Pension compensation

Clause 211 - Amendments relating to the Pensions Compensation Board

531.     The Pensions Compensation Board is limited in the amount of compensation it can make to occupational pension schemes. In the case of salary-related schemes the maximum amount that can be paid is the amount of the shortfall or the amount needed to be paid to the trustees to ensure that specified liabilities can be met (100% of pensioner liabilities and liabilities for those within ten years of pension age, and 90% of non-pensioner liabilities plus other liabilities of the scheme), whichever is less. For money-purchase schemes the amount of compensation is limited to 90% of the loss. By amending section 80 of the Pensions Act 1995, this clause removes the limitation which brings the amount of compensation payable to less than the amount of the loss. It also enables the Pensions Compensation Board to review a determination it has made without an application being made. This clarifies the current legislation which allows the Pensions Compensation Board to initiate a review of its decisions.

532.     Section 80(2A) as amended will provide for the Pensions Compensation Board to review a determination without an application being made.

533.     Section 80(4) as amended will provide for regulations to set out the details of the requirements and procedures applying to reviews under section 80.

534.     Subsection (3) removes the provisions in section 81 of the 1995 Act which impose requirements that the loss in salary-related schemes should result in the scheme being funded below a particular level and for the liabilities to be calculated using the same methodology as the minimum funding requirement.

535.     Subsection (4) amends section 83 of the 1995 Act ('amount of compensation') so that the amount of compensation is only limited to the shortfall at the application date, less any recoveries of misappropriated assets between the application date and the settlement date together with any interest at the rate set in regulations.

Annual increases in rate of pensions

Clause 212 - Annual increase in rate of certain occupational pensions

536.     Section 51 of the Pensions Act 1995 requires that certain private sector occupational pensions deriving from benefits built up on or after 6^th April 1997 must be increased annually by at least the annual percentage increase in the Retail Prices Index or the appropriate percentage (currently five per cent), whichever is the lesser. This requirement is to be modified so that pensions deriving from benefits built up on or after the commencement day are to be increased by at least the annual percentage increase in the Retail Prices Index or 2.5 per cent, whichever is the lesser.

537.     Subsection (1) of this clause provides for amendments to section 51 of the Pensions Act 1995 to be made in accordance with subsections (2) to (5) of this clause.

538.     Subsection (2) amends section 51(1)(b) and inserts new section 51(1)(c) in order to clarify the basis on which this section applies.

539.     Subsection (3) amends section 51(4)(b) by specifying different indexation requirements for Category X and Category Y pensions.

540.     Subsection (4) inserts new sections 51(4A), (4B) and (4C). New section 51(4A) defines a Category X pension as being one which is in payment before the commencement date or is a pension which will derive wholly from benefits built up before the commencement day. New section 51(4B) defines a Category Y pension as being one which will derive wholly from benefits built up on or after the commencement day. New section 51(4C) provides for different indexation requirements to apply where the pension in payment will derive from benefits built up over a period both before and after the commencement day.

541.     Subsection (5) amends section 51(5) so that any regulations made under this subsection may apply to pension rights built up on or after the commencement day.

542.     Subsection (6) inserts new section 51ZA into the Pensions Act 1995 and provides a new definition for "appropriate percentage" (the minimum amount by which a scheme must increase its pensions in payment) different to that set out in section 54(3) of the Pensions Act 1995.

543.     Subsection (7) amends section 54(3) of the Pensions Act 1995 by defining the "commencement day" as being the day appointed for the coming into force of amendments to section 51 of the Pensions Act 1995.

Clause 213 - Annual increase in rate of certain personal pensions

544.     Section 162 of the Pensions Act 1995 requires that personal pensions deriving from protected rights (rights that derive mainly from a National Insurance contribution rebate and its investment return) built up on or after 6^th April 1997 must be increased by at least the annual percentage increase in the Retail Prices Index or five per cent, whichever is the lesser. This requirement is to be modified so that pensions deriving from protected rights built up on or after the commencement day are to be increased by at least the annual percentage increase in the Retail Prices Index or 2.5 per cent, whichever is the lesser.

545.     Subsection (1) of this clause provides for amendments to section 162 of the Pensions Act 1995 to be made in accordance with subsections (2) and (3) of this clause.

546.     Subsection (2) amends section 162(1)(b) and inserts new section 161(1)(c) in order to clarify the basis on which this section applies.

547.     Subsection (3) inserts new subsections 162(2A), (2B) and (2C). New subsection 162(2A) defines a Category X pension as being one which is in payment before the commencement date or a pension which will derive wholly from benefits built up before the commencement day. New subsection 162(2B) defines a Category Y pension as being one which will derive wholly from benefits built up on or after the commencement day. New subsection 162(2C) provides for different indexation requirements to apply where the pension in payment derives from benefits built up over a period both before and after the commencement day.

548.     Subsection (4) inserts new section 162A into the Pensions Act 1995 and provides a new definition for "appropriate percentage" (the minimum amount by which a scheme must increase its pensions in payment) to that set out in section 162(3) of the Pensions Act 1995.

549.     Subsection (5) amends section 163(3) of the Pensions Act 1995 by defining the "commencement day" as being the day appointed for the coming into force of amendments to section 162 of the Pensions Act 1995.

Clause 214 - Power to increase pensions giving effect to pension credits etc

550.     Section 40 of the Welfare Reform and Pensions Act 1999 (the 'WRAP' Act) is concerned with pensions in payment derived from a pension share not covered by section 31 of that Act. It contains a power that enables the Secretary of State to protect an occupational pension in payment, derived from a pension share, against inflation. It also enables the Secretary of State to protect a personal pension in payment derived from safeguarded rights, against inflation.

551.     Subsection (1) provides for amendments to section 40 of WRAP Act. Subsection (2) amends section 40(1) of the WRAP Act by replacing the reference to "5%" with "the maximum percentage".

552.     Subsection (3) inserts new subsection (2A) into section 40 of the WRAP Act requiring that a pension deriving from a pension sharing order made before the commencement day be increased by at least the annual increase in the Retail Prices Index or five per cent, whichever is the lesser. Pensions deriving from a pension sharing order where entitlement arose on or after the commencement day are to be increased by the annual increase in the Retail Prices Index or 2.5 per cent, whichever is the lesser.

553.     Subsection (4) amends section 40(3) of the WRAP Act by defining the "commencement day" as being the day appointed for the coming into force of amendments to section 40 of the WRAP Act; and by defining "relevant pension credit".

554.     As far as the ECHR is concerned, it is considered that clauses 212 to 214 will not interfere with any "possessions" within the meaning of Article 1 of Protocol 1. Even if the measures do constitute an interference with possessions, it is considered that they are justified in the public interest, and proportionate.

Revaluation

Clause 215 - Exemption from statutory revaluation requirement

555.     This clause amends section 84 of the Pension Schemes Act 1993 (basis of revaluation) to enable schemes to satisfy the statutory revaluation requirements by revaluing the total pension or other benefit fully in line with the Retail Prices Index. This effectively restores the situation to that which existed before the provision was repealed by the Pensions Act 1995. The proposed new subsection (6) defines the meaning of "Retail Prices Index" for the purpose of this amendment.

Contracting out

Clause 216 - Meaning of "working life" in Pension Schemes Act 1993

556.     This clause amends the meaning of "working life" in section 181 of the Pension Schemes Act 1993 for the purposes of calculating an earner's Guaranteed Minimum Pension (GMP). This is currently defined as having the same meaning as stated in paragraph 5(8) of Schedule 3 to the Social Security Contributions and Benefits Act 1992 (i.e. "working life" is the period between (inclusive) the tax year in which the person attained the age of 16; and (exclusive) the tax year in which he attained pensionable age or died under that age). Under section 126 of and Schedule 4 to the Pensions Act 1995, the pensionable age for women to which paragraph 5(8) refers will be raised from 60 to 65 in stages commencing in 2010, to bring women's pensionable age into line with that for men. By virtue of this clause "working life" for the purposes of calculating an earner's GMP will now end with the tax year before the person reaches the age of 65 (in the case of a man) or 60 (in the case of a woman), or if earlier, the tax year before the person dies. This brings the definition of "working life" into line with the definition of "pensionable age" for GMPs, which will remain unchanged from 2010.

Clause 217 - Power to prescribe conditions by reference to Inland Revenue approval

557.     This clause adds a new subsection 9(5A) to the Pension Schemes Act 1993 to enable regulations to be made concerning contracted-out schemes under which conditions may be prescribed by reference to the Inland Revenue's tax approval requirements for pension schemes.

Clause 218 - Restrictions on commutation and age at which benefits may be received

558.     Subsection (1) of this clause amends section 21(1) of the Pension Schemes Act 1993 (which refers to commutation, surrender and forfeiture) to provide that where a scheme is required to comply with section 13 (minimum pensions for earners) or section 17 (minimum pensions for widows or widowers) of the Pension Schemes Act 1993 in providing a pension, then the scheme may provide for payment of a lump sum instead of that pension to the extent that this is permitted by regulations.

559.     Subsection (2) amends section 17 of the Pension Schemes Act 1993 (minimum pensions for widows and widowers) to provide that where a person has received a lump sum instead of a Guaranteed Minimum Pension that person will be treated as if they had not received the lump sum for the purposes of calculating the minimum pension payable to the widow or widower.

560.     Subsections (3) to (7) additionally amend the provisions in section 28 and section 29 of the Pension Schemes Act 1993 to remove certain restrictions on protected rights which build up in contracted-out money-purchase schemes and appropriate personal pension schemes. Subsections (3)-(5) provide for protected rights to be paid as a lump sum in circumstances and subject to restrictions set out in regulations. Subsections (6) and (7) remove the restrictions as to the age at which members' protected rights can be given effect, except in occupational schemes, where they will continue to be required to be paid by age 65.

Stakeholder pensions

Clause 219 - Meaning of "stakeholder pension scheme"

561.     This clause makes two clarifying amendments to section 1 of the Welfare Reform and Pensions Act 1999 (the WRAP Act) which outlines the meaning of 'stakeholder pension scheme'. The clause amends section 1(5) of the WRAP Act to clarify that the limitation on the application of stakeholder pension funds of scheme members to defray administrative expenses (the "charge cap") applies not only to contributions paid by or on behalf of members, but also to contributions paid by an employer on his own account to the designated scheme of one of his employees, and contributions made by another third party such as a relative. The clause therefore amends reference to member contributions to cover contributions made 'by, or on behalf or in respect of'. This clause also inserts section 1(10) into the WRAP Act, to clarify that stakeholder pension schemes must be contracted-out schemes to satisfy a qualifying condition for registration by the Regulator to the effect that they must accept transfer payments (including contracted-out rights) in respect of members' rights in other private pension schemes.

PART 6 - STATE PENSIONS

RETIREMENT PENSIONS

Summary

562.     Retirement pension is paid to people who have reached pensionable age (currently 60 for women and 65 for men) provided they have made a claim for it. During their working life, they have to have paid, been treated as paid or have been credited as having paid, National Insurance contributions. The amount of retirement pension depends on the number of contributions they have built up.

563.     People must either:

•      have one qualifying year since 6^th April 1975 which is derived from the payment of Class 1, 2 or 3 National Insurance contributions or from Class 1 contributions treated as paid; or

•      have paid 50 flat-rate contributions at any time before 6^th April 1975.

564.     To get a full rate basic retirement pension, people must have qualifying years for about 90% of the years in their working life. To get a minimum basic retirement pension (25% of the full amount), people normally need 10 or 11 qualifying years.

565.     Prior to April 2000, employees started paying National Insurance contributions once their earnings reached the Lower Earnings Limit. From April 2000, a new employees' earning threshold was introduced as the point from which employees start to pay contributions. This is set at a higher amount than the Lower Earnings Limit. As a result, employees who earn between the Lower Earnings Limit and the earnings threshold no longer pay National Insurance contributions but will be treated as if they have paid them. This means they will continue to build up entitlement to contributory benefits such as retirement pensions, even though they have not paid National Insurance contributions.

Working life

566.     A person's working life is the period over which they have to meet the contribution conditions for basic retirement pension. A working life is normally:

•      49 years for men;

•      44 years for women born on or before 5/10/1950;

•      45 years for women born on 6/10/1950 up to and including 5/10/1951;

•      46 years for women born on 6/10/1951 up to and including 5/10/1952;

•      47 years for women born on 6/10/1952 up to and including 5/10/1953;

•      48 years for women born on 6/10/1953 up to and including 5/10/1954;

•      49 years for women born on 6/10/1954 or later.

567.     A working life is counted from the start of the tax year in which a person reaches the age of 16 to the end of the tax year before the one in which they reach pensionable age.

Qualifying year

568.     A qualifying year for basic retirement pension is a tax year in which a person receives (or is treated as having received) qualifying earnings of at least 52 times the Lower Earnings Limit for that year.

Qualifying earnings

Earnings from Class 1 employment

569.     Earnings on which full-rate Class 1 contributions have been paid or are treated as having been paid count as qualifying earnings. Earnings of married women and widows with reduced liability do not count as qualifying earnings.

Class 2 and Class 3 contributions

570.     Each Class 2 or Class 3 contribution counts as one week's earnings at the Lower Earnings Limit.

Credit of earnings

571.     In certain circumstances a person may be credited with earnings to help them get a retirement pension if they do not have enough earnings in a tax year to reach the level needed to make it a qualifying year. Men with no liability to pay Class 1 or Class 2 contributions may be credited automatically for the tax years in which they reach 60 and the four succeeding years. From 6^th April 2010 this arrangement will be extended to women. Young people can get credits for the tax year in which they reach age 16 and the two following years. There are conditions attached to the receipt of credits and the availability of a credit does not mean a person does not have to pay National Insurance contributions if their earnings exceed the earnings threshold. Earnings are not credited to married women who have a reduced contribution liability.

Flat-rate contributions paid or credited before 6^th April 1975

572.     Any flat-rate contributions paid by or credited before 6^th April 1975 are converted into a number of qualifying years by dividing the total number by 50 and rounding up what is left over to the next whole number. However, the number of qualifying years calculated in this way cannot be more than the number of years in a working life up to April 1975.

Classes of National Insurance contributions

573.     There are six classes of National Insurance contributions - only three count towards qualifying years for retirement pensions:

•      Class 1 - paid by employed earners and their employers. Employees pay these if they work for an employer and earn more than the employee's earnings threshold. The employer also pays National Insurance contributions for the employee if they earn more than the employer's threshold. There is no upper limit on the employer's National Insurance contributions. Some married women and widows can still pay their National Insurance contributions at a reduced rate.

•      Class 2 - paid by self-employed people. Paid at a flat-rate.

•      Class 3 - voluntary contributions which may be paid to protect a person's National Insurance record in some circumstances. Paid at a flat rate. Class 3 contributions can be paid for previous years to enable someone either to qualify for a basic retirement pension at the minimum rate or to increase the rate of the basic retirement pension for which they have qualified. Any arrears of contributions paid after pensionable age cannot normally count for payment of retirement pension from a date earlier than the day on which the contributions were paid. Married women and widows cannot pay Class 3 contributions for any tax year in which they had reduced rate liability for the whole year.

Categories of contributory retirement pension

574.     There are two categories of contributory retirement pension:

•      Category A; and

•      Category B.

Category A pensions

575.     A category A retirement pension consists of two parts:

•      basic retirement pension - dependent on the number of qualifying years in a person's working life;

•      additional retirement pension - dependent on a person's earnings, or deemed earnings in their working life, since April 1978.

576.     It is paid to:

•      anyone who can satisfy the entitlement conditions;

•      anyone reaching pensionable age after 5^th April 1979 by using qualifying years of their former spouse for a basic retirement pension only;

•      a woman who reached pensionable age before 6^th April 1979 by using the qualifying years of her former husband for a basic retirement pension only;

•      a widow or widower entitled to long-term incapacity benefit under prescribed circumstances.

577.     In order to receive a Category A pension, a person has to have: reached pensionable age; satisfied the conditions for basic retirement pension (or additional retirement pension) or both; and made a claim for retirement pension.

Category B pensions

578.     A Category B retirement pension can consist of a basic retirement pension; or an additional retirement pension; or both. It is payable by virtue of a spouse's qualifying years and earnings. It is paid to: married women; widows; widowers. In the case of a married woman a Category B pension consists of 60% of the spouse's basic retirement pension. In the case of a widow or widower, a Category B pension may consist of a basic retirement pension of up to 100% of the spouse's retirement pension (it may be combined with any Category A pension of the person's own entitlement up to 100% of a full retirement pension payable to a single person). It may, with certain exceptions, also consist of half of a deceased spouse's additional retirement pension.

Clause 220 - Persons entitled to more than one Category B retirement pension

579.     This clause is intended to achieve the policy intention that legislation applying to people who are entitled to more than one retirement pension applies where a person is entitled to more than one retirement pension (whether of the same category or not); such person may notify the Secretary of State in writing as to which of those retirement pension he wishes to receive; where such notification is received, that person shall be entitled to the retirement pension he has said he wishes to receive in respect of any week commencing after the date of the notice; and in default of such notification, that person shall be entitled to whichever retirement pension is from time to time the most favourable to him.

580.     It amends section 43(3) of the Social Security Contributions and Benefits Act 1992 (which concerns persons entitled to more than one retirement pension). Contributory benefits legislation was consolidated by that Act and although section 43 currently enables a person to choose when there is entitlement to two retirement pensions of a different category, it does not do so where a person is entitled to more than one retirement pension of the same category. This, in the main, affects women who have married and been widowed twice or more. The amendment provides that where a person is entitled to more than one Category B retirement pension they can notify the Secretary of State in writing as to which of the Category B retirement pensions they wish to receive. In the event of no such notice, they will be entitled to the one which is the most favourable to them. The Department for Work and Pensions is currently making extra-statutory payments in these cases in line with the policy intention.

Clause 221 - Deferral of retirement pensions and shared additional pensions

The current position

581.     A person is entitled to retirement pension from age 60 for a woman and age 65 for a man, providing he makes a claim for it. If a person does not claim their pension from that date, because he is working, or for other reasons, he will not receive a pension for the period between pension age and the date of claim. He will instead qualify for an increase to his weekly pension from the point at which he does claim.

582.     A person may also be eligible for increments through electing to cancel his entitlement to retirement pension. For example, having drawn his pension at age 65, a man may choose to cancel his entitlement at age 66. A person may cancel their entitlement in this way once only. This means there are in effect two possible opportunities to earn increments - the first, by not claiming on reaching pensionable age; the second, by electing to cancel entitlement after claiming.

583.     The amount of the increase is calculated using a formula which results in an increase, or "increment", of 1/7^th of one per cent. of the weekly pension as at the date of claim, for each "incremental period" (equivalent to a week) in the deferment period. Increments of less than one per cent cannot be awarded; therefore to qualify for an increase a person must defer claiming for at least seven weeks. The incremental rate is currently equivalent to approximately 7.4 per cent of the weekly rate for each full year deferred. For example:

•      total number of weeks deferred = 52

•      weekly pension (basic plus additional) at date of claim = £90

•      amount of increase = 1/7 x 90/100 x 52 = 6.69

•      total weekly pension = £96.69

584.     Increments may normally be earned for a maximum of five years, and may be accrued on all components of the contributory state retirement pension i.e. Category A and B pensions and Graduated Retirement Benefit (the predecessor to the present earnings-related additional pension component of the state pension scheme). Increments may also be earned by deferring the shared additional pension, ¹ and Guaranteed Minimum Pension ².

¹ Since December 2000, it has been possible for the additional pension component of the state pension scheme to be shared as part of a divorce settlement. "Shared additional pension" is the term used for the weekly pension derived from the cash equivalent transfer value of a former spouse's state additional pension.

² Before 1997, salary-related occupational pension schemes could contract their members out of the State Earnings Related Pension Schemes (SERPS) by underpinning their benefits with a Guaranteed Minimum Pension which broadly reflected the pension which they would otherwise have built up in SERPS.

585.     It is not possible to defer only part of the pension, for example, a person cannot decide to claim just their basic pension while deferring their additional pension (i.e. their pension derived from the State Earnings Related Pension Scheme (SERPS) or their State Second Pension).

Married couples

586.     If a married man defers his Category A pension, his wife cannot claim a Category B pension based on his contributions until such time as he claims his pension. However, increments will accrue on both. Similarly, if he claims his pension but later decides to give it up to earn increments, his wife's entitlement to Category B pension will also be cancelled for the same period (subject to her consent) and increments earned on it.

587.     If a woman is entitled to her own Category A pension, she can claim or defer it without reference to whether her spouse is claiming his pension. However, in cases where her Category A pension could be increased by virtue of her husband's contributions and that increase is deferred because he is not claiming his pension, no increments would be payable unless she deferred her own pension as well as the increase.

588.     A woman who has attained state pension age and claimed her pension will be entitled to increments earned by her deceased husband provided they were married at the time he died. The inheritable proportion depends on which pension component the increments relate to. Broadly, she will inherit 100 per cent of increments earned on the basic Category A pension, and up to 100 per cent of increments on the additional (earnings-related) pension component, depending on what percentage of the additional pension itself she is entitled to. In addition, one-half of increments on Graduated Retirement Benefit are inheritable.

589.     Until April 2010, when equalisation of state pension age for men and women begins to be phased in, only widowed men are able to qualify for a Category B pension on the basis of their late wife's contributions. Similarly, a widower may only inherit increments earned by his late wife where he himself was over pension age at the time of her death.

Changes to deferment provisions introduced by the Pensions Act 1995

590.     The 1995 Act removed the five-year limit on deferral and changed the weekly rate of increment accrual from 1/7^th of one per cent. to 1/5^th of one per cent with effect from April 2010. The new incremental rate, equivalent to an annual incremental rate of 10.4 per cent., effectively reduces the minimum qualification period to five weeks through the "one per cent" rule.