The Government is consulting on regulations that will allow schemes which provide bridging pensions to continue payment of those pensions until State Pension Age (SPA), even where this is beyond age 65.
Background
Some defined benefit schemes, if they have a pension age which is earlier than SPA, provide a temporary “bridging” pension between actual retirement and SPA. The rationale for bridging pensions is that the member’s income is stable throughout retirement, rather than increasing significantly when his or her State Pension comes into payment. The “bridging” pension may be automatic under the scheme’s rules or an option offered at retirement.
In general pensions in payment are not allowed to be reduced during a member’s lifetime. However, the Finance Act 2004 provides an exception for bridging pensions as long as the reduction does not exceed the expected State Pension.
The proposed regulations
The Pensions Act 2011 provides for SPA to increase to 66 by 2020. The impact of this on an individual scheme will depend on the terms of its rules:
- if they provide for bridging pensions to be paid until SPA, the scheme will have to pay the higher pension for a longer period, increasing the benefit paid to the members;
- if they provide for bridging pensions to be paid only up to age 60 or 65, members will suffer a temporary reduction in overall income from that age until State Pension becomes payable.
The draft regulations introduce a limited power enabling trustees to modify their scheme by resolution, if they wish to do so, (notwithstanding any constraints in the scheme’s rules) in order to take account of the changes to SPA. This power is intended to allow trustees to modify the terms of any bridging pension offered to people who have not yet retired, although there will be no obligation on them to do so. Trustees may use the power only to make changes to take account of the changes to SPA, not to make other changes.
The Government envisages that any changes made using the new power will be intended to be cost-neutral. This means that, for instance, if the bridging pension is to be paid for longer (to reflect the extended period to SPA) the level of pension may be reduced to compensate for the additional cost that would otherwise be incurred. Employer consent to the use of the power will also be required.