Pensions Bill 2013
Earlier this year, the Government published a draft of the Pensions Bill 2013 ("the Bill"). Although the Bill's primary focus is to reform state pensions, other changes will affect personal and workplace pension schemes, some of which not least due to a knock on effect from the state pension reform.
This article summarises the key changes we are likely to see once the Bill receives royal assent:
State pension reformWith effect from 2016, the existing basic state pension and State Second Pension (S2P) will be replaced by a flat rate single-tier state pension. The flat rate will be set above the basic level of means-tested support (currently £142.70 a week). The DWP is currently proposing a figure of £144 per week, which will be subject to future increases (equal to the greater of 2.5%, earnings and CPI). The single tier pension will be based on national insurance contributions made by each individual throughout their working life, and therefore it will no longer be possible for married partners to claim a pension based on their working partner's NI records.
State Pension AgeState Pension Age will rise from 66 to 67 for both men and women over the period from April 2026 to March 2028. The Secretary of State will be required to keep the SPA under review in the light of changing life expectancy and other factors it considers relevant, and publish reports at intervals no longer than 6 years, with its first report due before 7 May 2017.
Abolition of contracting out for salary related pension schemesFollowing on from the introduction of the new single tier state pension, contracting out will cease for all salary related pension schemes with effect from 2016. This will have cost implications for those employers who presently sponsor contracted out defined benefit schemes. Currently, such employers can save 3.4% and 1.4% for employees (based on earnings between the upper and lower earnings thresholds). To address these consequences, there will be a statutory power for employers to adjust members' future service benefits or contributions in order to offset the resulting NI cost to employers.
Ban on incentives to transferFollowing a voluntary code of practice issued by the Pensions Minister last year, the Bill confers a power on the Secretary of State to legislate for the prohibition of transfer incentives. Whether such power is exercised may depend upon compliance with the code, and in any event will fall away if the Secretary of State does not exercise it within seven years. Whilst the DWP suggests the prohibition would be aimed at incentives to "non-pension" benefits, the Bill does not make this clear.
Defined contribution pots to follow memberThe Bill sets out the framework for the DWP's proposals of a system whereby small pots of defined contribution benefits automatically transfer with a member when they move from job to job. The proposals follow research which found a quarter of people in the UK had lost track of pensions when they changed jobs. This is only set to get worse now that auto enrolment will mean more people being automatically enrolled into various schemes during their working life. The Bill requires the Secretary of State to make regulations to establish the new automatic transfer system.
Key action point:
- The points above provide an overview of the key changes provided in the Bill, although we may see further changes as it passes through Parliament.