Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill

Explanatory Notes

Policy background

2 The State Pension used to be made up of two parts: the flat rate basic State Pension and the earnings-related additional State Pension. However, many employees were already members of pension schemes provided by their employer. Therefore, between 6 April 1978 and 5 April 1997, employers sponsoring salary-related occupational pension schemes could contract out their employees from the Additional State Pension through membership of the employer’s scheme, and both they and the scheme would pay lower National Insurance contributions, provided the scheme took on the responsibility for paying a GMP, from age 60 for a woman or 65 for a man. On reaching this age, members would generally have built up a GMP of at least a broadly similar amount to the Additional State Pension to which they would otherwise have been entitled, had they stayed in the State system. The primary legislation which makes provision for GMPs is the Pension Schemes Act 1993 and the Pension Schemes (Northern Ireland) Act 1993. Although the GMP rules were abolished for contracted-out service after 5 April 1997 past accruals remain subject to them.

3 The Pensions Act 2007 amended the Pension Schemes Act 1993 to introduce provisions enabling schemes to convert members’ rights to a GMP to other scheme benefits. The intention was to enable a scheme to adopt a unified and streamlined benefit structure, subject to certain safeguards to protect the members’ interests. The Pensions Act (Northern Ireland) 2008 made the same amendments to the Pension Schemes (Northern Ireland) Act 1993.

4 The Pensions Schemes Act 1993 and the Pension Schemes (Northern Ireland) Act 1993 require occupational pension schemes to calculate and pay GMPs differently depending on a person’s sex. A woman’s GMP accrues at a greater rate than that of a man in recognition that, at the time, a woman’s working life for State pension purposes was five years shorter than that of a man. As a result, where a woman and a man have an identical work history, the woman’s overall GMP will be greater than that of the man.

5 A woman is also entitled to receive her GMP at an earlier age (age 60) than a man is entitled to receive his (age 65) creating further differences between GMPs payable to men and women. This is a result of indexation and revaluation requirements - the requirement that GMPs are increased annually to protect the value of a member’s pension from being eroded by the effects of inflation, when in payment (indexation) or if the member has not yet retired but is no longer an active member of the scheme (revaluation). Indexation and revaluation rates are different. Because their GMP ages differ, a woman will be entitled to indexation on a GMP in payment in periods during which a man of the same age is entitled to revaluation on a GMP that has not yet been put into payment. As a result of different rates of indexation or revaluation applying at different times, a woman’s GMP will typically start out as higher than that for a comparable man, but the value of the man’s GMP may overtake that of the woman’s over time.

6 These differences create inequalities in the amount of pension income received by both men and women who have GMPs depending on individuals’ ages and circumstances. However, as provided in the Equality Act 2010, pension schemes are required to pay equal pensions to men and women for accruals from 17 May 1990.

7 Schemes therefore need to correct for inequalities in peoples’ pension income caused by GMPs accrued from this date.

8 In November 2016 the then Government consulted on a methodology for equalising pensions for the effect of GMPs by converting these benefits using the conversion legislation in the Pension Schemes Act 1993. GMPs can be equalised and converted into other benefits using a process involving valuation, equalisation and conversion.

9 In the responses to the Government consultation concerns were expressed by the pensions industry that the operation of certain provisions of the conversion legislation in the Pension Schemes Act 1993 and the Pension Schemes (Northern Ireland) Act 1993 was unclear and should be amended to make it easier to use. This would make it easier for schemes to equalise for the unequal effect of GMPs using the Government’s proposed methodology.

10 In particular, the pension industry has expressed concern that the existing conversion legislation:

a. Is unclear as to how conversion applies to survivor benefits (the element of a GMP which can be inherited by the member’s widow or widower or surviving civil partner)

b. Does not provide for circumstances in which the scheme’s sponsoring employer no longer exists and therefore cannot consent to a proposed conversion exercise

c. Requires schemes to notify HMRC that they have carried out a conversion exercise, even though the introduction of the new State Pension means that HMRC do not need to be informed about changes to GMPs.

11 The Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill therefore amends the GMP conversion provisions in the Pension Schemes Act 1993, the Pension Schemes (Northern Ireland) Act 1993, the Pensions Act 2007 and the Pensions Act (Northern Ireland) 2008, to clarify the legislation and make it easier to use.

12 The measures will:

a. Clarify that the legislation applies to survivors as well as earners.

b. Provide for a power to set out in regulations the conditions that must be met in relation to survivors’ benefits.

c. Provide for a power to set out in regulations detail about who must consent to the conversion.

d. Remove the requirement to notify HMRC.

 

10 March 2022