Clause 94: Pension compensation sharing and attachment on divorce etc

274.     This clause gives effect to Schedule 5 which amends matrimonial and civil partnership legislation so that the Court can make pension compensation sharing orders and orders for the attachment of pension compensation.

Schedule 5: Pension compensation sharing and attachment on divorce etc: England and Wales

275.     Schedule 5 makes various amendments to family legislation to enable the courts to make pension compensation sharing orders and attachment orders in respect of pension compensation paid by the Pension Protection Fund.

276.     Part 1 amends MCA 1973.

277.     New section 24E (Pension compensation sharing orders in connection with divorce proceedings) sets out the circumstances in which a pension compensation sharing order may be made. The circumstances mirror those set out in relation to the making of a pension sharing order in section 24B of the MCA 1973. The effect of this provision is that pension sharing will not be available in relation to rights which have already been shared between parties. Nor will it be available in relation to rights which are the subject of attachment (whether in favour of one of the parties or in favour of a third party)

278.     New section 24F (Pension compensation orders: duty to stay) provides powers to the Lord Chancellor to specify in regulations when the implementation of a sharing order is delayed. This mirrors the existing provision made in relation to pension sharing orders made by section 24C and will allow time for any appeals arising from the order to be heard.

279.     New section 24G (Pension compensation sharing orders: apportionment of charges) mirrors the existing provision made in relation to pension sharing orders by section 24D and provides that a court order may provide for the apportionment of any charge made by the Board of the Pension Protection Fund under clause 91 (charges in respect of compensation sharing costs).

280.     Paragraphs 4 to 6 of the schedule make consequential amendments to other provisions in the MCA 1973 following from the other amendments in the schedule, such as adding necessary cross-references to the new sections.

281.     Paragraph 7 makes provision in the MCA 1973 allowing for the making of attachment orders by inserting new sections 25F and 25G. These ensure that the court may make attachment orders in respect of Pension Protection Fund compensation in a similar way to the making of attachment orders in respect of pensions under the current provisions of sections 25B and 25D of the MCA1973.

282.     An attachment order is an alternative to a pension sharing order that will be available to the court on divorce etc. where one of the parties has rights to pension compensation. It is a less drastic alternative in that it does not involve the complications of dividing the rights. An attachment order simply requires the Board to subtract a specified amount from each payment it makes to one party and send it instead to the other party.

283.     New section 25G (Attachment of pension compensation: supplementary) mirrors section 25D and allows the Lord Chancellor, through regulations, to specify in relation to the implementation of an attachment order under section 25F the manner in which the Pension Protection Fund discharges its liability, the manner in which payment is calculated and is made, and the information to be provided in relation to payments.

284.     Paragraph 8 makes consequential amendments to section 31 (variation, discharge etc of certain orders for financial relief) of the MCA 1973 to reflect the amendments made to that act by this schedule, such as inserting necessary cross-references to the new sections and references to compensation sharing orders.

285.     Paragraph 9 inserts a new section 40B (appeals relating to pension compensation sharing orders which have taken effect) into the MCA 1973. This new section allows the court to make such further orders as required to put the parties, including the Board of the Pensions Protection Fund, in the appropriate position following a successful appeal.

286.     Part 2 of the Schedule makes amendments to the MFPA 1984 so that the provisions of that Act relating to the making of financial provision after overseas settlements on divorce, such as the making of interim orders and orders relating to financial provision and property adjustment also apply to, and enable the making of, orders in relation to Pension Protection Fund compensation under the various provisions inserted into the MCA1973 by this schedule.

287.     Part 3 amends the civil partnership legislation. The amendments correspond with those made to the matrimonial legislation by Part 1.

Clause 95: Consequential amendment

288.     This clause makes a consequential amendment to the PA 2004 following from the creation of pension compensation sharing.

Chapter 2: Other provisions about pension compensation

Clause 96: Amendments of Schedule 7 to the Pensions Act 2004

289.     This clause gives effect to Schedule 6.

Schedule 6: Amendments to Schedule 7 of the Pension Act 2004

290.     This Schedule makes amendments to Schedule 7 of the PA 2004 (Pension Compensation Provisions) relating to the calculation of pension compensation with the aim of improving the way it works.

291.     The amendments in Schedule 6 are intended to -

• clarify, through the amendments made in paragraphs 2,3,10 and 11, the interpretation of admissible rules in paragraph 35 of Schedule 7. This is to clarify that both rule changes and discretionary increases made, in relation to the scheme, in the period immediately before the insolvency event are ignored for the purposes of calculating pension compensation under Schedule 7.

• remove an unintended anomaly in the treatment of pension credit members of schemes which enter the Fund. Through amendments made by paragraphs 4 to 6, where a pension credit member (i.e. a member whose rights derive from a pension sharing order) of a scheme was entitled to revaluation under the scheme in which they were a pension credit member, they will be entitled to receive a revaluation addition under paragraph 21 of Schedule 7 like other scheme members.

• Paragraph 7 provides powers to specify when a person may choose to delay receipt of pension compensation and to receive an adjusted amount from a later date. This provision is to provide for circumstances such as when a person has several small tranches of entitlement under their scheme rules payable at different dates, but would rather delay receipt of the earlier tranches and receive a higher income at a later time.

• Paragraph 8 deals with schemes where the rules of the scheme would provide for a higher, or lower, rate of pension payment after a period of time, (for example, upon the pensioner reaching a certain age). Currently, the compensation provisions in Schedule 7 to the PA 2004 specify that compensation is calculated based on the rate of pension a person would be entitled to on the assessment date, or on reaching their normal pension age. This paragraph will enable compensation to be paid which reflects the level of pension which would have been payable at the time the compensation is paid.

• Paragraph 9 of Schedule 6 removes an unintended anomaly when determining normal pension age by adding the words "or otherwise" to the end of paragraph 34(1) to ensure consistency in meaning between that paragraph and paragraph 34(2).

Part 4: Miscellaneous

Clause 97: Pension sharing: power of Court of Session to extend time limits

292.     When a pension sharing order, or a corresponding order, is made under Scottish matrimonial law in respect of a pension arrangement, for that order to come into effect, it must be received by the person responsible for the pension arrangement together with certain matrimonial documents within two months of the date of the order. One of the persons with an interest in the order may apply to the sheriff for an extension of the two month period, if that period has already expired. Similarly, such an application may be made to the sheriff when such an order is made under Scottish matrimonial law in respect of shareable state pension rights.

293.     In Scotland most divorces are heard by the sheriff but some divorces are heard in the Court of Session. However, there are no powers to enable the Court of Session to extend the two month period on application if it has already expired.

294.     Clause 97 gives the Court of Session the same powers as the sheriff in relation to extending the two month period. The clause replaces the reference to "The sheriff" with "The Court of Session or sheriff" in sections 28(10) and 48(9) of the WRPA 1999. Section 28 concerns the activation of pension sharing under pension arrangements and section 48 deals with the activation of pension sharing from shareable state scheme rights.

295.     This will allow one of the parties with an interest in a pension sharing order or a corresponding order made either by the Court of Session or the sheriff to apply to either jurisdiction for an extension of the two month period in which the matrimonial documents should be received by the person responsible for the pension arrangement or the Secretary of State, if that period has already expired.

Clause 98: Interest on late payment of levies

296.     This clause gives effect to Schedule 7.

Schedule 7: Interest on late payment of levies

297.     Schedule 7 provides the Secretary of State with a discretionary power to make regulations allowing for a prescribed rate of interest to be charged on late payment of: the general levy (paragraph 1) (charged to cover the costs of running, amongst other things, the Pensions Regulator and the Pensions Ombudsman); the Pension Protection Fund administration levy (paragraph 3); the pension protection levy (paragraph 5); the fraud compensation levy (paragraph 7); and the Pensions Protection Fund Ombudsman levy (paragraph 8).

298.     Interest will be due to the creditor of the debt, which is the Secretary of State except in the cases of the pension protection levy and the fraud compensation levy, where the debts payable in relation to these levies are debts to the Board of the Pension Protection Fund.

299.     There is provision for the Regulator to collect interest in respect of all of the levies in the Schedule, on behalf of the Secretary of State or the Board of the Pension Protection Fund.

300.     There may be circumstances in which it would be inappropriate to charge interest on late payment of levies. This Schedule therefore includes a power to prescribe such circumstances in regulations (new section 175A(5)(b) of the PSA 1993, 117A(5)(b), 181A(5)(b) and 189A(5)(b) of the PA 2004).

Clause 99: Intervention by Regulator where scheme's technical provisions improperly determined

301.     Section 222(4)(c) of the PA 2004 requires trustees to follow prescribed principles when determining the actuarial methods and assumptions to be used in the calculation of a scheme's technical provisions. These are prescribed in regulation 5(4) of the Occupational Pension Schemes (Scheme Funding) Regulations 2005 (SI 2005/3377). One of the principles is that the methods and assumptions must be chosen prudently by the trustees. The requirement for prudence implements obligations under the European occupational pensions directive (Directive 2003/41/EC).

302.     Section 222(4)(c) of the PA 2004 is not currently included in the circumstances, set out in section 231(1), in which the Pensions Regulator can exercise its powers (set out in section 231(2)) in respect of the scheme funding provisions. Consequently doubt has arisen as to whether the Pensions Regulator can make use of the powers in section 231(2) if the sole ground of concern is that the actuarial methods or assumptions used in the calculation of the technical provisions do not appear to have been chosen prudently. This clause clarifies that the Regulator can use the powers in section 231(2) where the sole ground of concern is that the actuarial methods or assumptions do not appear to be prudent.

Clause 100: Exclusion of transfers out in certain cases

303.     Subsection (2) of this clause will enable the Secretary of State to make regulations preventing individuals, in prescribed circumstances, from taking advantage of a right under existing legislation to transfer funds from a prescribed pension scheme to another scheme.

304.     The power could be used in particular to limit transfers out of the scheme established under clause 50 in some circumstances, while permitting them in others.

305.     Subsection (3) will similarly give the Secretary of State power to make regulations under section 101F of the PSA 1993 to prevent the transfer of pension credit benefits out of a scheme, and could be used to prevent such transfers out of the scheme established under clause 50 in certain circumstances.

306.     Pension credit benefits (defined in section 101P of the PSA 1993) derive from rights resulting from pension sharing, for example on dissolution of a marriage or civil partnership.

307.     Regulations would state the circumstances in which any such transfers-out of pension credit benefits are prohibited.

Clause 101: Official pensions: adjustment of increases in survivors' pensions

308.     Section 59 of the SSPA 1975 deals with the index-linking of public service pensions. Section 59(5ZA) was inserted in 1990 to prevent an element of "double indexation" arising in relation to the "guaranteed minimum pension" or "GMP" payable to survivors of members of public service pension schemes. Double indexation of the GMP might occur if it is increased by both legislation relating to public service pension schemes and by legislation which provides for index-linking of state pensions.

309.     A GMP arises where a pension scheme member was contracted out of the additional state pension for service between tax years 1978/79 and 1996/97. When a public service pension scheme member dies, a member's widow is entitled to half of a member's GMP, but the member's widower is only entitled to half of the member's GMP accrued since 1988/89.

310.     Section 59(5ZA) fails to take account of the difference in GMP entitlement between widows and widowers and it does not cover civil partners.

311.     This clause amends section 59(5ZA) so that it reflects the different guaranteed minimum pension entitlements of widowers when compared to widows. It also extends the operation of section 59(5ZA) so that it will apply to future payments of pensions to civil partners.

Clause 102: War pensions: effect of later marriage or civil partnership

312.     Clause 102 amends section 168 of the PA 1995. Section 168 provides for the effect of remarriage on receipt of war pensions to widows. It refers only to remarriage and to widows, but the same rules are applied in relation to widowers, and in relation to civil partnership. The Ministry of Defence's war pension's instruments have already been amended to this effect. The clause makes corresponding amendments to section 168.

Clause 103: Polish Resettlement Act 1947: effect of residence in Poland

313.     This clause amends section 1(3) of the Polish Resettlement Act 1947 (c.19) to remove the provision preventing payments being made under the Pensions (Polish Forces) Scheme 1964 (S.I. 1964/2007) to or in respect of beneficiaries who are resident in Poland. This will enable pensions to continue to be paid to beneficiaries who become resident in Poland from 1 May 2004. The clause also enables the Scheme's residency restriction to be retained for beneficiaries who became resident in Poland before that date.

314.     This section also provides a power to make provision in the Scheme for backdated payments to be made to or in respect of those who became resident in Poland from 1 May 2004 to the date the amended section 1(3) comes into force in relation to any part of that period.

Part 5: General

Clause 104: Orders and regulations

315.     Most statutory instruments containing an order or regulations under this Bill will be subject to the negative resolution procedure (i.e. they can be annulled after a resolution of either House of Parliament).

316.     The exceptions are:

• the power to establish a scheme by order (clause 50);

• the power to repeal clause 53 (requirement to have a maximum amount of contributions that may be made by or in respect of a member in any tax year);

• the power for the Secretary of State to make amendments or repeals in connection with establishing a scheme under clause 50 (clause 106(2)); and

• the power for the Secretary of State to appoint commencement dates.

317.     The last of these is not subject to parliamentary procedure. The others are subject to affirmative resolution procedure - that is, a draft must be laid before, and approved by, both Houses of Parliament.

Clause 105: Orders and regulations: supplementary

Clause 106: Power to make further provision

318.     Clause 105 permits an order or regulations under powers conferred by the Bill to include consequential or transitional provisions. It also makes other provision about how those powers may be exercised.

319.     Clause 106 allows the Secretary of State to make further provision in connection with the Bill and, in particular, to amend primary and secondary legislation in connection with the introduction of the scheme to be established under clause 50.

Clause 107: General financial provisions

320.     This clause provides that expenditure incurred by the Secretary of State in consequence of the provisions of this Bill is to be paid out of money provided by Parliament. Any sums received by the Secretary of State as a consequence of the provisions of this Bill will be returned to the Consolidated Fund (the repository for most Government revenues).

Clause 108: Repeals

321.     This clause introduces Schedule 8 which lists the enactments repealed by this Bill.

Clause 109: Commencement

322.     The provisions of this Bill would be brought into force by an order or orders to be made by the Secretary of State with the following exceptions:

• In Part 1, sections 50 to 56 and 61 to 67 (power to establish a pension scheme, and provisions relating to the Personal Accounts Delivery Authority) would come into force on the day on which the Bill becomes an Act.

• Clause 81 (extension of assessed income period for those aged 75 or over) would come into force on 6 April 2009.

• Part 5 (except repeals) would come into force on the day on which the Bill becomes an Act.

Clause 110: Extent

323.     The Bill extends to England and Wales and Scotland. The following provisions also extend to Northern Ireland.

• In Part 1, Chapters 4 & 5 (that is, sections 50 to 67 and Schedule 1)

• Clauses 104 to 106 (relating to orders and regulations) ).

• Clauses 109 to 111.

FINANCIAL EFFECTS OF THE BILL

Tax and benefit payment costs

324.     Any increase in private pension savings generated by these reforms will increase the tax relief paid on pension contributions. Depending on how employers choose to fund their extra pension contributions, there could also be a reduction in receipts from corporation tax or income tax and National Insurance contributions.

325.     To some extent, this may be offset by higher private pension incomes leading to higher tax-receipts and reduced reliance on income related benefits.

326.     The consolidation of the State Second Pension will increase benefit expenditure by around £200 million a year on average in the years 2020-2035 and reduce it thereafter. Overall, this will have a neutral impact on Government expenditure.

327.     The expected total tax and benefit payment cost to government of the Bill is shown in the table below:

Tax and benefit payment costs of the Pensions Bill (2007/08 prices, £million)

Administrative costs

328.     There will be set-up and ongoing running costs to Government in relation to implementing these reforms, such as from providing information to employers on their new duties and setting up the compliance regime to regulate the duty on employers to automatically enrol eligible workers into a workplace pension scheme.

329.     There will also be costs related to the implementation and running of the scheme established under clause 50. In the long-term it is intended that the scheme will be self-financing through revenue raised from membership charges. However, in the early years, costs in setting up and operating the scheme will arise before significant revenues from membership charges are available. Therefore, finance for this period is required from the private sector, the public sector or both.

330.     Regardless of the initial financing strategy, the intention is that the costs associated with the early years funding solution for the scheme would be recovered over time from membership charges.

331.     The Government's intention is for the key reforms - the compliance and enforcement regime and the scheme established at clause 50 - to be delivered through a competitive procurement process to ensure maximum value from the market. The overall cost of this programme will therefore not be finalised until these commercial negotiations have completed. This cannot take place until some time after this Bill has received Royal Assent.

332.     Due to commercial confidentiality and the risk of adversely influencing the commercial process the Government cannot, at this stage of the development, publish its estimated costs of delivering the programme.

EFFECTS OF THE BILL ON PUBLIC SERVICE MANPOWER

333.     The overall effect of the Bill on public service staffing levels is considered to be marginal.

334.     Private sector firms will be able to provide the services needed to deliver the scheme established at clause 50 and parts of the compliance regime. For this reason, these two major parts of the Bill have little effect on public service staffing levels.

SUMMARY OF THE IMPACT ASSESSMENT

335.     A full Impact Assessment is published at the same time as the Bill. Copies are available for Members from the Vote Office. Copies are also available from the Department for Work and Pensions website (www.dwp.gov.uk).

336.     The changes considered in this Impact Assessment give rise to transfers of income between different economic agents and from individuals' working lives to their retirement. The majority of the impacts therefore involve a transfer rather than a resource cost or benefit to the economy. The Government estimates that in the long term these changes will result in a very small increase in national income, as measured by Gross National Product, due to greater savings in the economy. The overall impacts of this package are summarised below.

Impact on individuals

337.     The Government estimates that these changes will lead to 6-9 million people newly saving or saving more in a private pension. This is supported by research evidence on the effectiveness of automatic enrolment at encouraging pension saving, particularly among lower income groups. The combination of a minimum employer contribution of 3 per cent and tax-relief in money purchase schemes will also make saving more worthwhile for many individuals.

338.     These changes will also mean that all those on moderate to low earnings, or who work for a small employer, will have access to an occupational pension scheme.

339.     Any increase in private pension participation is likely to lead to an increase in private pension incomes in the future. The current estimate is that they will increase by around £14 billion by 2050.

340.     The measures to encourage and enable private saving will be supported by further steps to simplify the State Second Pension and existing pensions legislation.