF compensation cap
The PPF compensation cap has been increased for individuals with more than 20 years pensionable service. The standard compensation cap will be increased (up to a maximum of two times the standard cap) by 3% for every complete year of pensionable service over 20 years which an individual has completed.
- Other key points
The Act also contains powers for the Secretary of State to:
- prohibit incentives being offered to members to encourage them to transfer their benefits out of a salary related pension plan (this power will lapse if it is not exercised by 14 July 2021), and
- exempt certain workers from the auto-enrolment requirements (it is expected that this power will be used to exempt workers with fixed or enhanced protection against the lifetime allowance charge and workers who are serving a notice period or who have given notice of retirement).
The Act also extends the duty for the Secretary of State to pay unpaid employer contributions following an employer’s insolvency to cover all “workers” and not just “employees”. This brings the duty into line with the auto-enrolment requirements which apply to “workers” and it ensures that the same level of protection in relation to unpaid employer contributions is available to all individuals who are automatically enrolled into a workplace pension plan.
- New single tier state pension
The Act provides for the introduction of the new single tier state pension from 6 April 2016. The new state pension will apply to individuals who reach state pension age on or after 6 April 2016. The current state pension will continue to be paid to individuals who reach state pension age before that date.
The full new state pension will be no less than £148.40 per week. The actual amount will be set in Autumn 2015.
Individuals will qualify for the full new state pension if they have reached state pension age and accrued 35 qualifying years. The minimum number of qualifying years which must be accrued to qualify for a partial new state pension will be set out in regulations.
Transitional arrangements will apply to individuals who qualify for the new state pension and who have built up qualifying years under the current state pension system.
- Increase in state pension age
As previously announced, the Act provides for state pension age to increase from age 66 to age 67 for men and women between 6 April 2026 and 5 April 2028.
Going forwards, the Act requires the Secretary of State to review state pension age at least once every 6 years and to lay a report before Parliament stating whether or not there should be any change. The first report must be laid by 7 May 2017.
For the purposes of each review the Secretary of State must:
- obtain a report from the Government Actuary or the Deputy Government Actuary on whether the rules on state pension age mean that, on average, a person who reaches state pension age within a specified period can be expected to spend a specified proportion (expected to be no more than one-third) of their adult life in retirement, and
- appoint a person or persons to prepare a report on other specified factors relevant to the review.