On 14 May 2014, the Pensions Bill 2013-14 received Royal Assent and became the Pensions Act 2014. The Act implements major changes to the state pension, introducing the single-tier state pension. As a result the current state second pension and contracting out on a defined benefit basis will cease. The Act contains various other measures which will affect all occupational pension schemes to a greater or lesser extent. Employers and trustees should start planning now for the changes that will affect their schemes.

The Act’s provisions include:

  • The introduction of a flat-rate single-tier state pension which will apply to people reaching state pension age (SPA) on or after 6 April 2016. Individuals will need 35 qualifying years of National Insurance (NI) contributions or credits for the full amount to be paid (and payment will be subject to a minimum qualifying period which will be set at 10 years). The single-tier state pension will be based on individual qualification - it will no longer be possible to inherit or derive rights from a spouse or civil partner.
  • The abolition of contracting out on a defined benefit basis from 6 April 2016 as there will no longer be a state second pension to contract out of. Subject to certain exceptions, employers will be given a time-limited statutory power to mitigate the resulting increase in their NI contributions by modifying members’ benefits and/or contributions.
  • The acceleration of the planned increase in SPA to 67 and the introduction of an automatic review of SPA, linking SPA to longevity.
  • The power to impose a cap on pension charges alongside quality standards for pension scheme governance and transparency. Originally this power would have applied in respect of certain defined contribution (DC) schemes but its application is now wider in that it applies in respect of any class of scheme specified in regulations. A cap on charges for default funds of DC schemes used for automatic enrolment purposes is expected to be introduced from April 2015. The quality standards are also expected to take effect in respect of DC schemes from April 2015.
  • A framework for the automatic transfer of small pension pots between DC schemes when a member changes employment. We are still waiting for further detail on this and do not yet know when the provision will take effect.
  • A ban on short service refunds from DC schemes for new joiners who have 30 days or more pensionable service. This is expected to take effect this year.
  • A new statutory objective for the Pensions Regulator to “minimise any adverse impact on the sustainable growth of an employer“. This is expected to take effect shortly.