APPENDIX 4: PENSIONS BILL — GOVERNMENT
AMENDMENT
Supplementary memorandum by the Department for
Work and Pensions
1. I am writing to you about a Government amendment
that I am tabling today which contains regulation making powers
that may be of interest to the Committee.
2. Employer and pensions industry representatives
have expressed concerns about the impact of the quality requirements
for money purchase contributions on existing pension schemes introduced
by this Bill. We have been working with them to find the best
way of addressing these concerns.
3. We are therefore bringing forward an amendment
to allow us to introduce regulations that would enable employers
to certify that their scheme meets the quality standard, while
ensuring individuals do not end up persistently saving below the
minimum level of 8% of qualifying earnings. This reflects our
discussions with stakeholders.
4. A delegated powers memorandum is attached
at annex A and the amendments themselves are at annex B.
5. I am copying this letter to the Secretariat
of the Legislation Committee and the Lords Whips Office.
Annex A
Supplementary Memorandum
New clause after clause 27 - Sections 20, 24 and
26: certification that the quality requirement is satisfied
Powers conferred on : Secretary of State
Powers exercised by : Regulations and
Order (statutory instruments)
Parliamentary procedure : Draft Affirmative
Overview
6. Clauses 20 and 26 set out the quality requirements
for qualifying money purchase schemes. Clause 24(1)(a) enables
the Secretary of State to direct certain hybrid schemes to the
money purchase quality requirement.
7. Qualifying money purchase schemes must have
provisions that require a minimum contribution for each member
equivalent to 8 percent of qualifying earnings 3 percent of which
is made up by the employer. The new clause introduces an alternative
means, through certification, for employers to satisfy the relevant
quality requirement in respect of their workers. The person certifying
the scheme will make a statement that the scheme, in their opinion,
is able to meet the relevant quality requirement in relation to
all the members of the scheme who are jobholders that work for
the employer in question.
Background
8. This amendment has been developed as a concession
in the light of serious concerns of employer and pensions industry
representatives.
9. The concern is that, in the absence of creating
some surety for employers already providing pension provision
above those minimum standards, they will seek to amend their schemes
to exactly match the quality requirements in the Bill (thus ensuring
administrative compliance with the employer duty). This could
mean that they ended up delivering lower pensions to their employees
than were previously provided. This amendment introduces a facility
to provide for a certification procedure to provide that surety.
Powers in the amendment
10. Subsection (1) enables the Secretary of State
through regulations to provide that a scheme satisfies the quality
requirements for money purchase schemes and certain hybrid schemes
if there is a certificate, given in accordance with those regulations,
in force in relation to that employer.
11. Subsection (5) will enable further requirements
in relation to certification to be prescribed in regulations.
12. Subsection(6) makes it clear that regulations
under subsections (1) and (5) may:
a) prescribe the period for which the certificate
is in force - this is likely to be one year;
b) prescribe the persons able to make the certificate;
c) prescribe the certification process;
d) require the person certifying the scheme to
do so in accordance with guidance issued by the Secretary of State;
e) require an employer to calculate the contributions
payable to the scheme by or in respect of a jobholder during the
certification period (in order to assess whether individuals were
due the minimum contributions as required under clauses 20, 24(1)(a)
or 26 within the certification period); and
f) make provision where the requirements of a
scheme or the agreement with a provider do not meet prescribed
conditions. This power is likely to be used to create a degree
of tolerance for schemes that fall slightly below the relevant
quality requirement in certain circumstances to enable them to
continue to satisfy the quality requirement.
13. Subsection (7) confirms that regulations
made under subsection (6)(f) may specify that a scheme will not
satisfy the quality requirement unless prescribed steps are taken.
These steps are likely to be a requirement on employers to identify
and make good individual shortfalls above any tolerance set under
subsection 6(f).
14. Subsection (9) allows the Secretary of State
to repeal this section by Order.
Reason for delegation
Subsection (1) and (6)
15. The quality requirements for money purchase
schemes (which underpin the policy aims of the level of savings)
qualifying under the employer duty are based on a minimum contribution
for each member equivalent to 8 percent of qualifying earnings
of which the employer pays 3 percent. Qualifying earnings are
defined in clause 13. However, many existing schemes use a different
pensionable pay definition from qualifying earnings (often only
concerning themselves with basic salary), but pay a higher percentage
level of pensionable pay. Certification has been introduced as
a concessionary alternative to the quality requirements in clauses
20 and 26 as an easement for such schemes, by enabling employers
to have a degree of surety that their scheme will actually meet
the cash value set by the requirements in clauses 20 and 26 without
having to change their schemes. Delegating the detail of the certification
process and the de-minimis level to regulations will enable the
Secretary of State to consult with a range of stakeholders to
ensure that the new arrangements minimise the burdens on business
but at the same time enable individuals to make the additional
pension saving being targeted by the reforms.
Subsection (6)(d)
16. We have sought the ability for regulations
to require adherence to guidance issued by the Secretary of State
in order to be able to set out a detailed procedure for conducting
the certification. These forms of Secondary legislation would
be appropriate because the certification procedure may involve
technical and detailed instructions including specifications in
respect of data quality. Allowing for technical guidance to support
the regulations will enable the Secretary of State to draw on
the expertise of key scheme professionals, to ensure that the
procedure is workable at all times. The use of regulations and
guidance draws on the existing framework in which the Reference
Scheme Test (s. 12A Pensions Schemes Act 1993) and the Test Scheme
Standard (clauses 21-23) operate.
Subsection (9) (Henry VIII power)
17. It is hoped that the powers under Subsection
(1) and (6) will only be needed on a transitional basis and could
be removed once employers have experience of how the standards
in clauses 20 and 26 work in practice. This is important in order
to confirm the absolute standards set by those provisions. To
facilitate the policy intention a Henry VIII power has been drafted
to enable the Secretary of State to repeal the section by Order.
18. Regulations and an Order made under this
clause will be subject to the draft affirmative procedure to allow
for the appropriate level of legislative scrutiny by Parliament
of a core element of the Government's pension reform agenda
Department for Work and Pensions
November 2008
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