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These notes refer to the Pensions Bill as introduced in the House of Commons on 5th December 2007 [Bill 25]
1. These explanatory notes relate to the Pensions Bill as introduced in the House of Commons on 5th December 2007. 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 does not seem to require any explanation or comment, none is given.
3. The Pensions Commission's 2005 report A New Pension Settlement for the Twenty-First Century contained a series of recommendations regarding the UK pensions system. This Report formed the basis for the Government's White Paper Security in Retirement: towards a new pensions system, published in May 2006. The Pensions Act 2007 legislated for the first part of the reform of the UK pension system.
4. A second White Paper, Personal accounts: a new way to save, published in December 2006, contained further proposals, with an emphasis on private saving, and forms the basis for measures contained in this Bill.
5. For ease of reference when reading these explanatory notes, please note the following abbreviations for existing pieces of legislation amended by the Bill:
Bill 25EN 54/3
6. This Bill introduces two key requirements for employers:
7. The Bill also requires employers to give the Pensions Regulator information about how they will meet their obligations. The Pensions Regulator will be able to use this information to assess compliance with the duties set out in this Bill. The Pensions Regulator will be given powers to enforce these duties and the Bill sets out sanctions, including criminal penalties for failure to comply.
8. Provisions in the Bill extend the functions of the Personal Accounts Delivery Authority, established in the PA 2007, enhancing its powers from advising on to overseeing the establishment of the infrastructure and processes relating to any scheme created under this Bill. In carrying out these functions, the Authority will be required to have regard to a number of guiding principles set out in this Bill.
9. In order to carry out their functions, the bodies mentioned above will need to access data from a range of third parties, and from each other. This Bill includes a number of clauses giving specific powers for this data sharing.
10. Further reforms to the state pension system are contained in this Bill. Due to previous changes in legislation, additional State Pension has been accrued on several different bases over previous years. People therefore retire with a number of different entitlements to additional State Pension, some of which are not calculable ahead of state pension age. The Bill will consolidate those entitlements into a simple cash valuation.
11. The Bill also removes, in most cases, the requirement for people aged 75 or over claiming state pension credit to provide information and evidence on their retirement provision at the end of their assessed income period (usually five years).
12. The Bill makes a number of changes relating to the operation of the Pension Protection Fund and the Pensions Regulator, including enabling Pension Protection Fund compensation to be shared on divorce or dissolution of a marriage or civil partnership.
13. The Bill contains amendments to existing private pension legislation - some of which are based on recommendations made by the Deregulatory Review of Private Pensions (see http://www.dwp.gov.uk/pensionsreform/deregulatory_review.asp).
14. Finally, this Bill contains a number of measures to bring the existing body of pensions-related legislation up to date. For example it will update provisions on re-marriage and war pensions in the PA 1995 to include civil partnerships.
15. The Bill has five Parts:
16. Part 5 contains technical provisions.
17. The provisions of this Bill extend to England and Wales and Scotland, with the exception of those relating to the Personal Accounts Delivery Authority and the scheme established under clause 50 which also extend to Northern Ireland.
18. The Bill's effect in Wales is the same as in England. The Bill contains no provisions that relate exclusively to Wales, or affect the National Assembly for Wales.
19. The Bill generally applies in Scotland as it does in England. One difference relates to the new mechanism of pension compensation sharing on divorce etc (contained in Chapter 1 of Part 3). The power to initiate the mechanism is conferred on courts in England and Wales by amendments of matrimonial and civil partnership legislation (contained in Schedule 5). The Bill does not contain equivalent amendments to the Scottish matrimonial and civil partnership legislation.
20. Because the Sewel Convention provides that Westminster will not normally legislate with regard to devolved matters in Scotland without the consent of the Scottish Parliament, if amendments were introduced that related to such matters the consent of the Scottish Parliament would be sought for them.
Part 1: Pension scheme membership for jobholders
Clause 1: Jobholders
21. This clause defines "jobholder" for the purpose of the employer duty as employees or workers who ordinarily work in Great Britain, are aged between 16 and 75 and who earn qualifying earnings (as defined in clause 11). This clause also provides that where a jobholder has more than one employer, the employer duty provisions apply separately in relation to each employment.
22. This clause prevents an employer in any way facilitating the end of membership (by action or omission) without putting the member into another qualifying scheme (within a time period to be prescribed by Secretary of State). This duty does not apply if the jobholder remains an active member of another qualifying scheme in relation to that employment, or ends membership of their own accord.
23. Clause 3 introduces the employer obligation to automatically enrol jobholders aged between 22 and state pension age into an automatic enrolment scheme when they first meet the criteria in respect of that employment (the "automatic enrolment date" in subsection (6)). As a result of the arrangements, the jobholder's scheme membership is to be backdated to the automatic enrolment date.
24. There is a power which allows the Secretary of State to set out in regulations the steps the employer must take to allow them to arrange for the jobholder to become an active member of an automatic enrolment scheme (subsection (2)).
25. This obligation does not apply if, within a prescribed period, the jobholder has been an active member of a qualifying scheme in that employment, but chose to end membership (subsection (4)).
26. There is a power which enables the Secretary of State to create in regulations an exemption from the employer obligation to automatically enrol jobholders, where the qualifying scheme which the employer uses to discharge his obligation is a personal pension scheme and prescribed conditions are met (subsection (5)).
27. Clause 3 establishes that the effective date of automatic enrolment must be the first day on which the jobholder becomes eligible. Clause 4, however, provides for the possibility of delaying initial automatic enrolment in circumstances described in regulations. A similar delay could be permitted if regulations are made under clause 3 (5) that permit an employer to discharge his obligation using a qualifying personal pension scheme.
28. Employers that delay automatic enrolment may be required to ensure that members remain in such a scheme for a prescribed period of time, unless the jobholder leaves that employment or chooses to leave the scheme.
29. This clause sets out the duty on employers to automatically re-enrol into an automatic enrolment scheme jobholders who are aged at least 22 and under pensionable age and who are not already members of a qualifying scheme.
30. This obligation does not apply if the jobholder has been an active member of a qualifying scheme in that employment, but chose to end membership within a prescribed period before the re-enrolment date (subsection (4)).
31. There is a power which enables the Secretary of State to create in regulations an exemption from the employer obligation to automatically re-enrol jobholders, where the qualifying scheme which the employer uses to discharge his obligation is a personal pension scheme and prescribed conditions are met (subsection (5)).
32. The Secretary of State is to set the dates when the obligation applies in regulations (subsection (6)). The re-enrolment date will not be more than once in a three year period for either each employer or each jobholder.
33. There may be people who are not participating in workplace saving because they opted out or cancelled their active membership, or do not qualify for automatic enrolment because they are aged between 16 and 22 or between pensionable age and age 75.
34. Clause 6 allows jobholders to require their employer to make arrangements to enrol them into an automatic enrolment scheme by giving them notice. The jobholder may not give notice to opt in under this clause more than once in a 12 month period, although this doesn't prohibit the employer allowing employees to join the scheme at other times by agreement.
35. The enrolment process, the details of the notice required and the date from which membership must be effected are to be prescribed in regulations (subsection (5)).
36. There is a power which enables the Secretary of State to create in regulations an exemption from the employer obligation under this clause where the qualifying scheme which the employer uses to discharge his obligation is a personal pension scheme and prescribed conditions are met (subsection (6)).
37. This clause establishes the right of a jobholder who has been automatically enrolled into an automatic enrolment scheme to opt out of that membership by providing a signed notice (the form and content to be provided for in regulations, which must include information relating to the effect of opting out on the jobholder).
38. Once a jobholder has opted out they will be treated as if they had never been a member of that qualifying scheme.
39. The clause provides that any contributions collected from the jobholder (subsection (3)) or the employer (subsection (4)) must be refunded, in accordance with prescribed requirements.
40. The Secretary of State may set out in regulations: (i) the period during which an eligible jobholder can opt out of a qualifying scheme on enrolment or re-enrolment; (ii) how the decision is recorded; (iii) by when the refund must be made; (iv) how this is calculated and (v) the process.
41. This clause sets out that regulations may require information to be provided to the jobholder (and may specify who must provide this information) on the effect on them of automatic enrolment, re-enrolment, postponement of automatic enrolment, giving notice to opt in and the right to opt out. This might include, for example, information about the scheme into which they have been enrolled, what will happen next and their right to opt out of pension saving.
42. Clause 9 gives the Secretary of State power to make regulations requiring employers to provide information to the Pensions Regulator about how they are complying, or intend to comply, with the employer duties, including information relating to the pension schemes that are to be used.
43. This clause allows the Secretary of State to set regulations that require some employers to start discharging their duties under the Chapter before other employers.
44. Subsection (2) gives the Secretary of State the power to modify the requirements within Chapter 1, during a transitional period, depending on the qualifying schemes that employers use or in relation to particular types of jobholder. This subsection will enable employers to phase in their contributions.
Clause 11: Qualifying earnings
45. This clause defines qualifying earnings, by reference to an earnings band, with lower and upper limits of £5,035 and £33,540 (in 2006/07 earnings terms), on which pensions contributions will be calculated. Earning qualifying earnings is also part of the criteria of "jobholder" and so is a factor in determining whether a worker is to be automatically enrolled.
46. The clause then defines the sums which count as earnings by reference to which employer and jobholder contributions will be calculated. The components will be monetary sums comprising: wages/salary, commissions, bonuses, overtime and certain statutory benefits. The clause enables the Secretary of State to set out (in regulations) other sums that can be considered as part of "earnings".
47. The clause provides for the Secretary of State to review annually the value of the "qualifying earnings" lower and upper limits and amend them as he thinks appropriate for maintaining their value. He may use an existing statutory earnings review for the purpose of determining whether the amounts have maintained their value.
48. This clause allows the Secretary of State to prescribe a period for calculating whether an individual has or is likely to have qualifying earnings during the period over which they are normally paid. This is for the purposes of determining whether a worker falls to be automatically enrolled or automatically re-enrolled, in addition to calculating contributions due where money purchase schemes are used for pension savings. Because of the different types of workers and different pay periods used by employers, there is a need to enable the pay reference period to be tailored to specific worker and payment type. For example, agency workers might require a much shorter calculation period than salaried employees.
49. This clause defines a qualifying scheme. Qualifying schemes are those that meet minimum standards and quality requirements, which can be used by employers in discharging their obligations under clause 2.
50. A qualifying scheme can be either an occupational pension scheme or a personal pension scheme. Qualifying schemes must meet the quality requirement for the scheme type (see clauses 18 to 24). They must also be registered under Chapter 2 of Part 4 of the Finance Act 2004, which means that they are registered for tax relief.
51. The Secretary of State may in regulations set out the circumstances in which a scheme, that would otherwise qualify, is not a qualifying scheme. This can be where the payments and contributions that must be made to the scheme exceed a prescribed amount (subsection 2(a) and (b)); or the scheme provides average salary benefits and contains prescribed features (subsection 2(c)).
52. There will be additional requirements on schemes that can be used for the purposes of automatic enrolment, automatic re-enrolment and following notice to opt in. These schemes must be qualifying occupational pension schemes but must also enable automatic enrolment to take place. An automatic enrolment scheme must not require jobholders who are enrolled under clause 3(2), 5(2) or 6(5) to express a choice, or provide information, in order to remain active members. For example, a jobholder will not be required to make a choice about the fund into which their contributions may be invested.
53. Occupational pension schemes are those which fall within the definitions from UK or European legislation set out in paragraphs (a) and (b) or are of a prescribed description if they are based outside of the European Economic Area (EEA).
54. Personal pension schemes are defined as those that fall outside the definition of an occupational pension scheme, and have been established by a person within section 154(1) of the Finance Act 2004.
55. A UK occupational money purchase scheme must have rules that assure an employer contribution of at least 3% of qualifying earnings and total contributions paid by the employer and jobholder of at least 8%.
56. The PA 2007 legislates for the repeal of contracting out arrangements for money purchase schemes currently provided for under the Pension Schemes Act 1993. However, in the event that this has not occurred when the employer duties commence, clause 18 enables regulations to be made modifying the contributions required for money purchase schemes that are contracted-out.
57. It will not be possible to increase the minimum contributions required for money purchase schemes, including the scheme established at clause 50, without amending these sections.
Clause 20: Test scheme standard
Clause 21: Test scheme
59. If a jobholder is in contracted-out employment, evidenced by a certificate issued under section 7(1) of the PSA 1993, the scheme satisfies the quality requirement in relation to that jobholder. This means that the scheme will have passed the Reference Scheme Test (also in the PSA 1993). Subsection (3) enables the Secretary of State to change, by order, the quality requirement where the jobholder is in contracted-out employment. The quality requirement may be changed so that the scheme is required to meet a modified version of the test scheme standard (discussed below) with an accrual rate of no more than 1/80th, should this prove necessary in the future.
60. For jobholders who are members of a defined benefit scheme and are not in contracted-out employment, the scheme must meet the test scheme standard.
61. Clause 20 provides that a scheme satisfies the test scheme standard if it provides benefits that are broadly equivalent to or better than the benefits provided by a model test scheme - set out in clause 21. The comparison to the test scheme must be made by the employer for all of the jobholders they employ who are active members of the scheme and are not in contracted-out employment (relevant members).
62. In making a comparison when applying this section, the pensions of relevant members must be considered together as a whole (subsection (3)). There is a regulation-making power enabling the Secretary of State to set out further detail on how this will be done, and further instructions for conducting the comparison may appear in guidance. Regulations may provide that an actuary will be required to confirm that the scheme meets the test.
63. The test scheme provides a pension for life based on no more than 40 years of accruals at an annual rate of 1/120th (clause 21(3)).
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