As part of a package of measures to reform the state second pension (S2P), the upper accrual point (UAP) will be introduced with effect from 6 April 2009. This change will affect contracted-out rebates and the operation of some scheme rules, with the result that some scheme benefits may be inadvertently increased with consequent costs implications. For affected schemes, probably the only way to avoid this will be to amend the scheme rules before 6 April 2009.
What is changing?
The key changes are as follows:
- Introduction of the UAP. The weekly limit of the UAP will be set at £770 (equal to the current upper earnings limit (UEL)) and will remain frozen at this amount.
- The UEL will increase so that it falls into line with the threshold at which higher rate tax is payable after the personal allowance is taken into account (£43,888, ie £844 per week).
- S2P accrual will stop at the UAP and contracted-out rebates will be based on earnings between the lower earnings limit and the UAP. The UEL will no longer be used.
- Employers and employees will continue to pay National Insurance Contributions (NICs) on earnings between the UAP and the UEL.
- The reference scheme test, which sets out the overall scheme quality test which salary-related schemes must meet in order to contract-out, has been amended so that qualifying earnings factors for tax years 2009/10 onwards will be based on a limit of UAPx53 (as opposed to by reference to the UEL). This means that the reference scheme test will continue to operate as it does at the moment.
What does this mean?
It may be necessary to amend scheme rules to avoid the accidental increase in some benefits:
- Wherever scheme rules provide that benefits are calculated by reference to the UEL specifically, then these benefits may (after 6 April 2009) be calculated by reference to a higher amount than was intended. In these circumstances, trustees and employers may opt to replace these specific references with references to the UAP. Schemes which have adopted a reference scheme test underpin are likely to be affected.
- The contracting-out provisions of many scheme rules are drafted generically without specific references to the UEL. In these circumstances, rule changes are unlikely to be necessary. However, trustees are advised to review their rules carefully to make sure that their schemes are unaffected.
- It is possible, though unusual, for some contracted-in schemes to refer to the UEL (perhaps as a contributions or accrual threshold, not related to contracting-out requirements). Again, probably the only way to avoid unintentional benefit increases would be to amend the scheme's rules before 6 April 2009. Section 67 of the Pensions Act 1995 may operate to hinder or prevent relevant rule changes after that date.