Abolition of DC contracting out: consultation on implementing legislation

Introduction

On 28 July 2010, the DWP published a consultation on draft regulations in connection with the proposed abolition of DC contracting-out. The draft regulations are designed to implement certain consequential amendments to give effect to the abolition provisions contained in both the Pensions Act 2007 and Pensions Act 2008.

Key points

The Government has confirmed that DC contracting-out will be abolished from 6 April 2012.
The DWP’s latest consultation includes four sets of draft regulations which are designed to amend or revoke existing legislation to enable contracting-out to be ended for all DC schemes.

DC contracting out: A brief history

6 April 1978	SERPS introduced, allowing employees who paid full rate NICs to build up rights to an additional State Pension based on earnings over their working life (on top of the flat-rate basic state pension). Employers with a salary-related occupational pension scheme could “contract out” their employees from SERPS, provided the scheme took on responsibility for payment of a minimum pension (GMP) (the idea being that members would build up a broadly similar amount to the SERPS pension).
6 April 1988	Contracting-out extended to DC Schemes, both occupational (known as COMPS) and personal arrangements (APPs). Contracted-out benefits referred to as “protected rights”.
6 April 1997	Link between contracting-out and additional State Pension broken – prior to this contracted-out members received some SERPS pension where their GMP (or notional GMP for COMP and APP members) was less than the pension they would have received from the State.
6 April 2002	S2P replaces SERPS.
30 November 2005	The Pensions Commission recommends the abolition of DC contracting-out.1
25 May 2006	Having accepted the Pensions Commission’s recommendation, the Labour Government publishes a White Paper including proposals to abolish DC contracting-out.
26 July 2007	Pensions Act 2007 receives Royal Assent providing for the abolition of contracting-out.
26 November 2008	Pensions Act 2008 receives Royal Assent permitting the removal of all rules on accrued protected rights.

The draft regulations

As DC schemes will no longer be contracted-out from 6 April 2012, the DC contracting-out legislation will be redundant or retained for a transitional period only following abolition.

The consultation therefore includes four sets of draft regulations which are intended to amend or repeal (where appropriate) references in legislation to COMPS and APPs.

Broadly, the draft regulations:

allow a three-year transitional period so that the current automated rebate and recoveries process between HMRC and DC schemes can continue. Among other things, this will ensure that the final year’s rebate (for the tax year 2011/12) can be paid after 6 April 2012, in order to ease administrative burdens;
introduce a “de minimis” limit on the amount of rebate required to be paid. This is designed to avoid HMRC having to make a payment if the cost of doing so exceeds the actual amount of the proposed payment;
apply a 50% contracted-out deduction to survivors’ SERPS in all cases. This is to account for the fact that schemes will no longer be required to track protected rights separately and HMRC will not know whether effect has been given to those rights;
provide that, where a contracting-out certificate applies to a COMB, it will automatically be valid only for the salary-related section of the scheme; and
require trustees to provide members with certain minimum information in connection with the abolition of contracting-out.

Next steps

The consultation closes on 19 October 2010, following which the Government plans to issue its response within three months. This suggests a reasonable lead-in period which, it can be hoped, will allow schemes sufficient time to communicate these changes to members.

1 Please see our Alert: “Pensions Commission comes in from the cold” dated 30 November 2005