The Pensions Act 2007 has received Royal Assent. It introduces important changes to contracting-out, as well as new flexibilities for dispute resolution procedures and changes to the Financial Assistance Scheme. The Act also establishes the Personal Accounts Delivery Authority, which is to be responsible for setting up the new Personal Accounts regime for 2012. The personal accounts system will be the subject of yet another Pensions Bill in next parliamentary session.
Abolition of contracting-out for defined contribution schemes
The Act abolishes contracting-out on a defined contribution (DC) basis both for occupational and personal pension schemes, probably from 2012. Active members will then automatically be contracted back into the state second pension and will accrue no further protected rights.
Most of the Pension Schemes Act 1993 provisions restricting how protected rights can be secured or transferred will be repealed. Protected rights will be treated in the same way as ordinary DC rights. However, the requirement that married members or those with a civil partner must purchase an annuity from their protected rights providing a 50 per cent survivor’s benefit is at present retained, though this may be changed before 2012.
Conversion of guaranteed minimum pensions
From a date to be announced trustees of contracted-out defined benefit (DB) schemes will be allowed, with prior employer consent, to convert members’ Guaranteed Minimum Pensions (GMPs) into normal scheme benefits provided that actuarial equivalence is maintained (though it is unclear how the actuary will be able to confirm this when the question of the equalisation of GMPs for men and women has yet to be resolved). Certain procedural requirements and conditions must be satisfied, e.g. there must be no reduction of pensions in payment; DB benefits must not be converted to DC; and spouses'/civil partners’ benefits must be provided in relation to the period of service during which the GMP accrued.
Internal dispute resolution procedures
From late September 2007 trustees of occupational pension schemes will be allowed, but not compelled, to replace the two-stage internal dispute resolution procedure (IDRP) with a more flexible single-stage procedure involving a determination by the trustees. Schemes currently exempt from the IDRP requirements will remain exempt.
Financial assistance scheme
Some of the recently announced extensions to the Financial Assistance Scheme (FAS) are contained in the Act; others will be included in future regulations. The stated intention of the government is to provided 80 per cent compensation (subject to a £26,000 cap) to all members of qualifying pension schemes which commenced winding up between 1 January 1997 and 5 April 2005 where the sponsoring company has become insolvent or would have become insolvent had there not been a compromise of the pension debt.
Regulations will impose temporary restrictions on the ability of trustees of qualifying schemes to purchase annuities without the permission of the FAS manager.
Further details of these provisions can be found in our briefing Pensions Act 2007.