DC contracting-out to be abolished from 6 April 2012

Consultation paper and draft regulations issued July 2010. Response to consultation issued November 2010. Regulations issued May 2011, in force on 6 April 2012.  

The Pensions Act 2007 (Abolition of Contracting-out for Defined Contribution Pension Schemes) (Consequential Amendments) Regulations 2011/1245

The Pensions Act 2008 (Abolition of Protected Rights) (Consequential Amendments) Order 2011/1246

The draft Pensions Act 2007 (Abolition of Contracting-out for Defined Contribution Pension Schemes) (Consequential Amendments) (No.2) Regulations 2011

The draft Pensions Act 2008 (Abolition of Protected Rights) (Consequential Amendments) (No.2) Order 2011

According to the consultation paper:

  • From 6 April 2012, protected rights will no longer exist but will become ordinary money purchase benefits.
  • A three-year transitional period will allow the current automated process of rebate payments and recoveries to continue between HMRC and schemes formerly contracted-out on a DC basis.
  • During the transitional period, it will be for the scheme to advise HMRC that a member has transferred out of the scheme.
  • After the transitional period (from 5 April 2015) rebate adjustment payments will be paid direct to individuals, subject to a de minimis limit.
  • From 6 April 2012, a 50% contracted-out deduction (COD) will be made to a survivor's SERPS pension, in respect of weeks in which the survivor's spouse was contracted-out on a DC basis.  

According to the consultation response:

  • Where a transfer of protected rights took place from a COMP to a COSR before the abolition date, such transfers will continue to be treated in the receiving scheme as contracted-out rights under s 9(2B) Pension Schemes Act 1993.
  • No further review of the reference scheme test is proposed at this time.
  • It is not intended to make transitional arrangements to facilitate contractingout on a defined benefits basis for DB schemes that previously elected to contract-out on a DC basis.
  • Members must be informed within one month of the abolition date that their scheme is no longer contracted-out on a DC basis. However, this requirement will not apply where schemes have already informed affected members and given required information within 12 months preceding the abolition date.
  • Transfers from DB contracted-out schemes to non-contracted-out schemes after the abolition date will be permitted. Safeguards will ensure that members are aware of the implications of transferring, including that there is no longer a requirement to provide a survivor's benefit.
  • DWP will consider during 2011 whether a statutory override is needed to allow rule amendments where protected rights requirements have been hard-wired into scheme rules.

Following consultation, regulations (two sets still in draft) have been issued which make various consequential amendments relating to the abolition of DC contracting-out and the removal of the protected rights requirements.