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Pensions Bill


 

These notes refer to the Pensions Bill as introduced in the House of Commons on 28th November 2006 [Bill 12]

PENSIONS BILL


EXPLANATORY NOTES

INTRODUCTION

1.     These explanatory notes relate to the Pensions Bill as introduced in the House of Commons on 28th November 2006. They have been prepared by the Department for Work and Pensions 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 clause or part of a clause does not seem to require any explanation or comment, none is given.

SUMMARY AND BACKGROUND

3.     This section sets out the current position in each policy area, and how the Bill would change it.

4.     Many of the changes listed below are based on policy proposals set out in the Government's White Paper Security in Retirement: Towards a New Pensions System, published in May 2006 (hereafter referred to as 'the White Paper').

5.     For ease of reference when reading these explanatory notes, please note the following abbreviations for existing pieces of legislation amended by the Bill:

  • SSAA1992 - Social Security Administration Act 1992

  • SSCBA1992 - Social Security Contributions and Benefits Act 1992

  • PSA1993 - Pension Schemes Act 1993

  • PA1995 - Pensions Act 1995

  • WRPA1999 - Welfare Reform and Pensions Act 1999

  • CPA2004 - Civil Partnerships Act 2004

  • PA2004 - Pensions Act 2004

Bill 12—EN     54/2

State Pensions Glossary

Pension categories

6.     There are four categories of state pension provided under the SSCBA1992:

  • Category A

  • Category B

  • Category C (now obsolete)

  • Category D

7.     A Category A pension is contributory. It consists of two parts, either or both of which may be payable:

  • Basic state pension - dependent upon the number of qualifying years a person has in their working life

  • Additional state pension (also referred to as state second pension) - dependent upon earnings, or deemed earnings in a person's working life since April 1978.

8.     A Category B pension is also contributory. Like a Category A pension, it can consist of either a basic state pension, an additional state pension, or both. It is payable by virtue of a spouse's or civil partner's qualifying years and earnings.

9.     A Category D pension is non-contributory. It is payable when a person:

  • reaches age 80; and

  • satisfies certain residence conditions; and either

  • is not entitled to another category of state pension; or

  • is entitled to one at a lower rate than the Category D rate.

Earnings Limits

10.     See below an explanation of the terms relating to the different earnings limits for the purposes of accruing state pension.

11.     LEL - the "lower earnings limit" - currently £84 per week - is the minimum level of weekly earnings on which a person is treated as paying National Insurance contributions for benefit purposes. A person receiving contribution credits or paying flat rate voluntary or self employed contributions is treated as having earnings at the LEL for each weekly credit or contribution. The LEL is currently linked to the standard rate of basic pension. Under the proposed reforms this link will be broken when basic pension starts to be increased in line with average earnings.

12.     PT - the "primary threshold" - currently £97 per week - is the minimum level of weekly earnings on which an employed person pays National Insurance contributions. It is the weekly equivalent of the standard personal allowance for Income Tax.

13.     UEL - the "upper earnings limit" - currently £645 per week - is the maximum level of weekly earnings on which an employed person pays National Insurance contributions other than at the 1% NHS contribution and under the current scheme accrues state second pension. It is set at approximately seven times the PT (see above). Under the proposed reforms to state second pension the UEL will be replaced by an upper accruals point which will not be linked to the PT.

14.     QEF - the "qualifying earnings factor" is the minimum level of earnings on which a person must have paid, been treated as having paid, or been credited with National Insurance contributions in a tax year in order to make it a qualifying year for basic pension - the QEF is currently £4,368 per annum, 52 times the weekly LEL (see above)

15.     LET - the "low earnings threshold" - currently £12,500 per annum - relates to state second pension only - it is:

  • the level of earnings up to which, under the current scheme, state second pension accrues at the 40% rate and, under the proposed simplification, state second pension will accrue at the flat rate; and

  • the amount of earnings a person is deemed to have if they earn above the QEF but below the LET or they are accruing state second pension because they are a carer or are sick or disabled.

16.     The LET is increased annually in line with growth in average earnings.

17.     UET - the "upper earnings threshold" - this term relates to state second pension only and is used to refer to the top of the band of earnings over the LET on which state second pension accrues at the 10% rate. The UET is set at 3 times the LET minus two times the QEF - so currently it is (£12,500 x 3) - (£4,368 x 2) = £28,764 which is rounded to £28,800.

State Pensions Measures

Category A and B retirement pensions: single contribution condition

Current position

18.     Two contribution conditions are required to be satisfied for entitlement to the following benefits:

  • Category A and B basic state pension;

  • Widowed mother's allowance;

  • Widowed parent's allowance;

  • Bereavement allowance; and

  • Widow's pension.

19.     In the case of Category A pension, the contribution conditions apply to the claimant. For the other benefits listed the conditions apply with respect to the claimant's spouse or civil partner (or deceased spouse or civil partner).

20.     The first contribution condition is that the relevant insured person must, in any tax year since 6 April 1975, have actually paid Class 1 contributions on earnings of at least 52 times the weekly lower earnings limit for the tax year in question. An equivalent number of Class 2 or Class 3 contributions will also suffice. Alternatively a claimant must have paid 50 flat-rate contributions at any time before 6 April 1975.

21.     The second contribution condition is that that person must have achieved a minimum number of "qualifying years" during his working life to be entitled to the full rate of benefit. The minimum number of qualifying years required for a full rate Category A or B basic state pension is currently 44 years for a man and 39 years for a woman. A "qualifying year" is one in which a person's earnings factor for the year is not less than the qualifying earnings factor for that year.

Proposed changes

22.     For people reaching state pension age (a term interchangeable with 'pensionable age') from 6 April 2010, the policy intention, as set out in Chapter 3 of the White Paper, is to replace the existing contribution conditions for Category A and B pensions with a single contribution condition. The same new condition will apply to the spouse or civil partner of a claimant of a Category B pension where the spouse or civil partner reaches state pension age on or after 6 April 2010 (or dies on or after that date without having reached that age).

23.     For people reaching state pension age before 6 April 2010, and for those claiming bereavement benefits (whether before or after 6 April 2010), existing contribution conditions will continue to apply.

24.     The core proposal is that, for those reaching state pension age from 6 April 2010, the number of years needed to qualify for a full Category A or B pension is to be reduced from 44 years for a man and 39 years for a woman to 30 qualifying years for men and women alike. A person who has less than 30 qualifying years would be entitled to a proportion of the full basic state pension for each qualifying year they have built up.

Category B retirement pension - removal of restriction on entitlement

Current position

25.     Currently, in order for a married woman to qualify for a Category B pension based on her husband's contributions:

  • both she and her husband must have reached state pension age;

  • her husband must have satisfied the contribution conditions for a Category A pension; and

  • her husband must have made a claim for his Category A pension.

26.     A wife cannot receive her Category B pension until such time as her husband makes a claim for his Category A pension.

27.     Where a husband chooses to defer his Category A pension, increments may be added to his wife's Category B pension. She may also have the option of taking a lump sum payment if her Category B pension has been deferred for at least 12 months. However both of these are contingent on her not receiving any Category A pension during the period her Category B pension is deferred (if she does receive Category A pension in this period, she can later receive her Category B pension, but without the increments or lump sum). Thus, a situation may arise in which a wife is required to relinquish entitlement to her Category A pension in order to avoid losing increments or a lump sum payment in respect of her deferred Category B pension.

28.     From 2010, Category B pensions will become available to married men and people in civil partnerships on the same basis as they are currently available to married women, where their spouse or civil partner was born on or after 6 April 1950.

Proposed changes

29.     The Bill removes the restriction on a person's entitlement to a Category B pension that their spouse or civil partner must have made a claim for their Category A pension. The change will have effect from 6 April 2010. As a result, where one member of a married couple or civil partnership has deferred his or her Category A pension and the other member has reached pension age, the other member will have the choice of claiming Category B pension (and where applicable any Category A

pension based on their own contributions) or deferring their Category B pension (and any Category A pension to which they also have title) in order to accrue either increments or a lump sum.

30.     As a consequence of other changes made by the Bill, the extent to which people will be reliant on Category B pensions derived from their spouse's or civil partner's contributions would be significantly reduced. However retaining this restriction - even if it were to affect only a small minority of people - would maintain the complexity of the pension system.

Contributions credits for relevant parents and carers

Current position

31.     Home responsibilities protection has been available for complete tax years since 1978. It helps to protect the basic state pension and certain bereavement benefits 1 of someone precluded from regular employment because they are caring for a child or a sick or disabled person. Home responsibilities protection is not a 'credit'. Instead it works by reducing the number of qualifying years needed for a full basic state pension by up to half of the working life. Home responsibilities protection cannot reduce the number of qualifying years to below 20 for either men or women. From 2010, home responsibilities protection will not be able to reduce the number of qualifying years to below 22 for men. As state pension age equalises for men and women between 2010 and 2020, the limit on the number of qualifying years which can be reduced by home responsibilities protection will increase for women from 20 to 22.

1 Widowed parent's allowance and bereavement allowance

32.     Home responsibilities protection is available for complete tax years throughout which someone has been:

  • awarded child benefit for a child aged under 16;

  • regularly engaged for at least 35 hours a week in caring for someone who receives, for a minimum of 48 weeks a year, attendance allowance, or the higher or middle rate of the care component of disability living allowance, or constant attendance allowance. A similar provision exists, with slightly different rules, for income support recipients who are substantially engaged in caring for a disabled person who has claimed or is receiving one of the qualifying benefits;

  • from 2003, an approved foster parent or carer; or

  • covered by certain combinations of these conditions (Regulation 2 of the Social Security Pension (Home Responsibilities) Regulations 1994 (S.I. 1994/702 refers).

33.     For example, someone who is awarded home responsibilities protection for 13 years of caring would, as a result, only have to satisfy the second contribution condition (described at paragraph 21 above) for 31 years instead of 44 normally required for a full basic state pension.

Proposed changes

34.     The proposed new crediting arrangements would allow a parent, a registered foster parent or a carer reaching state pension age from 6 April 2010 to build up, in certain circumstances, entitlement to a Category A basic state pension, and for their spouse or civil partner to build up entitlement to an associated Category B pension. In addition, bereavement allowance and widowed parents' allowance 2, payable to a surviving spouse or civil partner, would be calculated by reference to the new credits in circumstances where the contributor dies on or after 6 April 2010.

2 Bereavement benefits were introduced on 9 April 2001, replacing the previous system of widow's benefits which were only payable to women.

35.     For those people reaching state pension age on or after 6 April 2010, each complete year of home responsibilities protection awarded under the existing rules of the scheme will be converted into a qualifying year for basic state pension and relevant bereavement benefits.

Category A and C retirement pensions: abolition of adult dependency increases

Current position

36.     Adult dependency increases are payable in respect of a 'dependant' who:

      a)     does not have earnings or an occupational or personal pension of more than a prescribed amount (generally £57.45 per week, but different rules apply where the dependant does not live with the pensioner); and

      b)     is not receiving pension or benefit in his or her own right at a rate equal to or greater than that of the adult dependency increase (generally £50.50 per week, but a lower rate is payable where the pensioner does not fully satisfy the contribution conditions for basic state pension).

37.     Adult dependency increases of state pension are currently payable in respect of the following, providing they meet the criteria set out above:

  • A wife;

  • A husband - providing his wife was receiving an adult dependency increase of incapacity benefit in respect of him immediately before she reached state pension age; and

  • A person having care of the pensioner's child/ren.

38.     As an adult dependency increase in respect of a wife is payable at the same rate as a Category B pension there is no financial advantage in a man continuing to claim an adult dependency increase in respect of his wife once she has attained state pension age.

39.     The PA1995 and the CPA2004 provide for women and people in civil partnerships to be eligible for adult dependency increases from 6 April 2010 under the rules which currently apply to men. The PA1995 also provides for the state pension age for women to increase from 60 to 65 between 2010 and 2020.

Proposed changes

40.     The proposed changes will abolish adult dependency increases with effect from 6 April 2010 and make provision for entitlements up to this date to be protected to 5 April 2020.

Up-rating of basic state pension and other benefits

Current position

41.     Currently, the basic state pension is required to be uprated annually in line with prices. The Secretary of State is required to consider how this movement should be measured. For contributory benefits, including the basic state pension, up-rating has, in practice, taken place according to the Retail Prices Index. However, in recent years, the Government has given a commitment to uprate by the greater of 2.5 per cent or the Retail Prices Index. Since giving this commitment the Retail Prices Index has always been higher.

42.     From the time state pension credit was introduced in October 2003, the Secretary of State has uprated the standard minimum guarantee annually in line with earnings, in reliance on a discretionary power in the existing legislation. There is currently no mandatory requirement to uprate the standard minimum guarantee in state pension credit.

43.     The lower earnings limit, currently £84 per week (equating to an annual qualifying earnings factor of £4,368), is the earnings point at which employees start to build up entitlement to contributory working age and pension benefits, by treating an individual as if they have paid National Insurance contributions. National Insurance contributions do not actually become payable until an individual has earnings at or above the primary threshold, currently £97 a week, or £5,044 per annum. At present, the amount of the lower earnings limit increases in line with prices, because it is linked to the weekly rate of Category A basic state pension.

44.     Similarly, the rate of the basic allowance in widowed mother's allowance, widow's pension, widowed parent's allowance and bereavement allowance also increases in line with prices because they are linked to the rate of Category A basic state pension. The higher permanent rate of the widow's pension and widower's pension in Industrial Death Benefit has also historically been the same as the rate of Category A basic state pension.          

Proposed changes

45.     The proposals will require the basic state pension to be uprated annually in line with earnings rather than prices, and would cover the up-rating of Category A, Category B, Category C and Category D pensions.

46.     The Government stated in the White Paper:

    "our objective, subject to affordability and the fiscal position, is to do this in 2012 but in any event at the latest by the end of the next Parliament. We will make a statement on the precise date at the beginning of the next Parliament".

47.     The proposals will also require the standard minimum guarantee in state pension credit to be uprated annually in line with earnings.

48.     In addition, the proposals will break the link between the amount of the lower earnings limit and the weekly rate of the basic state pension in a Category A pension. This will mean that the amount of the lower earnings limit will not automatically increase in line with earnings in the future. Instead, any future increase in the lower earnings limit will be at the discretion of the Treasury.

49.     The proposals in the Bill will ensure that the rate of the basic allowance in widowed mother's allowance, widow's pension, widowed parent's allowance and bereavement allowance will continue to be uprated in line with prices, like other pre-retirement benefits. However, the proposals will ensure that the rate of widow's pension and widower's pension in industrial death benefit will be uprated in line with earnings to maintain the link with the rate of Category A pensions.

Deemed earnings factors for purposes of additional pension

Current position

50.     The state second pension was introduced in 2002. It replaced the state earnings related pension scheme to provide a more generous additional state pension for:

  • employed earners with earnings equal to the lower earnings limit for a full tax year;

  • carers who have no earnings or earnings below the annual lower earnings limit, in any year throughout which:

-they are awarded child benefit for a child under 6;

-they are entitled to carer's allowance; or

-they receive home responsibilities protection (paragraph 31 refers);

  • disabled people with broken work records in any year throughout which they:

-receive severe disablement allowance; or

-are entitled to long-term incapacity benefit.

51.     In addition, those entitled to severe disablement allowance or long-term incapacity benefit must satisfy a labour market attachment condition when they reach state pension age. This condition requires that they have worked and paid Class 1 National Insurance contributions for at least one tenth of their working life since 1978.

52.     Carers and disabled people in these groups are treated as if they have earnings at the qualifying earnings factor (52 times the lower earnings limit) and, along with employed earners who have earnings at the lower earnings limit but below the low earnings threshold, are also boosted to (i.e. deemed to be earning at) the low earnings threshold 3. In other words, these groups are treated as having Band 1 earnings for the purposes of calculating entitlement to state second pension for a given tax year.

3 £12,500 per annum in 2006/2007

53.     Employed earners with earnings above the low earnings threshold would accrue state second pension according to their band of earnings.

Proposed changes

54.     The proposed changes would increase the number of people who are deemed to be earning at the low earnings threshold, and so accruing state second pension as if they had Band 1 earnings until the proposed new simplified state second pension is introduced.

55.     The changes allow persons to be deemed to be earning at the low earnings threshold for a tax year starting with that commencing 6 April 2010, if they satisfy any of 3 conditions:

  • the first is that the person has earnings equal to or greater than the qualifying earnings factor for the year but less than the low earning threshold;

  • the second is that the person has earnings less than the qualifying earnings factor but is entitled to enough new earnings factor credits to bring his earnings factor up to the qualifying earnings factor;

  • the third is that a person has no earnings but is entitled to 52 of the new credits for the year.

56.     The new earnings credits, of 1/52 of the qualifying earnings factor for the year are available in respect of each week in which a person was:

  • awarded child benefit for a child under 12;

  • a foster parent;

  • caring for someone with a qualifying disability benefit for at least 20 hours a week; or

  • entitled to carer's allowance;

  • entitled to severe disablement allowance or incapacity benefit. The labour market attachment test would no longer apply to disabled people from 6 April 2010.

57.     People earning at or above the low earnings threshold will continue to accrue state second pension according to the band of earnings they are in until the new simplified state second pension is introduced (see paragraphs 58 - 63 below).

Additional pension: simplification of accrual rates

Current position

58.     Paragraphs 60 - 63 detail how state second pension is to be accrued. In broad terms, for any given tax year, state second pension accrues on the portion of an employee's annual earnings between the annual value of the lower earnings limit and the upper earnings limit for Class 1 National Insurance contributions - called the "surplus earnings factor". This amount is revalued in line with growth in average earnings up to the last full tax year of a contributor's working life. The accumulated surplus earnings factors are then divided by the number of years in the person's working life to produce a "lifetime average" which is multiplied by the relevant accrual rate and divided by 52 to produce a weekly rate of additional pension.

59.     People earning, or treated as earning, between the lower earnings limit and the upper earnings limit accrue state second pension on a cumulative basis depending on the level of their earnings. Earnings above the upper earnings limit do not accrue state second pension. The table below sets out the current earnings accrual bands for state second pension that will apply from 2009/2010.

EarningsPercentage
Band 1Not exceeding low earnings threshold40
Band 2Exceeding low earnings threshold but not exceeding upper earnings threshold10
Band 3Exceeding upper earnings threshold but not exceeding upper earnings limit20
 
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Prepared: 29 November 2006