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Session 1998-99 Publications on the internet Other Bills before Parliament Arrangement of Clauses (Contents)

Welfare Reform and Pensions Bill

These notes refer to the Welfare Reform and Pensions Bill as introduced in the House of Commons on 10th February 1999 [Bill 44] Welfare Reform And Pensions Bill EXPLANATORY NOTES INTRODUCTION 1.     These explanatory notes relate to the Welfare Reform and Pensions Bill, as introduced in the House of Commons on 10 February 1999. They have been prepared by the Department of Social Security (DSS) and the Department for Education and Employment (DfEE) in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament. 2.     The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a provision does not seem to require any explanation or comment, none is given. 3.     Because this Bill contains a large number of provisions, covering several subject areas, each of the main areas is introduced and described separately in the notes. The section below gives a brief overview of the Bill's structure, and shows where each subject may be found. Certain overarching issues (for example, the Bill's financial effects, and its impact on public sector manpower) are grouped at the back of the document. Also at the end, there is a glossary of some of the common terms that occur in more than one part of the notes. These terms are underlined wherever they first appear under a heading in the commentary (for example, occupational pension, Incapacity Benefit). Terminology 4.     Two points to note: In this document, social security benefits are referred to by their common names and abbreviations (e.g. "Jobseeker's Allowance", "JSA"), rather than by the terms that appear in the legislation (e.g. "a jobseeker's allowance"). A Bill has "clauses", most of which are divided into "subsections". When it becomes an Act, these become known as "sections" (and subsections). Many clauses in this Bill amend sections of, or insert sections into, existing Acts. "Paragraph" and "sub-paragraph" are used in the commentary only to refer to Schedules. OVERVIEW OF THE BILL 5.     The Bill has 75 clauses and 10 Schedules. Its provisions fall into two main areas: pensions (Parts I-IV - clauses 1-43) and welfare (Part V - clauses 44-66). 1) Pensions Part I (clauses 1-7): Stakeholder Pension Schemes --    The framework for a new type of pension scheme, the "stakeholder pension scheme" Part II (clauses 8-14): Pensions: general --    Changes to the regulatory framework for occupational and personal pensions Parts III-IV (clauses 15-43): Pensions on divorce --    Provisions for pension rights to be split as part of a divorce settlement, in the same way as other financial assets. (These clauses were published in draft in June 1998, with accompanying explanatory notes. The introduction to the relevant section of the commentary outlines how the clauses have changed since then.) 2) Welfare (Part V) Chapter I: Social security benefits Clauses 44-46: Benefits for widows and widowers --    A new scheme of bereavement benefits, available to both men and women, to replace the current widows' benefits Clause 47: Work-focused interviews --    A requirement for certain benefit claimants to take part in work-focused interviews Clauses 48-49: Jobseeker's Allowance --    A requirement for certain couples to claim Jobseeker's Allowance jointly --    Provision for "Employment Zones" Clause 50: Incapacity for work --    Reform of the "All Work Test", the qualifying test for Incapacity Benefit Clauses 51-54: Incapacity benefits --    Changes to the contribution conditions for Incapacity Benefit --    Reducing Incapacity Benefit payments on account of income from pensions --    New entitlement to Incapacity Benefit for people incapacitated in youth --    Abolition of Severe Disablement Allowance for new cases Clauses 55-56: Disability benefits --    Introduction of regulation-making powers in Attendance Allowance --    Change of terminology for awards of Attendance Allowance and Disability Living Allowance made for an indefinite period --    New entitlement to higher rate of mobility component in Disability Living Allowance for 3-4 year-old children Clauses 57-60: Miscellaneous and supplementary provisions --    Requirement for claimants of Child Benefit to state their national insurance number --    New powers for local authorities to collect social security information --    Miscellaneous amendments --    Powers to use social security information for purposes of employment and training Chapter II: National Insurance contributions Clauses 61-64 --    Minor amendments to the rules for National Insurance contributions Chapter III: Miscellaneous Clauses 65-66 --    Scheme to reduce under-occupation of social housing by Housing Benefit claimants --    Discretionary power for the Inland Revenue to pass tax information about self-employed non-resident parents to the Child Support Agency Part VI: General Clause 67: power to incur expenditure on providing for proposed new services Clauses 68-75: several general provisions, including: --    the Parliamentary control of regulations, --    consequential amendments --    transitional provisions --    repeals of existing legislation, --    commencement dates --    territorial extent of the Bill COMMENTARY ON CLAUSES PARTS I-IV: PENSIONS Background: the current system The UK pension system combines a contributory state system, including the State Earnings Related Pension Scheme (SERPS), with a private system of occupational and personal pensions. All employees and self-employed people, except the very lowest paid, pay National Insurance contributions (NICs). These give entitlement to the basic state pension. In addition, employees, but not the self-employed, have to pay towards a second pension (SERPS) unless they are "contracted out". If they are contracted out of SERPS and belong to a salary-related occupational pension scheme, they pay a lower rate of NICs. Those who belong to contracted-out money purchase schemes pay a partly reduced rate of National Insurance contribution and the balance is refunded periodically to their pension scheme by the Contributions Agency. People with an "appropriate personal pension" (i.e. a contracted-out personal pension) pay the full rate of National Insurance contributions, and a refund is paid into their pension at the end of the tax year. Occupational pension schemes can be established either on a "salary-related" (or "defined benefit") basis, where the pension received depends on the employee's salary and service history (for example a scheme might pay a pension of one-sixtieth of final salary for each year of service); or on a "money purchase" (or "defined contribution") basis, where the contributions and any NI rebate are invested. On retirement the pension savings are used to buy an annuity; the pension received depends on the investment performance and the annuity rates available at retirement. There are also some hybrid or "mixed benefit" schemes. All personal pensions are provided on a money purchase basis. Occupational pension schemes which are contracted out must satisfy certain conditions. These conditions are designed to ensure that employees in contracted-out schemes, who are benefiting from NI rebates paid by the Government, receive pensions from the scheme which at least equal what they would have received from SERPS. Contracted-out schemes can be salary-related, money purchase or mixed benefit. Prior to April 1997 in order for a salary-related scheme to contract out it had to promise to provide a Guaranteed Minimum Pension (GMP) which is broadly equivalent to what the SERPS entitlement would have been had the individual not contracted out. In broad terms it must also pay 50% of the GMP to qualifying spouses. Since April 1997 contracted-out salary-related schemes have no longer had to provide a GMP for future service but instead they have to satisfy a scheme-based test (reference scheme test) as one of the requirements for the issue of a contracting-out certificate. GMPs accrued prior to 1997 will still form part of the occupational pension and will broadly continue to be subject to the rules currently in force. The test requires schemes to meet a statutory standard laid down in the Pensions Act 1995. The Scheme Actuary will certify that the test is met if the scheme provides benefits broadly equivalent to, or better than, those of the reference scheme. Pensions accruing for pensionable service, in the scheme, from 6 April 1997 are sometimes referred to as section 9(2B) rights. The Government have put in place a framework within which occupational and personal pensions have to operate. The framework is designed to protect the interests of scheme members. It includes provisions to ensure that those who leave schemes before retirement can transfer or preserve their accrued rights, that pensions in payment receive some protection against price increases, that schemes are properly run and assets safeguarded and that the benefits scheme members expect to receive are reasonably secure. The Government have established the Occupational Pensions Regulatory Authority (OPRA) to enforce some aspects of the occupational pensions regulatory framework. The sale of personal pensions is regulated by the Financial Services Authority (FSA). PART I: STAKEHOLDER PENSION SCHEMES This part of the Bill, clauses 1-7, and Schedule 1, create a statutory framework which sets out the general principles for a new type of pension scheme, the "stakeholder pension scheme". It is likely that the framework will require adaptation as schemes evolve. In order to provide this flexibility, matters of detail will be set out later in secondary legislation. A consultation paper on stakeholder pension schemes was published in November 1997. The Government's detailed proposals were set out in the consultation paper A new contract for welfare: PARTNERSHIP IN PENSIONS (Cm 4179), published in December 1998. Commentary on clauses Clause 1: meaning of "stakeholder pension scheme" This clause provides a definition of stakeholder pension schemes which: enables them to be accommodated within much of the existing legislative framework applying to occupational and personal pensions; and sets out a number of additional requirements which schemes will have to meet in order to acquire stakeholder pension scheme "status". The Pension Schemes Act 1993 defines two types of pension scheme - occupational pension schemes and personal pension schemes. Subsection (1) provides for such schemes to be stakeholder pension schemes providing that they are registered as such (clause 2 refers) and meet a number of specific conditions. These conditions are set out in the following paragraphs. In addition it provides a power to prescribe other conditions which will give flexibility for the future to set out additional conditions, in the light of experience of operating schemes. Subsection (2) requires stakeholder pension schemes to be set up under a trust, or under an alternative arrangement which may be specified in regulations. Trusts are a legal concept used frequently as the basis for pension schemes, under which one or more persons (the trustees) hold property for the benefit of others, under terms which are usually specified in the trust deed. The regulation-making power will provide the flexibility to enable schemes to be set up on a different basis should other arrangements be identified which provide a comparable degree of security and protection for scheme members' interests. Subsection (3) provides a power to set out requirements as to the content of the instruments that set up a scheme. Taken together with subsection (2), this provides the basis for defining the structure of stakeholder pension schemes. Regulations will be used to set requirements in relation to, for example: the scope of the trust deed: in particular to ensure that the trust deed gives the trustees control of the scheme so that they are able to appoint and dismiss the organisations or individuals that provide services to the scheme (e.g. actuaries, auditors, administrators, investment managers); the composition of the trustee board: to require, for example, a specified proportion of trustees to be nominated by members of the scheme; whether the schemes should provide additional benefits for scheme members: such as an option to take out life assurance cover, or insurance which provides for contributions to continue to be paid if the member becomes ill or disabled. Subsection (4) provides that schemes must offer "money purchase" benefits to members. Money purchase benefits are defined in section 181 of the Pension Schemes Act 1993. The main impact will be to exclude schemes which provide benefits related to the member's final salary; unlike occupational pension schemes, there will generally be no organisation to provide the funding commitment required to run stakeholder pension schemes on a salary-related basis. Schemes operating on a money purchase basis must provide benefits which are related to the contributions paid by the members, together with the investment returns on those contributions. This will mean that each scheme member should have an identifiable fund of money within the scheme, which is the sum of their contributions and investment returns on those contributions (less charges and expenses). The fund is normally used to purchase an annuity at retirement. There is also a regulation-making power to prescribe exceptions This power provides flexibility for the future by allowing the framework to be amended to accommodate schemes which may wish to offer benefits on a suitable alternative basis. Subsection (5) provides a regulation-making power, which will be used to prescribe requirements in relation to the amount which may be deducted from scheme members' pension funds in respect of charges and expenses. The regulations will set out how any charge is to be calculated, specify limits on the level of the charge, and specify when a charge can be imposed. For example, it is intended that there will be no charge for transfers of funds from stakeholder schemes or for changing contribution levels. Requirements for charges will be reviewed in the light of experience of operating schemes. Providing for these matters by regulation gives some flexibility for the future to amend the charging structure or limits if it becomes appropriate to do so. Subsection (6) makes it a condition of being a stakeholder pension scheme that a scheme complies with the obligations under section 113 of the Pension Schemes Act 1993. Regulations will set out minimum standards concerning, for example, annual information about the value of a pension, the contributions that have been paid in and charges deducted by the schemes. Subsection (7) provides that schemes must allow members to make contributions either on a regular basis or as and when they can; many existing personal pensions do not provide this flexibility for their members. The subsection also provides a regulation-making power to prescribe minimum contribution levels, or other restrictions which schemes would be allowed to impose. Setting minimum contribution levels would be used to strike a balance between flexibility for members and the costs to schemes of handling very small contributions. The regulation-making power gives a degree of flexibility to vary these amounts in future if it becomes appropriate to do so. Subsection (8) provides that stakeholder pension schemes should accept transfers of pension rights from other pension schemes. Because stakeholder pension schemes will fall under the "pension scheme" definitions in Part I of the Pension Schemes Act 1993, members will have an automatic right to a transfer of their rights in occupational and personal pensions to another scheme (subject to certain limitations specified in the 1993 Act). This subsection provides an additional requirement on stakeholder schemes to accept transfer payment in respect of members' rights in other schemes. It will allow members, for example, to consolidate their pension rights into a single fund if they so choose. There is currently no such requirement for occupational and personal pension schemes. But a stakeholder pension scheme would not be required to accept a transfer if this would prejudice its tax-approved status. A tax-approved scheme cannot accept transfers from an "unapproved" scheme, as this would be contrary to Inland Revenue rules. Subsection (9) requires that a stakeholder pension scheme should be approved by the Commissioners of the Inland Revenue. Approval will confer a number of tax benefits: in particular, contributions by members qualify for income tax relief, and investment returns and capital gains on the scheme's funds are exempt from tax. The references to certain separate provisions of the Pensions Schemes (Northern Ireland) Act 1993 are necessary in the light of the extension of clauses 1 and parts of clause 2 to Northern Ireland. Clause 2: Registration of stakeholder pension schemes In addition to meeting the requirements set out in clause 1, (and as stated in clause 1(1)), pension schemes must be registered as stakeholder schemes with the Occupational Pensions Regulatory Authority (OPRA) in order to acquire stakeholder status. This clause defines the procedure for the registration of stakeholder pension schemes and the role of OPRA in relation to this. Subsection (1) requires OPRA to maintain a register of stakeholder schemes. The register of stakeholder pension schemes will enable members of the public to identify stakeholder schemes, and also provides a basis on which employers can ensure that they comply with the access requirements set out in clause 3. Subsection (2) requires scheme trustees to support applications for registration with a declaration that the scheme meets all the conditions contained in clause 1. OPRA are required to register schemes on the basis of this application, subject to subsection (3), with a discretionary power to impose a fee for registering schemes. Subsection (3) gives OPRA a power to refuse to register schemes or to remove schemes from the register if it has evidence that the scheme does not comply, or no longer complies, with the conditions in clause 1. Subsection (4) gives OPRA the power to sanction trustees who do not ensure that a scheme which applies to register as a stakeholder scheme complies with the requirements in clause 1, and continues to do so once it has been registered. It allows two sanctions from the Pensions Act 1995 to be applied to breaches of this obligation: Section 3 of the 1995 Act allows OPRA to prohibit named individuals from acting as trustees; Section 10 of the 1995 Act provides for civil penalties for trustees who breach certain obligations imposed by the Act. Subsection (5) provides a criminal sanction for knowingly or recklessly providing misleading information when applying to register a scheme as a stakeholder pension scheme. This is consistent with a number of requirements in the Pensions Act 1995 which are underpinned by criminal sanctions for more serious breaches in relation to occupational pension schemes. Subsection (6). Section 115 of the Pensions Act 1995 provides that offences under the Pensions Act 1995 committed by corporate bodies or Scottish partnerships apply to individuals, such as a manager, director or partner, in certain circumstances, for example, where the offence has been committed with the consent of that individual. This subsection applies this provision to offences under subsection (5). Subsection (7) contains a power which provides for the register of stakeholder pension schemes (or copies or extracts from it) to be made available for inspection or supplied to prescribed persons, subject to certain conditions. This power mirrors the existing power in section 6(4) of the Pension Schemes Act 1993, which provides for the register of occupational and personal pensions to be made available for inspection. The intention is for the register to be available for inspection by the general public and by those employers required to offer access to schemes for their employees. Clause 3: Duty of employers to facilitate access to stakeholder pension schemes This clause defines the obligation of employers to provide access to stakeholder pension schemes. Subsection (1) provides that, unless regulations state otherwise, any employer who employs relevant employees (subsection (7) refers) must comply with the requirements set out in this clause. Subsections (2),(3),(4) and (5) define the scope of this requirement: Subsection (2) provides that employers must choose one or more registered stakeholder scheme, at least one of which offers membership to all employees. It is anticipated that trade unions or other membership organisations may set up schemes which are open only to members; if an employer chose such a scheme, and had any employees who were not members of such an organisation, he would have to choose an additional or alternative scheme which was available to all. The subsection also provides that employers must consult with employees and any organisation representing them, such as a trade union, about the choice of scheme; Subsection (3) provides that the employer must inform his employees of the name and address of the designated scheme. There is also a power to prescribe other information which the employer must provide - which gives some flexibility to modify the requirement in the light of experience of operating schemes; Subsection (4) provides that the employer must allow the scheme "reasonable access" to the relevant employees in order to provide information about the scheme. What is "reasonable" is likely to vary according to the nature and size of the employer's business but this could involve the holding of workplace meetings or the distribution of information through pay packets Subsection (5) provides that where an employee who is a member of a qualifying scheme so requests, the employer must deduct the employee's contributions from his wages and pay them to the chosen scheme. The intention is to strike a balance between costs to the employer and flexibility for the member, so there is also a regulation-making power to prescribe restrictions on this requirement. For example, a limit might be placed on how often employees can ask their employer to alter the amount of deduction. It is proposed to consult on precisely how this exemption would apply. A further power to make regulations provides for deductions to be paid to a person other than the chosen scheme. There will be consultation, for example, on the establishment of a clearing house to receive contributions. If a clearing house were established, this power could be used to enable employers to pass contributions to it rather than direct to schemes. Subsection (6) applies the civil penalties contained in section 10 of the Pensions Act 1995 to breaches of the employer access requirement. Subsection (7) defines the terms "qualifying schemes" and "relevant employees". A "qualifying scheme" is the employer's designated scheme (or schemes), or if regulations provide, any other stakeholder pension scheme. Initially, it is intended that employers would only be required to make deductions on behalf of employees who are members of their designated scheme(s). If arrangements such as the clearing house are developed, which minimise the additional costs to employers of making payments to a number of different schemes, the regulation-making power will enable the requirement to be extended to other schemes. "relevant employees" are all employees who are not eligible to join that employer's occupational pension scheme and who earn more than the lower earnings limit (defined in section 181 of the Pension Schemes Act 1993). The power to prescribe other classes of employees provides some flexibility to modify the requirement in the light of experience of operating schemes. Clause 4: Inspection of premises Section 99 of the Pensions Act 1995 gives OPRA powers to inspect premises and documents for the purposes of investigating whether certain regulatory provisions of the 1995 Act are being complied with. Subsections (1) to (3), and (6), give OPRA similar powers for the purposes of investigating whether the employer access requirement (clause 3 refers) is being complied with. Subsections (4) and (5) similarly apply sections 98(3), 100 and 101 to 103 of the 1995 Act to the investigation of compliance with the employer access requirement. These provisions deal with OPRA's powers in relation to production of documents and obtaining search warrants, and create offences for obstructing OPRA's investigations. Section 103 enables OPRA to publish reports of its investigations. Clause 5: Application of certain enactments Subsection (1 and 2): sections 46, 58 and 102 of the Employment Rights Act 1996 protect the employment rights of trustees of their employer's occupational scheme. Trustees are protected from suffering any detriment in relation to their employment as a result of carrying out their duties as a trustee of that scheme; they have the right to take time off work to perform their functions; and dismissal arising from performing their trustee functions constitutes unfair dismissal. These subsections extend this protection to employees who are trustees of their employer's designated stakeholder scheme. Subsection (3) brings into force Schedule 1 (see below). This extends certain provisions of the Pension Schemes Act 1993 and the Pensions Act 1995 to stakeholder pension schemes. Clause 6: Reduced rates of contributions etc.; power to specify different percentages Subsection (1): section 42B(2) of the Pension Schemes Act 1993 enables the Secretary of State to make an order determining the reduced rate of National Insurance contributions payable by members of contracted-out money purchase occupational pension schemes. The reduced rates reflect the cost of providing members with benefits of an equivalent value to the SERPS benefits they are giving up. This subsection allows different rates to be specified according to whether the money-purchase contracted-out scheme is registered as a stakeholder scheme or not. It could be used to allow the reduced rate of contributions to reflect any difference in costs between schemes which are stakeholder pension schemes and those which are not. Subsection (2) provides a corresponding power to set different rates for members of appropriate personal pension schemes, depending on whether or not the schemes are registered as a stakeholder pension scheme. Subsection 2(b) allows different rates to be specified depending on when the member first joined the scheme.

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Prepared: 11 february 1999