Power for trustees to modify bridging pensions

Introduction

The DWP has issued regulations (“the Regulations”) which will allow trustees of schemes which provide bridging pensions to modify their scheme, by resolution, to take account of the changes being made to SPA.

In this Alert:

• Key points
• Bridging pensions
  
• Changes to SPA
  
• A word on tax legislation
  
• Statutory power to make changes
  
• Consultation?
  

Key points

• With effect from 1 October 2013, trustees may, by resolution, modify the bridging pension provisions of their scheme to alter the amount and timing of the reduction in pension.
• Schemes whose rules as at 5 April 2010 provide for bridging pensions to continue to SPA may not use the statutory power to affect pensions already in payment.
• Changes made must be reasonable, in consequence of the changes made to SPA, and employer consent is required.

Bridging pensions

Some DB schemes pay members who retire before SPA a higher pension at the outset, which is then reduced at SPA to take account of State Pension coming into payment. The aim is to allow the member to receive a similar overall level of income in retirement, regardless of when State Pension actually starts.

Although often referred to as bridging pensions, these arrangements are also known by a variety of other names including “level pensions”, “step-up pensions” and “State Pension offsets”.

Changes to SPA

SPA was initially due to equalise between men and women in 2020 and to increase, in increments, from 65 to 68 by 2046. However, this timetable has been accelerated by the Pensions Act 2011.1 SPA will now be equalised between men and women by 2018, and will increase to 66 for both sexes by October 2020.

When most schemes introduced bridging pensions it is unlikely that the possibility of SPA equalising or, indeed, increasing beyond age 65 was contemplated. Some rules therefore tied the cessation of a bridging pension to SPA, while others stated that it would end at 60 (for women) or 65 (for men).

The potential impact of the changes to SPA on a scheme depends on the terms of its bridging pension. In some schemes, the payment of a bridging pension is intended to be cost neutral; the member receives a higher pension prior to SPA but the cost of this is accounted for in the level of pension paid to the member after SPA. Other schemes pay an amount in addition to the member’s pension, in which case paying bridging pensions for a longer period than anticipated will have an impact on the scheme’s funding.

A word on tax legislation

In order to count as an authorised payment, the FA04 generally prevents pensions being reduced once in payment. Reductions made to bridging pensions are an exception to this rule, provided that:

• the pension is reduced between the ages of 60 and 65; and
• the amount of the reduction does not exceed a specified limit set out in the FA04 (which is designed to ensure that the reduction is based on expected State Pension).

With effect from the tax year 2013/14, the Finance Act 2013 aligns the tax rules governing bridging pensions with the forthcoming changes in SPA.

However, it is worth bearing in mind that the way in which bridging pensions are valued for AA purposes remains an issue for schemes.

Statutory power to make changes

Recognising that restrictions in scheme rules may prevent changes being made to bridging pensions, the Government consulted on a possible statutory modification power in October 2012.2 

With effect from 1 October 2013, the Regulations will allow trustees to modify their schemes by resolution to alter the amount and timing of a reduction in pension made as part of a bridging pension, subject to certain conditions.

Conditions

Trustees may only make a change to their scheme rules if:

• it is reasonable in consequence of changes to SPA. For example, where without a modification to its rules the scheme could incur significant, unanticipated costs or members might face financial hardship; and
• the participating employer(s) consent. (Where there is more than one employer a representative may be nominated to consent on behalf of them all.)

Options

There are two options available for trustees under the new statutory power (which are more flexible than those originally put forward):

• schemes which, as at 5 April 2010, provide for a pension to be reduced between 60 and 65 may be amended to permit “a reduction, of an equal or differing amount, in the rate of such a member’s pension” to take effect at any time between 60 and the member’s SPA;3 or
• schemes which, as at 5 April 2010, provide for a pension to be reduced at SPA may be amended to permit “a reduction, of an equal or differing amount, in the rate of such a member’s pension” to take effect at any time between the member reaching the ages of 60 and 65.

Modifications under the second option must not affect pensions in payment.

Consultation?

The draft regulations originally required employers to consult with affected members. Acknowledging that this would be of little (if any) benefit in practice, this requirement has been removed in the final DWP offering.

1 See our Alert: “Better late than never – The Pensions Act 2011” (dated 3 November 2011)
2 See our Alert: “Consultation on draft legislation – bridging pensions” (dated 8 October 2012)
3 Which, of course, will vary depending on a member’s date of birth