The Pensions Act, dealing mainly with the introduction of the single-tier State Pension and the increase in State Pension Age to 67, was enacted on 14 May. We have updated our earlier commentary on the Bill, to reflect subsequent amendments.
State Pension
The Act makes provision for the new single-tier State Pension that will be introduced for those reaching State Pension Age (SPA) from April 2016, specifying that the weekly amount of the full State Pension will be set in regulations, as will the minimum length of NI contribution record required to qualify for a proportional State Pension. That minimum period will not be more than 10 years.
When the new system is implemented, in 2016, those then under SPA will have their existing accruals under the Basic and State Second pensions compared with their notional accrual of the single-tier pension and the higher of these two amounts will be recognized as a “foundation pension”. For this purpose the notional single-tier pension will be calculated as follows (assuming that the full rate of the new pension is set initially at £144 per week):
Number of pre-implementation qualifying years x £144 ÷ 35,
less an amount to reflect periods of being contracted-out.
The full rate of the single-tier pension will be increased at least in line with earnings, although any entitlement above the full single-tier pension will be increased only in line with Consumer Price inflation (both before and after SPA).
If an individual’s foundation pension is less than the full single-tier pension, he will be able to accrue further State pension, up to the full rate.
In the current State pension system, a person who is, or has been, married or in a civil partnership may be entitled to a state pension based on the National Insurance record of his spouse or civil partner. This will not be the case for those reaching SPA after the new State Pension is introduced. However, there will be transitional arrangements applying to surviving spouses and civil partners, where the marriage or civil partnership was established prior to the introduction of the new system.
The Act makes further provision in relation to:
- the inheritance of a State pension that was deferred beyond SPA,
- the inheritance of Graduated Retirement Benefit (earned between 1961 and 1975),
- women who elected to pay reduced-rate National Insurance contributions more than 35 years before reaching SPA,
- the sharing of State pensions on divorce,
- prisoners and
- overseas residents.
It will still be possible to defer one’s State Pension and the increase in deferment will be prescribed in regulations.
The savings credit element of State Pension Credit will be abolished for those reaching SPA after the introduction of the new system.
The end of contracting out
The introduction of the single-tier pension will mean the end of contracting out. The Act gives employers limited powers (lasting only 5 years) to change scheme rules in these circumstances, either by increasing member contributions or reducing benefits, to offset the additional employer’s NI contributions – of 3.4% of earnings between the Lower Earnings Limit and the Upper Accruals Point – that they will have to pay. Employers will, however, have to consult with affected employees as regards such changes to scheme rules and an actuary will have to certify that the proposed amendments comply with the requirements of the Act. This limited power to amend scheme rules will override other legislation that might otherwise preclude the amendment.
Boosting State Pension
People who reach State Pension Age prior to 6 April 2016 will have the option to buy up to £25 per week additional State pension through the payment of voluntary National Insurance contributions, at a cost of approximately £900 per £1 per week of pension bought.
State Pension Age (SPA)
The Act brings forward the increase in SPA to age 67 between 2026 and 2028, according to the following table:
| Date of birth | SPA |
| 6 April to 5 May 1960 | 66 years and 1 month |
| 6 May to 5 June 1960 | 66 years and 2 months |
| 6 June to 5 July 1960 | 66 years and 3 months |
| 6 July to 5 August 1960 | 66 years and 4 months |
| 6 August to 5 September 1960 | 66 years and 5 months |
| 6 September to 5 October 1960 | 66 years and 6 months |
| 6 October to 5 November 1960 | 66 years and 7 months |
| 6 November to 5 December 1960 | 66 years and 8 months |
| 6 December 1960 to 5 January 1961 | 66 years and 9 months |
| 6 January to 5 February 1961 | 66 years and 10 months |
| 6 February to 5 March 1961 | 66 years and 11 months |
| 6 March 1961 to 5 April 1977 | 67 years |
Thereafter SPA will be reviewed by the Secretary of State every 5 years, the first 5-yearly review being published by 7 May 2017. As part of each review the DWP must obtain:
- a report from the Government Actuary’s Department covering how SPA should be adjusted with a view to ensuring that each generation can expect to spend a similar proportion of adult life in retirement and
- a report from an independent body, covering other factors relevant to the review.
This part of the Act will come into force on 14 July 2014.
Bereavement Support Payment
The Act provides for a new Bereavement Support Payment to surviving spouses and civil partners who are under SPA when bereaved, on condition that:
- the deceased must have paid Class 1 or 2 National Insurance contributions of at least 25 times the Lower Earnings Limit for at least one tax year and
- the survivor must be ordinarily resident in Great Britain “or a specified territory”.
This benefit replaces the existing range of bereavement benefits and will cease when the individual reaches SPA.
“Pot follows member”
The Act establishes the framework by which a person’s pension account may be transferred automatically to his new pension scheme when he leaves an employer. A pot will be eligible for automatic transfer:
- either once all contributions have ceased and the individual has left employment or once all contributions have ceased for a prescribed period,
- as long as the pot was created after a certain date and
- if it is less than a specified amount (with a requirement on the Secretary of State to review the limit at least every 5 years and revise it if appropriate).
The Government has indicated that the specified amount will be £10,000 initially.
“Automatic transfer schemes” will have to check, when a new member joins the scheme, whether he has an existing small pot that can be transferred.
The same clause of the Act confers a power to make regulations requiring the consolidation of multiple pots in the same scheme where these all belong to one member, for instance if he has worked for more than one employer and they participate in the same multi-employer scheme.
The power for schemes to pay refunds of contributions to members who complete between 30 days’ and two years’ membership of a scheme will be withdrawn, in relation to people who become active members after that section of the Act comes into force.
Automatic enrolment
The Act gives employers the power to exclude certain workers from automatic enrolment into a pension scheme. This is to avoid the enrolment of individuals who have Enhanced or Fixed Protection, who would lose such protection if they contributed (or benefitted from contributions paid on their behalf) to a pension arrangement.
There is also an alternative quality requirement by which defined benefit schemes may be recognized as qualifying schemes for automatic enrolment. This requirement will be phrased in terms of a minimum contribution rate (which will be at least 8%), rather than a minimum accrual rate.
The Government has acted to close a loophole involving hybrid schemes. Employers offering a defined benefit scheme or a hybrid scheme to all employees can postpone automatic enrolment until 2017. However, some employers have been taking advantage of this even though employees can join only the defined contribution section of the hybrid scheme. The Act prevents employers from postponing automatic enrolment for members who have only defined contribution benefits.
The Regulator and the Pension Protection Fund
The Act has introduce the Pensions Regulator’s new objective, applicable only in relation to its consideration of scheme funding, to minimise any adverse impact on the sustainable growth of an employer.
Compensation paid by the PPF is subject to a cap (currently £32,761 per annum) for scheme members who are below normal pension age at the date their scheme enters the PPF. The cap was introduced in order to protect the PPF against senior executives awarding themselves large pensions and then triggering insolvency: the cap would operate to remove the benefit in them doing this. However, it also affects ordinary long-serving members who have built up a higher pension through a long career with the company.
The Act includes a change to the way that the cap operates. For members who have service of at least 21 years, the cap will be increased by 3% for each year of service in excess of 20 (up to a maximum of twice the standard cap), so that the effect on such long-serving employees is reduced.
Private Pensions – miscellaneous amendments
The Act contains a power for the DWP to make regulations to ban the offering of financial or other incentives to members of a pension scheme to transfer their pension rights out of the scheme. However, if no such regulations have been made within 7 years of that power coming into force (14 July 2014), it will be repealed. People contravening such regulations may be liable to a fine.
The Act makes provision also for the prohibition of a corporate trustee if a director or partner of that trustee has been prohibited from being a trustee. Previously, while the Regulator could prohibit an individual from acting as a trustee in relation to one or more schemes, he had no power in relation to a corporate trustee of which that individual was a principal.
For schemes with fewer than 5 members the maximum period between returns to the Pensions Regulator will be increased to 5 years. The maximum period is currently three years for all schemes.