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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 This component will ultimately be withdrawn by around 2030, leaving a flat-rate benefit.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
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.
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
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.
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
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.
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
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.
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
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.
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
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.
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:
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.
94. The Bill is formed of 4 Parts:
95. The following measures extend to the whole of the UK:
96. The following measures extend only to Northern Ireland:
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.
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:
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:
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:
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).
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