Pensions Bill deals with state pension age, inflation and auto-enrolment
The new Pensions Bill brings forward the increase in the state pension age for men and women to age 66. It also allows increases to occupational pension income and state second pension to be linked to the consumer prices index and relaxes some of the detailed rules for auto-enrolment.
On this page:
State pension ages
Auto-enrolment
Earnings trigger
Choice of threshold
Use of waiting periods
Use of the consumer prices index
Payment of surplus
Pensions Regulator deadlines
Judicial pensions
Table 1: Changes to state pension age.
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Key points
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The new Pensions Bill (on the Parliament website) currently before Parliament has a range of provisions on state and private pensions that fall into two categories: those intended to cut costs and those intended to cut red tape. Raising the state pension age (SPA), the use of the consumer prices index (CPI) and introducing member contributions for judicial pensions are intended to cut costs. Relaxations to the rules governing auto-enrolment, to the rules governing payments to employers from occupational schemes and to the deadlines for the Pensions Regulator to exercise its powers are planned to ensure the pensions system works more efficiently.
State pension ages
The Bill equalises the SPA for men and women at age 65 by November 2018 - 18 months earlier than under the current legislation - and raises men's and women's SPA to 66 by April 2020, six years earlier than currently provided for. The change will be made by substituting a new schedule in the Pensions Act 1995.
Raising the SPA for women began in April 2010. So, women born after 6 April 1950 currently reach their SPA after age 60. For example, a woman who was born in the period from 6 October 1950 to 5 November 1950 inclusive is to reach SPA on 6 May 2011 (ie at just over age 60 and a half); and a woman who was born in the period from 6 November 1950 to 5 December 1950 inclusive is to reach her SPA on 6 July 2011 (ie at a slightly older age).
Once the new Bill's provisions have been enacted, the existing pattern of increases to women's SPA will continue until 6 April 2016. The Bill changes the pattern after that, as shown in table 1, accelerating the move to an SPA of 65 for women.
Measures in the Pensions Act 2007 had provided for the SPA for men and women to increase from age 65 to age 68 over a period of 22 years beginning on 6 April 2024. The new Pensions Bill, however, scraps the early part of that timescale. It raises men's and women's SPA from age 65 to age 66 between March 2019 and April 2020, as the table shows .
The existing legislation then raises SPA from age 66 to 67 between 2034 and 2036. Those who were born in the period from 6 April 1968 to 5 April 1969 inclusive reach SPA on 12 specified dates so that, for example, those born from 6 April 1968 to 5 May 1968 are to reach SPA on 6 May 2034. Those born after 5 April 1969 but before 6 April 1977 are to reach SPA when they reach age 67.
Finally, the existing legislation raises SPA from 67 to 68 between 2044 and 2046. Those who were born in the period from 6 April 1977 to 5 April 1978 inclusive reach SPA on 12 specified dates so that, for example, those born from 6 April 1977 to 5 May 1977 inclusive reach SPA on 6 May 2044. Those born after 5 April 1978 are to reach SPA when they reach age 68.
Auto-enrolment
The new Pensions Bill also makes changes to the auto-enrolment provisions put in place by the Pensions Act 2008. These changes largely stem from the recent review set up by the Department for Work and Pensions (DWP) and carried out by Paul Johnson, with Adrian Boulding and David Yeandle.
Where jobholders are active members of a qualifying scheme, the employer must not take any action or fail to take action so that the jobholder ceases to be a member of the qualifying scheme, or the scheme ceases to be a qualifying scheme, unless a specified exception applies. One exception is where the employer arranges for the jobholder to become an active member of another qualifying scheme, within a period to be specified by regulations. As the 2008 Act currently stands, however, there is no duty on the employer to re-enrol the jobholder into another qualifying scheme automatically. The employer can do this, but only if the jobholder gives his or her consent. If such consent were not given, the employer could potentially be in breach of the 2008 Act until the next automatic re-enrolment date arose. The new Pensions Bill amends the provision so that it is not contravened if, in compliance with the duty to re-enrol, the jobholder becomes an active member of an automatic enrolment scheme within a period of time to be specified.
Earnings trigger
The Bill amends the Pensions Act 2008 so that automatic enrolment normally only applies to a jobholder who is in receipt of annual earnings of more than £7,475 (with adjustments when the period is less than a year). Under the 2008 Act, auto-enrolment applied to those with any earnings within the band of qualifying earnings, which had originally been proposed to start at £5,035.
The notes to the Pensions Bill explain that the £7,475 earnings trigger is distinct from the band of qualifying earnings on which contributions are payable in the case of a qualifying scheme which is either a money-purchase or a personal pension scheme. Therefore, where the jobholder has been automatically enrolled or re-enrolled, contributions must still be paid if the jobholder's earnings fall below the earnings trigger, but are above the lower limit of the qualifying earnings band.
The Bill provides that the earnings trigger applies to automatic enrolment and re-enrolment except in some specified circumstances when the lower limit of the qualifying earnings band applies. The Bill's notes explain that, in effect, the earnings trigger does not apply to automatic re-enrolment where:
- the jobholder ceases to be an active member of a qualifying scheme, or the scheme ceases to be a qualifying scheme, by reason of something other than an action or omission by the jobholder (this, in particular, creates a re-enrolment obligation where the action or omission is that of the employer); or
- there is a period where the jobholder fails to meet certain eligibility criteria and so ceases to be a jobholder. This could be because they are either not working or ordinarily working in Great Britain for that period or because they are not in receipt of qualifying earnings during that period.
Choice of threshold
In annex B of its impact assessment (external website) of the new Pensions Bill, the DWP states that the primary reason for changing the earnings threshold for automatic enrolment was that there might be individuals who were consistently on low earnings and who would find that the state, through pensions and benefits, provides them with a sufficiently high replacement rate without additional saving. For these individuals it might not be beneficial to redirect income during their working life into pension saving. The second reason for change was to realign thresholds with other current earnings triggers such as the national insurance and tax thresholds.
The review team led by Paul Johnson examined alternative earnings thresholds at which an individual should become eligible for automatic enrolment: the national insurance primary threshold (£5,824), the income tax threshold (£7,475), an aspirational future income tax threshold of £10,190 and the full-time national minimum wage of £14,266. The decision was that the threshold should be £7,475 in 2011/12 earnings terms so that it would be aligned with the threshold for income tax.
The review proposed that individual contributions should be deducted from earnings above the national insurance primary threshold. Choosing this option would ensure that individuals who were automatically enrolled would have their pension contributions calculated on a significant portion of their income. Those who are earning too little to be automatically enrolled will, however, retain the right to opt into automatic enrolment.
Most low earners go on to earn more, and only through saving year on year can they accumulate a pot of reasonable value. The DWP states: "More importantly, in the real world it makes little sense to look at individual replacement rates. Most individuals live in households with others and many low earners are women living with men who earn rather more. It may well be desirable for them to be accumulating a pension pot of their own."
The impact assessment points out that reducing the number of individuals automatically enrolled as a result of increasing the automatic enrolment threshold leads to both administrative and contribution cost savings. Separating the earnings threshold from the lower earnings limit reduces administrative costs associated with those individuals who repeatedly start and then stop making contributions because of fluctuating earnings.
Use of waiting periods
Under the existing arrangements set out in the Pensions Act 2008, employers are to be required to enrol eligible jobholders automatically with effect from the automatic enrolment date, except if the employer offers a high-quality scheme - in which case they may postpone automatic enrolment by three months. There was concern among employers that they would have to meet the costs of enrolling large numbers of jobholders who might work for only short periods. In the event the review team recommended, and the DWP accepted, that a waiting period of up to three months would be acceptable. The DWP states: "In order to balance this easement against the risk to individuals' savings, jobholders will have the opportunity to opt into a qualifying scheme at any point during the waiting period."
The DWP warns that waiting periods may increase opt-out rates because during the time of the waiting period the new employees will receive a "full" wage and will therefore be "more acutely aware of the cost of contributing to a pension when they are eventually enrolled".
Use of the consumer prices index
The Pensions Bill changes indexation of defined-benefit (DB) pensions in payment and the revaluation of the deferred pensions of early leavers from DB schemes as a result of the Government's decision to use the CPI rather than the retail prices index (RPI) as the measure of the "general level of prices". In the normal course of events it is expected that the CPI will prove to be a lower figure than the RPI and so is likely to disadvantage scheme members.
The Pensions Bill amends the Pension Schemes Act 1993 so that pension schemes which provide full, uncapped revaluation of deferred members' preserved pension rights, including guaranteed minimum pensions (GMPs), may do so without referring to the 1993 Act provided that the value of pensions is maintained by reference to the rise in the "general level of prices".
The Bill also makes changes to the Pensions Act 1995 so that pension schemes can continue to increase pensions in payment under the provisions of their own rules, rather than under the new statutory requirements. Instead of increasing pensions in payment in line with the RPI, the scheme rules may increase pensions in line with the RPI, the CPI or a combination of the two, subject to what amendments the rules of each pension scheme allow.
The notes to the Pensions Bill point out that if a pension scheme continues to increase pensions in line with the RPI and has done so continuously from January 2011, or, if later, when the pension first comes into payment, these amendments made by the Bill "will ensure that they need not carry out an annual comparison of the RPI under scheme rules and the CPI under the statutory requirements and pay the higher of the two".
The Pensions Bill also amends the Welfare Reform and Pensions Act 1999, to allow the secretary of state to prescribe that, as a minimum, pension credit arising from pension sharing on divorce and paid by an occupational pension scheme must be increased by reference to the percentage increase in the general level of prices for the purpose of the statutory revaluation requirements.
In relation to the Pension Protection Fund (PPF), the Pensions Bill removes the references to the RPI and replaces it with the reference to the "general level of prices" for the purpose of calculating the increases for compensation paid by the PPF. This gives the secretary of state the power to decide, as he or she thinks fit, the manner in which percentage increases are to be determined and the notes to the Bill cite, for example, the use of the CPI.
The Bill also removes the requirement for cash-balance benefits to be indexed under the requirements of the Pensions Act 1995. At present, legislation requires that members with cash-balance benefits buying or receiving an annuity or being paid a scheme pension must have those pensions increased in line with the limited price indexation provisions, ie for accruals from 1997 to 2005 this is the lower of the RPI and 5%, and for accruals from 2005 it has been the lower of RPI and 2.5%.
Pensions or annuities already in payment before the coming into force of these new provisions will continue to be indexed and will not be affected by the new legislation. Likewise these provisions do not apply to cash-balance benefits in relation to a pension scheme that is, or has been, contracted out using the GMP/reference scheme route.
Payment of surplus
As a result of unintended consequences of s.251 of the Pensions Act 2004, and as we reported previously, if trustees wanted to retain the right to make payments to sponsoring employers they needed to pass an appropriate resolution by 5 April 2011.
The Pensions Bill contains clauses extending the transitional period during which s.251 will apply to 6 April 2016, and so allows trustees more time to review any powers in their scheme's rules to make payments to the employer, decide how such powers should be exercised in the future, and take whatever action they consider is necessary under s.251.
Pensions Regulator deadlines
Currently, the Pensions Regulator must determine to exercise its regulatory functions to issue a contribution notice or a financial support direction within tight deadlines specified by statute. This proved problematic in the case of the financial support decisions imposed on Lehman Brothers, with determinations being issued in the nick of time.
Amendments being made by the Bill provide that those deadlines apply when the regulator issues a warning notice of its intention to exercise its regulatory functions, instead of when the determination to exercise the relevant regulatory function is issued. The amendment also creates a power to specify in regulations a further deadline, after the warning notice is given, beyond which the regulator cannot exercise the relevant regulatory function.
Judicial pensions
The Pensions Bill also deals with judicial pensions.
The Independent Public Service Pension Commission's interim report recommended that the most effective way to make short-term savings on public sector pensions is to increase member contributions. As a consequence, the Bill introduces provisions into the current judicial pension schemes to allow contributions to be required.
Table 1: Changes to state pension age |
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EQUALISATION TIMETABLE FOR STATE PENSION AGE |
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Period within which woman's birthday falls |
Date new SPA age reached |
New SPA in years and months |
6 Apr 1953 - 5 May 1953 |
6 Jul 2016 |
63 yrs 2 mths - 63 yrs 3 mths |
6 May 1953 - 5 Jun 1953 |
6 Nov 2016 |
63 yrs 5 mths - 63 yrs 6 mths |
6 Jun 1953 - 5 Jul 1953 |
6 Mar 2017 |
63 yrs 8 mths - 63 yrs 9 mths |
6 Jul 1953 - 5 Aug 1953 |
6 Jul 2017 |
63 yrs 11 mths - 64 yrs 0 mths |
6 Aug 1953 - 5 Sep 1953 |
6 Nov 2017 |
64 yrs 2 mths - 64 yrs 3 mths |
6 Sep 1953 - 5 Oct 1953 |
6 Mar 2018 |
64 yrs 5 mths - 64 yrs 6 mths |
6 Oct 1953 - 5 Nov 1953 |
6 Jul 2018 |
64 yrs 8 mths - 64 yrs 9 mths |
6 Nov 1953 - 5 Dec 1953 |
6 Nov 2018 |
64 yrs 11 mths - 65 yrs 0 mths |
INCREASE IN STATE PENSION AGE FROM 65 TO 66 (MEN AND WOMEN) |
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Period within which birthday falls |
Date new SPA reached |
New SPA in years and months |
6 Dec 1953 - 5 Jan 1954 |
6 Mar 2019 |
65 yrs 2 mths - 65 yrs 3 mths |
6 Jan 1954 - 5 Feb 1954 |
6 Jul 2019 |
65 yrs 5 mths - 65 yrs 6 mths |
6 Feb 1954 - 5 Mar 1954 |
6 Nov 2019 |
65 yrs 8 mths - 65 yrs 9 mths |
6 Mar 1954 - 5 Apr 1954 |
6 Mar 2020 |
65 yrs 11 mths - 66 yrs 0 mths |
From 6 Apr 1954 |
66th birthday |
66 yrs |
