The Government is consulting on:
- the changes contained in the draft Occupational Pension Schemes and Social Security (Schemes that were Contracted-out and Graduated Retirement Benefit) (Miscellaneous Amendments) Regulations 2017,
- secondary legislation which has been introduced in the past where the DWP committed to review the provisions and
- a new methodology for equalising pensions for the effect of inequalities caused by Guaranteed Minimum Pensions (GMPs) and potential changes to GMP conversion legislation that may be needed to enable equalisation to take place.
This consultation does not, however, deal with the question of bulk transfers from formerly contracted-out schemes to schemes that have never been contracted-out (for instance new schemes established for the purpose of the transfer).
Draft regulations
The Regulations are intended to come into force on 6 April 2017 and cover a number of measures to assist the administration of schemes with GMPs.
The statutory timescale for payment of a Contributions Equivalent Premium (CEP) is extended where a CEP is identified as a result of the scheme reconciliation service (which schemes use to match their GMP records against those held by HMRC).
The regulations that protect members’ benefits on a change to scheme rules are strengthened to reflect policy intent.
A new rate of fixed-rate revaluation – 4% pa for members leaving pensionable service after 5 April 2017 – is documented. The rate is that recommended by the Government Actuary.
Reviews of secondary legislation
Occasionally, if a company is restructuring or is involved in a merger or acquisition, it may wish to transfer the members of its pension scheme to another scheme. If a bulk transfer of members is to be made, without members’ consent, from a contracted-out defined benefit scheme, the receiving scheme must also be (or have been) contracted-out. Since contracting out was abolished in April 2016, any new scheme now established to be a receiving scheme in these circumstances cannot be contracted-out, so cannot receive a bulk transfer from a formerly contracted-out scheme. The Government is reviewing legislation in the light of this issue but notes that amended legislation will not be introduced before autumn 2017.
Equalising pensions for the effect of GMPs
In 2012 the DWP published a suggested methodology for how schemes could equalise pensions for the effect of (unequal) GMPs. This method would have resulted in both men and women receiving more pension than they would have done without equalisation, so would have added unnecessarily to schemes’ benefit costs. The pensions industry has, therefore, been pressing DWP for a more realistic – and logical – method of equalisation.
The DWP set up a working group to consider this issue and that group has now concluded that a more appropriate means of equalising would be to make a one-off calculation and actuarial comparison of the benefits a member is entitled to with those he would have been entitled to had he been of the opposite gender and to convert the greater of the two into an ordinary scheme benefit of equivalent value. It will be for individual schemes to decide the assumptions used to value the “before and after” benefits. The consultation document notes that the Government is not placing any obligation on schemes to use this method, nor does it comprise legal advice to schemes on how to equalise.
The working group has also suggested some changes to the process of GMP conversion, some of which have been accepted by DWP and others not. DWP intends to issue guidance to clarify some of the details of the GMP conversion process once the legislation has been amended.