Sackers responds to DWP consultation on draft legislation for abolition of DC contracting-out
On delivering Sackers' response to the Department for Work and Pensions consultation on draft consequential legislation which is designed to implement the planned abolition of contracting-out on a defined contribution (DC) basis from 6 April 2012, Michaela Berry, a partner at Sackers, said:
"Although the abolition of DC contracting-out from April 2012 will simplify benefits for many schemes and their members, there are a number of far reaching consequences which don't appear to have crossed the DWP's radar. The ban on transferring contracted-out benefits to DC schemes from 2012 has been widely reported as likely to put the brakes on enhanced transfer value exercises. These have been heavily criticised by the Pensions Regulator in their recent consultation - but the jury is still out as to whether this is a clanger or a conspiracy. We'll have to wait until the DWP publishes its response to the consultation to find out.
But less widely known is the fact that there are serious implications for funding arrangements for some schemes. DB schemes which are currently contracted-out on a DC basis will need to review their funding strategy to account for the fact that they will no longer receive the National Insurance rebates from the abolition date. As these rebates have already been seriously cut back in the last few years anyway, employers will therefore need to consider whether they can dig deep to make up this funding shortfall, or whether they will have to reduce benefits going forward."
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