The Pensions Act 2011 received Royal Assent on 3 November. The main changes made by the Act, in relation to occupational schemes and their employers, are to:
- accelerate the existing timetable for increasing the State Pension Age to 66,
- reflect changes to the auto-enrolment requirements agreed following a review in 2010 and
- reflect the introduction of the Consumer Prices Index as the basis for statutory minimum increases to occupational pensions and payments from the Pension Protection Fund.
State Pension Age
The Act confirms the timescale over which the State Pension Age (“SPA”) will increase to 66. Originally the Pensions Bill provided that this would happen by April 2020. For women, this clashes with the current arrangements, under which between 2010 and 2020 women’s SPA is rising by one month every 2 months, from 60 to 65.
That current arrangement will be accelerated from April 2016, so that women’s SPA rises by 3 months every 4 months, reaching 65 in November 2018. Between then and April 2020 SPA for men and women was to rise from 65 to 66. This provision met with much resistance in Parliament, not least because some women in their late 50s would have seen their State Pension Age rise by two years. An amendment was made therefore, extending the period over which the rise to 66 will take place, to end in September 2020. The amended timescale means that nobody’s State Pension Age will rise by more than 18 months.
Men born after 5 December 1953 and women born after 5 April 1953 will be affected by the change, with all those born after 5 September 1954 now having to wait until the age of 66 to claim their State pension.
Deferred retirement – pre-88 GMP
Defined benefit pension schemes that were contracted-out of the earnings-related State pension have to increase the GMPs of members who defer their retirement beyond 60 (women) or 65 (men), to reflect the fact that these will be paid for a shorter period. The rate of increase is higher on GMPs that accrued after 5 April 1988, since it includes increases (at the lower of 3% and inflation) that the scheme would pay on post-88 GMPs in payment. Currently the State pays corresponding increases on pre-88 GMPs but a very long and convoluted clause in the Act provides that these increases will be abolished.
This will mean a slightly lower State pension for people who were members of contracted-out pension schemes between 1978 and 1988 who start drawing their scheme pension later than age 60 (women) or 65 (men).
Auto-Enrolment
The Coalition Government commissioned a review of the auto-enrolment proposals prior to committing itself to its inheritance in this regard. The review produced the following decisions which have been reflected in the Act.
Earnings trigger
Every employer – however small – will be required to auto-enrol all workers who are over age 22 and earning above an “earnings trigger” of £7,475 into a qualifying pension arrangement. Workers earning below this amount but above the National Insurance threshold may opt in if they wish. Contributions will be payable on earnings between the National Insurance earnings threshold (£5,715 in 2010/11) and the Upper Earnings Limit and must total at least 8% of earnings between those limits, of which the employer must pay at least 3%. The introduction of a higher earnings trigger avoids people being auto-enrolled for very small contribution amounts (below £140 pa). The earnings trigger and the qualifying earnings band will be reviewed each year by the DWP.
Waiting period
Employers may, by notice to affected workers, impose a waiting period of up to 3 months before auto-enrolling them. The 3 months may take effect from:
- the employer’s staging date,
- the worker commencing employment or
- the worker becoming eligible (for example on his 22nd birthday),
as appropriate. Workers may opt into the arrangement earlier if they so choose.
Administration charges
In October the Pensions Bill was amended to give the Government the power to issue Regulations to restrict the charges that may be levied on deferred members by a pension arrangement that is a “Qualifying Scheme” and so may be used for auto-enrolment. This gives the Government the opportunity to address the situation where pension providers charge lower amounts to members who are currently contributing than to those who have ceased to contribute.
Indexation and revaluation
Many pension schemes contain rules on pension increases that refer specifically to Retail Price inflation (RPI), meaning that they cannot avail themselves of the change in the statutory minimum rate of increase to Consumer Price inflation (CPI). The Act provides that such schemes may continue to provide increases in line with their rules each year, rather than having to operate a “better of” policy in years when CPI exceeds RPI.
The Bill also removes references to RPI from legislation, so that
- occupational pensions and
- compensation payments from the Pension Protection Fund (PPF)
may rise in line with CPI or such other inflation measure as the DWP may decide in future.
Pensions secured on retirement from a cash balance scheme will no longer have to be inflation-linked in payment. This brings the treatment of such pensions into line with those payable from defined contribution schemes.
Pension Protection Fund (PPF)
Before a scheme can enter the PPF an actuary has to carry out a prescribed valuation (under section 143 of the Pensions Act 2004) to verify that the value of the assets is less than the cost of securing benefits equivalent to PPF compensation. In cases of severe underfunding it will already be obvious that this valuation will show a deficit: this may be seen from the last valuation performed for levy purposes. The Act will enable the PPF to take a pragmatic approach and dispense with the need for a section 143 valuation in such cases. At the same time the Act removes the requirement for the period between employer insolvency and a scheme’s entry to the PPF (the “assessment period”) to be at least a year. These changes should enable some schemes to enter the PPF earlier – and at lower cost – than would otherwise have been the case.
Under current legislation, when a scheme enters a PPF assessment period, the PPF may unwind any amendments made to the scheme rules during the previous 3 years. The Act extends this power to unwind to discretionary pension increases made during the last 3 years.
Money Purchase Benefits
A further amendment was made to the Bill to clarify the definition of “money purchase benefits”. This has become an issue since the case of Houldsworth versus Bridge in which the Supreme Court determined that it is possible for a money purchase scheme to have a deficit! The case revolved around a scheme that qualified as “money purchase” using the definition of such a scheme contained in the Pension Schemes Act 1993 but under which the scheme’s liabilities were not necessarily equal to its assets. Although that particular scheme was of an unusual design, the principle may be extended to, for instance, money purchase schemes that pay pensions from the fund rather than buying an annuity when a member retires.
The Pensions Act now clarifies that a scheme in which a deficit might arise cannot be a money purchase scheme. Such a scheme will, therefore, have to comply with scheme funding legislation and pay PPF levies. This may have ramifications for schemes that are essentially money purchase but have paid scheme pensions, perhaps to avoid a member having to purchase an uneconomic annuity with a very small fund.
Payments to employers
Where scheme rules permit the payment of surplus to an employer while the scheme is ongoing, section 251 of the Pensions Act 2004 requires the trustees to pass a resolution if they wish to retain that power. The original deadline for this was 6 April 2011 but the 2011 Act has extended it to 6 April 2016.
Commencement
The changes to State Pension Age and those regarding payments to employers came into force on 3 January. The other provisions will be effected in due course, by Commencement Orders.