Proposed changes

60.     Under the proposed changes, state second pension will be restructured.

61.     The first step will be to merge Bands 2 and 3, so that all earnings exceeding the low earnings threshold (but not exceeding the upper earnings limit) will fall into Band 2 and accrue additional pension at a rate of 10%. This change will have effect for the tax year 2010-11 onwards.

62.     In addition, from a date to be determined by the Secretary of State by order, the current 40% accrual band (Band 1) for earnings between the lower earnings limit and the low earnings threshold will be replaced with a weekly flat rate accrual amount of £1.40 (giving an equivalent annual amount of £72.80). This will be accrued by all contributors and people credited into state second pension in respect of each year of contribution. For a time, the additional earnings-related component of state second pension (accruing at 10%) will remain in place. This component will ultimately be withdrawn by around 2030, leaving a flat-rate benefit.

63.     These changes will have an effect on the contracted-out rebate for defined benefit schemes. If a pension scheme member is opted out of state second pension they receive a "rebate" from the Government, delivered through reduced-rate National Insurance contributions, which is based on the amount of state second pension foregone. Therefore changes to state second pension need to be taken into account when calculating the rebate.

Increase in state pension age

Current position

64.     For men, state pension age is currently 65. For women this has been 60 but, by virtue of the PA1995, this is only maintained for those women born before 6 April 1950. The changes in that Act were designed to remove inequalities within the State Pension scheme between men and women, including the five-year differential in state pension age which has existed since 1940. Over the period from April 2010 to April 2020, state pension age for women will therefore be gradually increased to 65, affecting all women born in the period between 6 April 1950 and 5 April 1955. For women born on or after 6 April 1955, state pension age will be 65, the same as for men.

Proposed changes

65.     In the White Paper, the Government proposed raising the state pension age in the context of a growing pensioner population resulting from increasing longevity and falling birth rates.

66.     The Bill provides for state pension age to increase by one year per decade between 2020 and 2050, with each change phased in over two consecutive years in each decade.

67.     The first increase, from 65 to 66, would be phased in between April 2024 and April 2026; the second, from 66 to 67, would be phased in between April 2034 and April 2036; and the third, from 67 to 68, between April 2044 and April 2046. These changes would therefore affect anyone born after 5 April 1959 - that is anyone below the age of 47 on 5 April 2006 (who would therefore reach the age of 65 on or after 6 April 2024).

68.     A number of social security benefits either become payable or cease to be payable when state pension age is reached. The Bill provides for these age thresholds to rise in line with rising state pension age. The benefits to which this applies include jobseeker's allowance, incapacity benefit (and the new employment and support allowance which is intended to replace incapacity benefit ⁴), bereavement benefits and state pension credit.

⁴ See clause 1(3) of the Welfare Reform Bill as introduced in the House of Commons on 4 July 2006.

69.     In the case of attendance allowance and disability living allowance, the age threshold is currently set at 65. By 2020, it will therefore have become aligned with pensionable age for both women and men. The Bill replaces the reference to age 65

with pensionable age with effect from 6 April 2024, so that the minimum age for entitlement to attendance allowance and the upper age at which a person may qualify for disability living allowance will increase in line with rising state pension age.

Non-State Pensions Measures

Conversion of guaranteed minimum pensions

Current position

70.     Sections 13 to 23 of the PSA1993 set out the requirements on contracted-out salary related occupational pension schemes to provide a guaranteed minimum pension to members contracted out of the state earnings related pension scheme through membership of the occupational scheme between 6 April 1978 and 5 April 1997. From 6 April 1997 the requirements applying to contracted-out schemes were simplified and no further rights to guaranteed minimum pensions accrued from that date onwards.

Proposed changes

71.     In the White Paper, the Government proposed to introduce a facility for schemes to convert members' rights to a guaranteed minimum pension into rights to an ordinary scheme pension, calculated under the scheme's own rules, subject to certain safeguards to protect the members' interests. Each member's post conversion benefit would be required to be at least as actuarially valuable as their rights immediately prior to conversion.

72.     By conducting a guaranteed minimum pensions conversion exercise, a scheme may be able to adopt a unified and streamlined benefit structure which will enable administrative savings to be made as well as offering advantages to members (in terms of understanding their rights in the scheme and being able to transfer them to other schemes more easily). It would be for scheme trustees to decide whether they wished to make use of this facility.

Abolition of contracting-out for defined contribution pension schemes

Current Position

73.     Contracting-out provides a private sector alternative to the state second pension. Under the contracting-out arrangements, employees forego all or part of their additional state pension for the years in which they are contracted out and in return pay lower-rate National Insurance contributions and/or receive payments into their pension scheme. These reductions and payments are known collectively as the contracted-out rebate. Contracting-out is allowed for occupational pension schemes that contract out on a defined contribution (also known as money purchase) basis (known as a COMP) or on a defined benefit (salary-related) basis. Personal pension schemes are also allowed to contract out. A contracted-out personal pension scheme is referred to as an appropriate scheme (APP).

74.     When a private pension scheme contracts out, Her Majesty's Revenue and Customs (HMRC) (which provides for the operational side of contracting-out) issues a certificate identifying the scheme's contracted-out status. Certificates for occupational pension schemes are referred to as "contracting-out" certificates, whilst certificates for personal pension schemes are referred to as "appropriate scheme certificates". When the scheme ceases to contract out, it surrenders the certificate. The certificate can be withdrawn by HMRC if the scheme is not complying with the relevant statutory requirements.

75.     Money purchase schemes must, as a condition of contracting-out, provide protected rights. Protected rights are derived from the contracted-out rebate and the investment return on the rebate. They are subject to certain rules regarding where they can be invested; where they can be transferred; the purchase of a unisex annuity when the protected rights are secured and the purchase of a dual life annuity if the scheme member is married or in a civil partnership at the point of annuitisation.

76.     In addition to the protected rights, a scheme member may build up additional rights under the scheme's own rules. The rules applying to protected rights will not apply to the rights built up under the scheme rules unless the scheme has designated that they do so. If the scheme does not do so, the protected rights will have to be tracked separately from the scheme rights and they could be treated differently at the point of annuitisation.

77.     Those who were contracted-out pre-1997 are still treated as having an entitlement to the additional state pension for the years in which they were contracted out up to 1997 and a contracted-out deduction is made from the additional state pension entitlement, to avoid double provision. When the scheme member dies, his or her surviving spouse or civil partner is entitled to some or all of the deceased member's additional state pension rights and, where the member was contracted-out pre-1997, a contracted-out deduction is also applied to the survivor benefit.

Proposed changes

78.     The Bill abolishes contracting-out for money purchase occupational schemes and personal pension schemes. Contracting-out certificates for COMPs and appropriate scheme certificates will be automatically cancelled. The result will be that from the date of cancellation, members of money purchase schemes will be contracted back into the state second pension and will start to build up entitlement to a state second pension. Provisions of the PSA1993 and other legislation will be amended or repealed to abolish contracting-out for money purchase schemes. As a result the contracting-out rebate will no longer be available for money purchase schemes. Schemes which cease to be COMPs or APPs as a result of this Bill will have to comply with the same obligations in respect of protected rights which are currently imposed on former COMPs and APPs. Schemes which cease to be COMPs or APPs as a result of this Bill will also face the same restrictions on changes to their rules which apply to other former COMPs and APPs.

Dispute resolution arrangements

Current position

79.     Currently, trustees or managers of occupational pension schemes are required to have in place formal arrangements for the resolution of disagreements relating to the scheme. The existing dispute resolution procedure requires a two stage process, with someone nominated by trustees giving a decision at the first stage, and then the matter being referred to the trustees if the applicant is still not satisfied.

Proposed changes

80.     The measure in the Bill will make it possible to replace the two-stage internal dispute resolution procedure with a single stage arrangement where all decisions would be taken by trustees or managers. This would not be compulsory, however, and schemes will be able to retain the present two-stage arrangements if they wish.

81.     This amendment would give effect to the proposal announced in the 2002 Green Paper Simplicity, security and choice: Working and saving for retirement.

Removal of Secretary of State's role in approving actuarial guidance

Current position

82.     In order for actuaries to calculate pension schemes' liabilities consistently, all are required to use an agreed set of guidelines. These guidelines are contained in documents referred to either as 'Guidance Notes' or as a 'Technical Memorandum'. There are seven Guidance Notes and one Technical Memorandum referred to in pensions legislation. The Secretary of State is required by primary legislation to approve three of these Guidance Notes and the Technical Memorandum.

83.     Historically the Actuarial Profession has produced these documents. The professional bodies for actuaries - the Institute of Actuaries in England and Wales and the Faculty of Actuaries in Scotland - have combined the role of regulator with that of professional body.

Proposed changes

84.     The Morris Review of the Actuarial Profession recommended that the Financial Reporting Council should establish a new regime to set actuarial standards and to oversee the regulation of the Profession. The Financial Reporting Council is the UK's independent regulator for corporate reporting and governance. The Government accepted this recommendation and the Financial Reporting Council has now set up the Board for Actuarial Standards to promote confidence in corporate reporting and governance by setting high quality actuarial standards. The Institute of Actuaries in England and Wales and the Faculty of Actuaries in Scotland continue to exist as the professional bodies for the profession in their respective jurisdictions.

85.     On 6 April 2007, the Board for Actuarial Standards will adopt and take responsibility for the existing versions of the pensions Guidance Notes and the Technical Memorandum.

86.     In order to maintain the independence of the Financial Reporting Council, and through it the Board for Actuarial Standards, as the UK's independent regulator for corporate reporting and governance, the Bill contains a measure to remove from the primary legislation the requirement for the Secretary of State to approve the three Guidance Notes and the Technical Memorandum.

Personal Accounts Delivery Authority

Current position

87.     As outlined in the White Paper, the Government intends to give effect to some form of personal account scheme from 2012. The Government intends to legislate for the personal accounts scheme in a planned future Bill.

88.     However, to ensure delivery of a personal accounts scheme by 2012, much preliminary work must be done in advance of Royal Assent of the planned second Bill. The Government's intention is that the delivery and eventual governance of the personal accounts scheme should be independent of Government, utilising the knowledge and skills of individuals with experience of private pensions administration. No existing organisations were identified that currently have the necessary remit, skills and capacity for the work necessary to deliver a system of personal accounts or the capacity to expand and adapt their operations to commence the work within the necessary timeframe.

Proposed Changes

89.     The Bill establishes a body corporate called the Personal Accounts Delivery Authority (referred to as the 'Authority') to undertake the preliminary work necessary for the establishment of a personal accounts scheme.

90.     The Authority is being established with a remit limited to:

• Provide advice and recommendations to Government, helping it to think through the operational and commercial implications of its policy options.

• Formulate a commercial strategy for the personal accounts scheme by preparing specific products which comprise a financial, technical and commercial strategy prior to issuing an Invitation to Negotiate.

91.     The Authority will be at a distance from Government and will be able to manage its own affairs. Schedule 6 gives further detail on the membership and structure of the Authority.

92.     This Bill also gives the Secretary the State the power to wind up the Authority if he deems that due to the abandonment or modification of relevant proposals on the personal accounts scheme it is no longer necessary or appropriate to have an Authority.

93.     This Bill gives the Authority limited powers, as detailed in paragraph 90. The Government will consider options to extend this remit in legislation planned for a later date, subject to the agreement of Parliament.

BILL OVERVIEW

94.     The Bill is formed of 4 Parts:

• Part 1 - State Pension

• Part 2 - Occupational and personal pension schemes

• Part 3 - Personal Accounts Delivery Authority

• Part 4 - General

TERRITORIAL APPLICATION

95.     The following measures extend to the whole of the UK:

• Those within Part 3 of the Bill. This relates to the establishment of the Personal Accounts Delivery Authority.

96.     The following measures extend only to Northern Ireland:

• Clause 8 on the basis that it deals with National Insurance contributions, which are a reserved matter. This clause amends the Social Security Contributions and Benefits (Northern Ireland) Act 1992 to remove the link between the lower earnings limit and basic pension in Northern Ireland (the same function as clause 7 performs for Great Britain);

• Clause 26, which provides for the application of the policy of parity in mirroring this Bill (see paragraph 98 below); and

• Part 3 of Schedule 7, insofar as that applies to the Act of 1992 mentioned above.

97.     The amendments made by Schedule 5, which relate to the removal of the Secretary of State's role in approving actuarial guidance, have the same extent as the Acts that they amend.

98.     All other measures extend to England and Wales and Scotland but not to Northern Ireland. Pensions legislation is a transferred matter under the Northern Ireland Act 1998 and Northern Ireland has its own body of pensions law but there is a long-standing policy of parity in this area. While the Northern Ireland Assembly is suspended, pensions provision is made by way of Order in Council. It is intended that a Northern Ireland Pensions Order, containing provisions corresponding to those of the Bill, will be made (as set out in clause 26).

99.     The Bill does not contain any measures which affect the powers of the National Assembly for Wales.

100.     Where matters extend to Scotland, it will not be necessary to invoke the Sewel Convention.

COMMENTARY ON CLAUSES

Part 1: State Pension

Clause 1: Category A and B retirement pensions: single contribution condition

101.     At present, the contribution conditions for basic state pension and bereavement benefits are set out in paragraph 5 of Schedule 3 to the SSCBA1992. Clause 1 inserts a new paragraph 5A setting out the new single contribution condition that will apply in certain cases from 6 April 2010.

102.     In order to achieve this:

• -Subsection (3) introduces the new paragraph 5A (the single contribution condition for those reaching state pension age on or after 6 April 2010).

• -Subsection (2) makes a consequential amendment to paragraph 5.

• -Subsection (4) introduces Part 1 of Schedule 1 which will effect the required consequential amendments in respect of the changes made by this clause.

Provisions of new Paragraph 5A of Schedule 3 to the SSCBA1992 as inserted by Clause 1

103.     Sub-paragraph (1) sets out the cases in which the new single contribution condition will apply, as determined by when the contributor concerned reaches state pension age:

• A person reaching state pension age on or after 6 April 2010 will be entitled to a Category A pension on satisfying that condition; and

• A spouse or civil partner of a person reaching state pension age on or after 6 April 2010 (or of a person who dies on or after that date without having reached that age) may substitute or inherit a Category B pension based on that person's Category A pension where the contributor concerned satisfied that condition.

104.     Sub-paragraph (2) sets out the new condition. It requires that, in order to qualify for a full basic state pension, the contributor concerned must have paid or been credited with class 1, 2 or 3 National Insurance contributions for at least 30 "qualifying years" in their working life. In the case of 1987-88 or a later year, it is also sufficient if the person has been credited with earnings. In addition, for each of those 30 years, the person's earnings factor must be not less than the qualifying earnings factor for that year.

105.     Sub-paragraph (3) defines how earnings factors are to be calculated for these purposes. The earnings factor will be calculated with regard to Class 1 contributions paid or treated as paid, or earnings credited, up to the upper earnings limit, together with any Class 2 or 3 contributions for the year.

106.     Sub-paragraph (4) enables regulations to be made which modify paragraph 5A(2) and (3) so they will not prevent people insured under the 1946 and 1965 National Insurance Acts who reach state pension age from 6 April 2010 qualifying for basic state pension (Category A and/or Category B) under the new single contribution condition.

Schedule 1: Part 1: Category A and B retirement pension: single contribution condition

107.     Paragraphs 1 to 3 amend sections 44 (Category A pension), 48A (Category B pension for a married person or civil partner) and 48B (Category B pension for a surviving spouse or civil partner) of the SSCBA1992 to ensure that:

• people reaching state pension age before 6 April 2010 would continue to be entitled to the benefits identified in paragraph 5 of Schedule 3 to the SSCBA1992 on satisfaction by the contributor concerned of the two contribution conditions set out in that paragraph; and

• people who reach state pension age on or after 6 April 2010 would be entitled to a Category A pension on satisfaction of the single contribution condition in paragraph 5A of Schedule 3 to the SSCBA1992; and

• in the case of Category B pensions, entitlement would be calculated by reference to paragraph 5A of Schedule 3 to the SSCBA1992 for people who are:

a)     married to or in a civil partnership with someone who reaches pensionable age on or after 6 April 2010; or

b)     the surviving spouse or civil partner of someone who died on or after 6 April 2010 and did not reach state pension age before that date.

108.     Paragraph 4 amends section 60 of the SSCBA1992. This section allows provision to be made for those who do not satisfy the contribution conditions for certain benefits. As similar provision is made by new section 60A (see below) where only the new single contribution condition needs to be satisfied, it is necessary to exclude the cases where the single condition applies from the scope of section 60.

109.     Paragraph 5 introduces new section 60A. This applies to those cases where only the single contribution condition needs to be satisfied as set out in the new paragraph 5A of Schedule 3.

110.     Subsection (1) of this section provides that this section applies where a person does not satisfy the single contribution condition in order to be entitled to a Category A or Category B pension.

111.     Subsection (2) of this section provides a regulation-making power to allow a person who would have been entitled to benefit by virtue of paragraph 5A, Schedule 3 to the SSCBA1992 but for the fact that the contributor (defined in subsection (4)) has not acquired the full 30 qualifying years nevertheless to be entitled to a prescribed proportion of a full basic state pension for each qualifying year the contributor has built up (defined in subsection (3)). The calculation for determining the pro-rated amount of basic state pension entitlement in these cases will be set out in regulations. This means that the 25% de minimis rule (see regulation 6(1) of the Social Security (Widow's Benefit and Retirement Pensions) Regulations 1979 (S.I.1979/642)), which applies to benefits calculated under paragraph 5, Schedule 3 to the SSCBA1992 will not apply to the benefits to which this section applies.

112.     Subsection (5) of this section would allow the widow, widower or surviving civil partner of an employed earner who dies on or after 6 April 2010 as a result of an industrial injury benefit (section 94(1) of the SSCBA1992) or a prescribed disease or injury (section 108(1)) to inherit a Category B pension (section 48B), even if the contribution condition set out at paragraph 5A of Schedule 3 to the SSCBA1992 is not satisfied by the deceased employed earner. This makes equivalent provision to that made by section 60.

113.     Subsection (6) of this section provides that the reference to the single contribution condition in subsections (1) and (3) includes a reference to that condition as modified by regulations under paragraph 5A(4) of Schedule 3 (i.e. regulations modifying the condition for the purposes of persons who were insured under the National Insurance Act of 1946 or 1965 - see paragraph 107 above).