House of Lords - Explanatory Note
Welfare Reform And Pensions Bill - continued          House of Lords

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6. National Insurance contributions (NICs)

The current position

In his 1998 Budget, the Chancellor of the Exchequer announced a package of reforms to the structure of NICs. Most of these changes were introduced in the Social Security Act 1998, and came into effect in April 1999. As a result:

  • The point at which employers start to pay NICs (the employer earnings threshold) is set at the same level as the single person's tax allowance (currently £83 a week) rather than the Lower Earnings Limit (currently £66 a week);

  • Employees no longer have to pay any contributions on earnings up to and including the Lower Earnings Limit, and employers do not pay any contributions on earnings below the employer earnings threshold;

  • The four employer rates of contributions have been replaced by a single rate of 12.2%, and Class 1B contributions have been introduced. Class 1B contributions are paid by employers who enter into a PAYE Settlement Agreement with Inland Revenue for tax.

Recent developments

The Chancellor also announced in 1998 that he would raise the point at which employees start to pay NICs to the level of the single person's tax allowance, as soon as measures were in place to protect people against the benefit losses that would otherwise result. These changes were confirmed in the 1999 Budget. In his 1999 Budget statement, the Chancellor also announced that the Upper Earnings Limit (UEL) for employee contributions would be raised to £535 a week in 2000, and £575 in 2001; and that changes would be made to counter National Insurance avoidance where services are provided through an intermediary.

The measures in the Bill

These Budget changes, including protection for benefit rights on earnings between the Lower Earnings Limit and the new threshold, were introduced as amendments to the Bill at Commons Committee and Report. The Bill also contains various other minor NICs measures.

The NICs measures in the Bill are contained in Part V (clauses 68 - 73 and 76; and Schedules9-11). Clause 68 introduces Schedule 9, which:

  • Introduces a new primary earnings threshold from which employees will start to pay NICs. In two stages, the threshold will be raised to the single persons tax allowance. It is being set at £76 a week in April 2000, with full alignment in April 2001;

  • Protects benefit rights for earnings between the Lower Earnings Limit and the new threshold. This will ensure that people with earnings below the new threshold are not prevented from building up their entitlement to contributory benefits; and

  • Provides for the Upper Earnings Limit (UEL) for employee contributions to be set as a multiple of the new threshold. This will enable it to be raised to £535 a week in 2000 and £575 in 2001, in line with the Chancellor's Budget statement.

Clause 69 introduces Schedule 10, which makes corresponding provision for Northern Ireland.

Clauses 70 and 71 contain new measures to counter National Insurance avoidance where services are provided through an intermediary. Most employers engage staff direct under a contract of services, and pay Class 1 NICs and Pay As You Earn (PAYE) for income tax. They may also hire staff under a contract for services where the person being hired is self-employed. Clauses 70 and 71 concern the situation where an individual is hired through a third party (such as a service company) in order to escape any direct contractual relationship between the client and the worker. This provides scope for avoiding tax and National Insurance, and can also lead to a loss of the worker's legal employment rights. Clause 70 gives the power to ensure that if the client has ongoing control over the manner and method in which a worker carries out a task, any payments made by the client in respect of that worker are treated as earnings for National Insurance purposes. Clause 71 makes corresponding provision for Northern Ireland. Matching tax proposals will be made in the Finance Bill introduced in 2000.

The Bill also contains three further minor NICs measures. These will:

  • alter the way in which the Class 1B rate of NICs payable on items employers include in PAYE settlement agreements (PSAs) is set (clauses 72 & 73). The current legislation permits the Government to vary the rate in regulations independently of the main employer's rate. It is now proposed to tie the rate of Class 1B directly to the rate of employer (Class 1) contributions;

  • remove references in existing legislation to the payment of NICs by means of adhesive stamps (Schedule 13, Parts VI & VII); and

  • make a number of minor amendments and corrections arising from the Social Security Contributions (Transfer of Functions, etc.) Act 1999 (clause 76, which introduces Schedule 11). The amendments do not in any way affect the intention of this Act, which transferred NICs policy and the Contributions Agency to the Inland Revenue.

7. Miscellaneous measures

The Bill also contains various miscellaneous measures. These are:

A number of pensions measures (Clauses 9 - 18 and Schedule 2). The Green Paper A new contract for welfare: PARTNERSHIP IN PENSIONS (Cm 4179, December 1998) explained that the Government will continue to support occupational pension schemes and simplify regulation where possible. The Pensions Act 1995 sets out the framework for regulating occupational pension schemes and to clarify the responsibilities of scheme trustees, advisers and sponsoring employers. Monitoring of this Act in the light of the Government's commitment has identified a case for simplification in some areas and removal of a few anomalies. Four groups of measures are therefore contained in the Bill:

  • provisions relating to the late payment of employee contributions to pension schemes (including personal pension schemes);

  • provisions increasing the compensation payable by the Pension Compensation Scheme;

  • further protection for pensions on bankruptcy - but with provision for recovering excessive contributions made by people who become bankrupt;

  • minor measures, e.g. bringing the reporting periods of the Pension Compensation Board into line.

Extension of entitlement to state Maternity Allowance (clause 48). In his 1999 Budget, the Chancellor of the Exchequer announced a reform of Maternity Allowance so that women earning below the lower earnings limit for National Insurance contributions, but earning at least £30 a week, would be entitled to the benefit for the first time. Clause48, which was added to the Bill at Commons Report stage, makes the necessary changes to the legislation.

Requirement for a National Insurance Number to claim Child Benefit (clause 64). The Social Security Administration (Fraud) Act 1997 introduced a requirement for a National Insurance Number for all claims to all benefits. However, because of the definition of "benefit" used, this requirement does not apply to Child Benefit. This change extends the requirement to Child Benefit.

Sharing of Functions relating to claims and information (clause 66). This clause gives local authorities and central Government further powers to collect and share information relating to benefit claims. At present, local authorities may only deal with claims for Housing Benefit and Council Tax Benefit. However, since they will be key players in delivering the Single Work-Focused Gateway, they will need to be able to handle claims and information relating to a wider range of social security benefits. Clause 66 aims to achieve this. It also ensures that there is no doubt about the ability of other partners in joint working arrangements with local authorities - for example, the Benefits Agency and the Employment Service - to provide the same level of customer service in respect of claims for Housing Benefit and Council Tax Benefit.

Disclosure and use of information (clause 67). This clause will facilitate cross-Government working in a number of social security and employment-related areas. It provides the powers to use and supply information which are needed to deliver the Single Work-Focused Gateway and Employment Zones (see above). It will also ensure that information can be used to best effect in the New Deal for Lone Parents, New Deal for Disabled People, New Deal for Partners of Unemployed People and the new Personal Capability Assessment (see above).

A housing under-occupation scheme (clause 74) which will allow tenants living in the social rented sector (typically, property owned or managed by the local authority or a housing association), who are in receipt of Housing Benefit, to keep part of any benefit saving generated by moving to cheaper and smaller accommodation. It is intended to bring this into force initially on a pilot basis in selected areas.

Information sharing between the Inland Revenue and Child Support Agency (clause 75). This measure will enable the Child Support Agency to undertake a full maintenance assessment of self-employed earnings in cases where a non-resident parent has refused to provide the necessary information. The proposed power will allow the Inland Revenue to disclose tax information in those cases where the Child Support Agency has been unable to obtain the information through any other route.

A power to incur preparatory expenditure in advance of future legislation (clause 77). This enables the Secretary of State to seek specific Parliamentary approval to incur expenditure to prepare for future changes in the functions for which he is responsible (i.e. social security benefits, child support, war pensions), before Royal Assent is given for the Act that would give effect to the change. For example, a new benefit, or major changes to existing provisions, require a significant amount of preparatory work - such as developing and testing new computer systems, and preparing manuals for use by staff. Often such work has a significant lead-in time. This power will enable the Secretary of State to seek the approval of the House of Commons to commence such work, and so avoid the risk of a delay in implementation.

Extending benefit splitting to hardship payments in Jobseeker's Allowance (Schedule8, paragraphs 29(3) to (5)). These are straightforward technical changes to correct anomalies in the Jobseekers Act 1995. All or part of a person's standard income-based JSA can already be paid to a third party where it is in the family's interest to do so. This change extends that power to JSA hardship payments.



Background: the current system

The UK pension system combines a contributory state system, including the State Earnings Related Pension Scheme (SERPS), with a private system of occupational and personal pensions.

All employees and self-employed people, except the very lowest paid, pay National Insurance contributions (NICs). These give entitlement to the basic state pension. In addition, employees, but not the self-employed, have to pay towards a second pension (SERPS) unless they are "contracted out". If they are contracted out of SERPS and belong to a salary-related occupational pension scheme, they pay a lower rate of NICs. Those who belong to contracted-out money purchase schemes pay a partly reduced rate of National Insurance contribution and the balance is refunded periodically to their pension scheme by the Contributions Agency. People with an "appropriate personal pension" (i.e. a contracted-out personal pension) pay the full rate of National Insurance contributions, and a refund is paid into their pension at the end of the tax year.

Occupational pension schemes can be established either

  • on a "salary-related" (or "defined benefit") basis, where the pension received depends on the employee's salary and service history (for example a scheme might pay a pension of one-sixtieth of final salary for each year of service); or

  • on a "money purchase" (or "defined contribution") basis, where the contributions and any NI rebate are invested. On retirement the pension savings are used to buy an annuity; the pension received depends on the investment performance and the annuity rates available at retirement.

There are also some hybrid or "mixed benefit" schemes.

All personal pensions are provided on a money purchase basis.

Occupational pension schemes which are contracted out must satisfy certain conditions. These conditions are designed to ensure that employees in contracted-out schemes, who are benefiting from NI rebates paid by the Government, receive pensions from the scheme which at least equal what they would have received from SERPS. Contracted-out schemes can be salary-related, money purchase or mixed benefit.

Prior to April 1997 in order for a salary-related scheme to contract out it had to promise to provide a Guaranteed Minimum Pension (GMP) which is broadly equivalent to what the SERPS entitlement would have been had the individual not contracted out. In broad terms it must also pay 50% of the GMP to qualifying spouses. Since April 1997 contracted-out salary-related schemes have no longer had to provide a GMP for future service but instead they have to satisfy a scheme-based test (reference scheme test) as one of the requirements for the issue of a contracting-out certificate. GMPs accrued prior to 1997 will still form part of the occupational pension and will broadly continue to be subject to the rules currently in force.

The test requires schemes to meet a statutory standard laid down in the Pensions Act 1995. The scheme actuary will certify that the test is met if the scheme provides benefits broadly equivalent to, or better than, those of the reference scheme. Pensions accruing for pensionable service, in the scheme, from 6 April 1997 are sometimes referred to as section 9(2B) rights.

There is a legislative framework within which occupational and personal pensions have to operate. The framework is designed to protect the interests of scheme members. It includes provisions to ensure that those who leave schemes before retirement can transfer or preserve their accrued rights, that pensions in payment receive some protection against price increases, that schemes are properly run and assets safeguarded and that the benefits scheme members expect to receive are reasonably secure.

In addition, the Occupational Pensions Regulatory Authority (OPRA) was established to enforce some aspects of the occupational pensions regulatory framework. The sale of personal pensions is regulated by the Financial Services Authority (FSA).


This Part of the Bill (clauses 1-8, and Schedule 1) creates a statutory framework which sets out the general principles for a new type of pension scheme, the "stakeholder pension scheme". It is likely that the framework will require adaptation as schemes evolve. In order to provide this flexibility, matters of detail will be set out later in secondary legislation.

A consultation paper on stakeholder pension schemes was published in November 1997. The Government's detailed proposals were set out in the consultation paper A new contract for welfare: PARTNERSHIP IN PENSIONS (Cm 4179), published in December 1998.

Commentary on clauses

Clause 1: meaning of "stakeholder pension scheme"

This clause provides a definition of stakeholder pension schemes which:

  • enables them to be accommodated within much of the existing legislative framework applying to occupational and personal pensions; and

  • sets out a number of additional requirements which schemes will have to meet in order to acquire stakeholder pension scheme "status".

The Pension Schemes Act 1993 currently defines two types of pension scheme - occupational pension schemes and personal pension schemes. Subsection (1) provides for such schemes to be stakeholder pension schemes providing that they are registered as such (clause 2 refers) and meet a number of specific conditions. These conditions are commented on in the following paragraphs. In addition, the subsection provides a power to prescribe other conditions which will give flexibility for the future to set out additional conditions, in the light of experience of operating schemes.

Subsection (2) requires stakeholder pension schemes to be set up under a trust or under any alternative arrangement specified in regulations. Trusts are a legal concept used frequently as the basis for pension schemes, under which one or more persons (the trustees) hold property for the benefit of others, under terms which are usually specified in the trust deed. The regulation-making power will provide the flexibility to enable schemes to be set up on a different basis should other arrangements be identified in the future which provide a comparable degree of security and protection for scheme members' interests.

Subsection (3) provides a power to set out requirements as to the content of the instruments that set up a scheme. Taken together with subsection (2), this provides the basis for defining the structure of stakeholder pension schemes. Regulations will be used to set requirements in relation to, for example:

  • the scope of the trust deed: in particular to ensure that the trust deed gives the trustees control of the scheme so that they are able to appoint and dismiss the organisations or individuals that provide services to the scheme (e.g. actuaries, auditors, administrators, investment managers);

  • the composition of the trustee board: to ensure, for example, that trustees associated with a commercial organisation (which may originally establish the scheme) cannot form a majority of the trustee board, or to require a specified proportion of trustees to be nominated by members of the scheme;

  • whether the schemes should provide additional benefits for scheme members: such as an option to take out life assurance cover, or insurance which provides for contributions to continue to be paid if the member becomes ill or disabled.

Subsection (4) provides that schemes must offer "money purchase" benefits to members. Money purchase benefits are defined in section 181 of the Pension Schemes Act 1993. The main impact will be to exclude schemes which provide benefits related to the member's final salary; unlike occupational pension schemes, there will generally be no organisation to provide the funding commitment required to run stakeholder pension schemes on a salary-related basis. Schemes operating on a money purchase basis must provide benefits which are related to the contributions paid by the members together with the investment returns on those contributions. This will mean that each scheme member would have an identifiable fund of money within the scheme, which is the sum of their contributions and investment returns on those contributions (less charges and expenses). The fund is normally used to purchase an annuity at retirement.

There is also a regulation-making power to prescribe exceptions. This power provides flexibility for the future by allowing the framework to be amended to accommodate schemes which may wish to offer benefits on a suitable alternative basis.

Subsection (5) provides a regulation-making power, which will be used to prescribe requirements in relation to the amount which may be deducted from scheme members' pension funds in respect of charges and expenses. The regulations will set out how any charge is to be calculated, specify limits on the level of the charge, and specify when a charge can be imposed. For example, it is intended that there will be no charge for transfers of funds from stakeholder schemes or for changing contribution levels. Requirements for charges will be reviewed in the light of experience of operating schemes. Providing for these matters by regulation gives some flexibility for the future to amend the charging structure or limits if it becomes appropriate to do so.

Subsection (6) makes it a condition of being a stakeholder pension scheme that a scheme complies with the obligations under section 113 of the Pension Schemes Act 1993. Regulations will set out minimum standards concerning, for example, annual information about the value of a pension, the contributions that have been paid in and charges deducted by the schemes.

Subsection (7) provides that schemes must allow members to make contributions either on a regular basis or as and when they can; many existing personal pensions do not provide this flexibility for their members. The subsection also provides a regulation-making power to prescribe minimum contribution levels, or other restrictions which schemes would be allowed to impose. Setting minimum contribution levels would be used to strike a balance between flexibility for members and the costs to schemes of handling very small contributions. The regulation-making power gives a degree of flexibility to vary these amounts in future if it becomes appropriate to do so.

Subsection (8) provides that stakeholder pension schemes should accept transfers of pension rights from other pension schemes. Because stakeholder pension schemes will fall under the "pension scheme" definitions in Part I of the Pension Schemes Act 1993, members will have an automatic right to a transfer of their rights in occupational and personal pensions to another scheme (subject to certain limitations specified in the 1993 Act). This subsection provides an additional requirement on stakeholder schemes to accept transfer payment in respect of members' rights in other schemes. It will allow members, for example, to consolidate their pension rights into a single fund if they so choose. There is currently no such requirement for occupational and personal pension schemes. But a stakeholder pension scheme would not be required to accept a transfer if this would prejudice its tax-approved or tax-exempt status. A tax-approved or tax-exempt scheme cannot accept transfers from an "unapproved" scheme, as this would be contrary to Inland Revenue rules.

Subsection (9) requires that a stakeholder pension scheme should be approved or exempted by the Commissioners of the Inland Revenue. Approval or exemption confers a number of tax benefits: in particular, contributions by members qualify for income tax relief, and investment returns and capital gains on the scheme's funds are exempt from tax. The conditions for tax approval and the detail of the tax privileges will be set out, as is normal, in a future Finance Bill. The references to certain separate provisions of the Pensions Schemes (Northern Ireland) Act 1993 are necessary to extend clause 1, and the relevant provisions of clause 2, to Northern Ireland: these pensions rules apply to the whole UK.

Clause 2: Registration of stakeholder pension schemes

In addition to meeting the requirements set out in clause 1 (and as stated in clause 1(1)) pension schemes must be registered as stakeholder schemes with the Occupational Pensions Regulatory Authority (OPRA) in order to acquire stakeholder status. This clause defines the procedure for the registration of stakeholder pension schemes and the role of OPRA in relation to this.

Subsection (1) requires OPRA to maintain a register of stakeholder schemes. The register of stakeholder pension schemes will enable members of the public to identify stakeholder schemes, and also provides a basis on which employers can ensure that they comply with the access requirements set out in clause 3.

Subsection (2) requires scheme trustees to support applications for registration with a declaration that the scheme meets all the conditions contained in clause 1. OPRA are required to register schemes on the basis of this application, subject to subsection (3), with a discretionary power to impose a fee for registering schemes.

Subsection (3) gives OPRA a power to refuse to register schemes or to remove schemes from the register if it has evidence that the scheme does not comply, or no longer complies, with the conditions in clause 1.

Subsection (4) gives OPRA the power to sanction trustees who do not ensure that a scheme which applies to register as a stakeholder scheme complies with the requirements in clause 1, and continues to do so once it has been registered. It allows two sanctions from the Pensions Act 1995 to be applied to breaches of this obligation:

  • Section 3 of the 1995 Act allows OPRA to prohibit named individuals from acting as trustees;

  • Section 10 of the 1995 Act provides for civil penalties for trustees who breach certain obligations imposed by the Act.

Subsection (5) provides a criminal sanction for knowingly or recklessly providing misleading information when applying to register a scheme as a stakeholder pension scheme. This is consistent with a number of requirements in the Pensions Act 1995 which are underpinned by criminal sanctions for more serious breaches in relation to occupational pension schemes.

Subsection (6). Section 115 of the Pensions Act 1995 provides that offences under the Pensions Act 1995 committed by corporate bodies or Scottish partnerships apply to individuals, such as a manager, director or partner, in certain circumstances, for example, where the offence has been committed with the consent of that individual. This subsection applies this provision to offences under subsection (5).

Subsection (7) contains a power which provides for the register of stakeholder pension schemes (or copies or extracts from it) to be made available for inspection or supplied to prescribed persons, subject to certain conditions. This power mirrors the existing power in section 6(4) of the Pension Schemes Act 1993, which provides for the register of occupational and personal pensions to be made available for inspection. The intention is for the register to be available for inspection by the general public and by those employers required to offer access to schemes for their employees.

Clause 3: Duty of employers to facilitate access to stakeholder pension schemes

This clause defines the obligation of employers to provide access to stakeholder pension schemes. Subsection (1) provides that, unless regulations state otherwise, any employer who employs relevant employees (subsection (7) refers) must comply with the requirements set out in this clause.

Subsections (2),(3),(4) and (5) define the scope of this requirement:

  • Subsection (2) provides that employers must choose one or more registered stakeholder schemes, at least one of which offers membership to all employees. It is anticipated that trade unions or other membership organisations may set up schemes which are open only to members; if an employer chose such a scheme, and had any employees who were not members of such an organisation, he would have to choose an additional or alternative scheme which was available to all. The subsection also provides that employers must consult with employees and any organisation representing them, such as a trade union, about the choice of scheme;

  • Subsection (3) provides that the employer must inform his employees of the name and address of the designated scheme. There is also a power to prescribe other information which the employer must provide - which gives some flexibility to modify the requirement in the light of experience of operating schemes;

  • Subsection (4) provides that the employer must allow the scheme "reasonable access" to the relevant employees in order to provide information about the scheme. What is "reasonable" is likely to vary according to the nature and size of the employer's business but this could involve the holding of workplace meetings or the distribution of information through pay packets

  • Subsection (5) provides that where an employee who is a member of a qualifying scheme so requests, the employer must deduct the employee's contributions from his wages and pay them to the chosen scheme. The intention is to strike a balance between costs to the employer and flexibility for the member, so there is also a regulation-making power to prescribe restrictions on this requirement. For example, a limit might be placed on how often employees can ask their employer to alter the amount of deduction. It is proposed to consult on precisely how this exemption would apply. A further power to make regulations provides for deductions to be paid to a person other than the chosen scheme. There will be consultation, for example, on the establishment of a clearing house to receive contributions. If a clearing house were established, this power could be used to enable employers to pass contributions to it rather than direct to schemes.

Subsection (6) applies the civil penalties contained in section 10 of the Pensions Act 1995 to breaches of the employer access requirement.

Subsection (7) defines the terms "qualifying schemes" and "relevant employees".

  • A "qualifying scheme" is the employer's designated scheme (or schemes), or if regulations provide, any other stakeholder pension scheme. Initially, it is intended that employers would only be required to make deductions on behalf of employees who are members of their designated scheme(s). If arrangements such as the clearing house are developed, which minimise the additional costs to employers of making payments to a number of different schemes, the regulation-making power will enable the requirement to be extended to other schemes.

  • "relevant employees" are all employees who are not eligible to join that employer's occupational pension scheme and who earn more than the lower earnings limit (defined in section 181 of the Pension Schemes Act 1993). The power to prescribe other classes of employees provides some flexibility to modify the requirement in the light of experience of operating schemes.

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Prepared: 24 May 1999