Pensions Act 2014
The Pensions Act 2014 (“the Act”) received Royal Assent on 14 May 2014. While its main purpose is to implement the new single tier State pension, it also contains several key measures for occupational pension schemes.
In this Alert:
- Key points
- State pension changes
- Abolition of DB contracting-out
- TPR’s new statutory objective
- Automatic transfers
- PPF compensation cap
- Next steps
- Provides for the new single tier State pension to be implemented on 6 April 2016
- Abolishes DB contracting-out with effect from the same date, but provides employers with a statutory power to amend their schemes to take account of increases in their NICs
- Increases SPA from age 66 to age 67 between 2026 and 2028
- Will introduce a new statutory objective for TPR
- Puts in place a framework for, and requires regulations be made to introduce, a system of automatic transfers for certain members of workplace pension schemes
- Will remove the ability to make refunds of contributions to members of DC schemes
- Provides for regulations to be made to restrict the administration charges that may be imposed on members of certain pension schemes and to introduce administration and governance requirements
- Requires the Government and the FCA to legislate/make rules to require the disclosure of information about some or all of a DC scheme’s (both occupational and personal) transaction costs and administration charges
- Will increase the PPF compensation cap for individuals with long service.
Single tier State pension
The current State pension system comprises the BSP, the additional state pension (commonly known as S2P, but formerly SERPS) which is linked to earnings, and the pension credit (a means tested benefit). With the aims of sweeping away complexity and allowing individuals to plan more easily for their retirement, with effect from 6 April 2016 individuals with 35 or more “qualifying years” of NICs will be entitled to a flat rate state pension. However:
- the current State pension arrangements will continue to apply to people who reach SPA before 6 April 2016;
- transitional arrangements will be introduced to ensure that anyone who, at the date of change, would have been entitled to a higher payment than the new flat rate pension will not lose out.
State Pension Age
Under plans originally put forward by the Labour Government, SPA was due to increase to age 67 between 6 April 2034 and 5 April 2036. The Act accelerates this timetable so that the increase will occur between 6 April 2026 and 5 March 2028.
In addition, the Act makes provision for SPA to be periodically reviewed by the Secretary of State, in light of changes to life expectancy and other relevant factors. The Secretary of State will be required to prepare and publish a report on the outcome of the review. The first of these must be issued before 7 May 2017, with subsequent reports due every six years.
A key consequence of the move to a single tier State pension is that DB contracting-out will be abolished (also from 6 April 2016).
When DC contracting-out was abolished, generally protected rights simply converted into normal DC benefits. In contrast, on the abolition of DB contracting-out, past service contracted-out rights will be retained within schemes and will remain subject to the same statutory requirements as before.
Employers will be given a statutory power, without the need for trustee consent, to amend their scheme rules to adjust members’ future pension accruals or pension contributions to take into account the loss of the contracting-out rebate. However, an actuary will be required to certify that the proposed amendments meet certain statutory requirements.
The power may be used more than once, but will only be available for a limited period of five years.
A consultation on draft regulations in relation to the abolition of DB contracting-out was published on 8 May 2014, please see our Alert for details.
With effect from mid-July 2014, when carrying out its functions in relation to scheme funding, TPR should “minimise any adverse impact on the sustainable growth of an employer”. We are expecting TPR’s new code of practice reflecting the new objective to come into force around the same time.
The introduction of automatic enrolment is expected to lead to the proliferation of dormant, often small, DC pension pots. The Government intends to address this with a new system of automatic transfers, initially in respect of DC pots of up to £10,000 (this figure will be reviewed from time to time, but at least every five years).
The Act provides the framework for this new system and requires regulations to be made to introduce it. In addition, regulations may be made to require, in certain circumstances, the merger of an individual’s dormant pension account(s) into their active account (all within the same scheme).
The Act provides for regulations to be made to prohibit “administration charges” from being imposed on members of certain schemes and to impose administration and governance requirements. TPR may be given powers to ensure that schemes comply.
The Government and the FCA will also be required to legislate / make general rules requiring information about some or all of the transaction costs and administration charges of an occupational DC scheme, and certain personal pension schemes, to be both published and given to members and prospective members, spouses or civil partners.
The regulations may also require the publication of additional information which would or may assist in making comparisons between schemes’ costs and charges.
The PPF provides compensation to members of eligible DB pension schemes, when there is a qualifying insolvency event for the employer, and where there are insufficient assets in the pension scheme to cover the PPF level of compensation.
At the moment, anyone under a scheme’s normal pension age when the employer becomes insolvent is paid compensation based on 90% of their expected pension subject to a maximum cap (the “compensation cap”). The Act will provide for a revised compensation cap to be applied to a person with more than 20 years’ pensionable service.
Current compensation payments for both members and their survivors will be recalculated to take into account the increased cap for long service and revised payments will be made going forward. However, there will be no backdating.
The Act will make certain technical changes to the automatic enrolment (“AE”) legislation, including:
- a power to make regulations to allow employers to exclude certain types of individual from AE
- alternative quality requirements for DB schemes
- amendments to ensure that it is only possible to postpone AE where the jobholder is entitled to DB benefits.
The Act also includes provision for:
- the removal of the ability to make a short service refund from an occupational DC scheme. However, this will only apply to individuals who first become active members of a scheme, or who re-join a scheme having already taken a refund or transfer, on or after the relevant section coming into force (currently expected to be in 2014)
- regulations to be made to prohibit the offering of a financial/similar incentive to an individual to induce them to transfer their benefits out of a salary-related occupational pension scheme. This power will be repealed seven years after it comes into force if it has not been exercised.
The provisions in respect of the single tier State pension and the abolition of DB contracting-out will generally come into force on 6 April 2016. However, the majority of the Act will be brought into force by order, at as yet unspecified dates.
If you have any questions about the above, or would like further information, please speak to your usual Sackers’ contact.