Pensions World

Auto-enrolment and state pension age changes become law as the Pensions Act finally receives the royal assent, says John Wilson, JLT Benefit Solutions

The changes to state pension age (SPA) have been extensively reported in the media and are the main reason that the Pensions Bill took ten months to reach the statute books. So, to avoid further prevarication, the practical impact of the Act in this area is succinctly shown in Tables 1 and 2.

In his Autumn Statement, George Osborne, the Chancellor, announced an accelerated timetable for SPA to reach 67 – 2026, instead of 2034.
The changes do not just affect the individuals concerned. They affect employers and trustees, too; for example, there could be bridging pension issues in schemes that pay higher pensions between normal pension age (NPA) and state pension age (SPA).

Auto-enrolment

The Pensions Act 2011 provides as follows:

• a “jobholder” (worker) will be eligible for auto-enrolment into a pension scheme only where they earn at least the same as the personal allowance for income tax (£7,475 per year in 2011/12 and, subject to a ministerial order, £8,105 in 2012/13). This threshold is distinct from the band of earnings on which minimum contributions are based – the threshold at which contributions become payable is aligned with the national insurance primary threshold (£5,815) and there is also an upper earnings limit for contributions of £38,670 (in 2011/12 terms)
• an employer may defer enrolling an “eligible jobholder” for up to three months; previously, enrolment was normally required from day one
• flexibility to be introduced, through regulations, in respect of the date that workers who have opted out have to be re-enrolled
• the Secretary of State may prescribe an alternative means for employers to certify that their scheme meets the “quality requirements” for an auto-enrolment scheme. This is principally concerned with the test that defined contribution schemes will have to meet in terms of minimum contributions.

Since the Pensions Act 2011 received royal assent, the Pensions Minister, Steve Webb, has announced that there will be changes to the auto-enrolment “staging” timetable for employers with fewer than 3,000 employees; small businesses will not now stage until the start of the next Parliament.

Defining moment

As a result of parliamentary and judicial intervention, the meaning of money purchase has become a real bone of contention.

By way of background, in July 2011, the Supreme Court issued its judgment in the case of Houldsworth vs Bridge Trustees and held, in connection with the wind up of the Imperial Home Décor pension scheme, that certain benefits should be treated as “money purchase benefits” even though it was possible for them to develop funding deficits.

Why is the judgment a problem? According to the Department for Work and Pensions (DWP), pensions law treats money purchase benefits differently from other benefits such as those offered by final salary schemes. A range of provisions exist to protect members of final salary schemes against the risk that their scheme cannot meet the pensions promise (scheme funding, employer debt and the Pension Protection Fund (PPF), to name a few).

The government takes the view that the term “money purchase benefits” should only refer to benefits where there is no risk of a funding deficit whatsoever and that is why the legislative protections for benefits such as final salary benefits do not apply to money purchase benefits.

So if the government had not acted following the judgment, members could find that their schemes were unable to pay their benefits – but they were still not eligible for help from the PPF.

The Pensions Act 2011, with retrospective effect to 1 January 1997, ensures that the definition of “money purchase benefits” only includes those benefits which cannot develop a deficit in funding.

In the House of Lords, Lord Freud provided a more detailed explanation, particularly regarding transitional arrangements that might need to be made.

He was asked about protection for members for whom an annuity might have been purchased by a pension scheme without it being ringfenced for them and responded that the government would legislate to clarify the position if it proved necessary.

RPI/CPI

This relates to the government’s decision, made some time ago, to use CPI (the Consumer Prices Index) rather than RPI (the Retail Prices Index) as the basis for calculating pension increases and revaluation in private and public sector pension schemes.

The implications of the Pensions Act measures are as follows:

• There is no statutory override to impose CPI as the measure for increasing pensions payments. Therefore, the exact impact of the change depends on scheme rules.
• There is no modification power under s68 of the Pensions Act 1995 to facilitate amendments for schemes that want to their pension increase provisions from RPI to CPI.
• There will be no CPI underpin where scheme rules provide for indexation by reference to RPI (there had been a concern that the statutory switch to CPI might result in schemes which use RPI to determine pension increases being required to give the “better of” CPI or RPI). In a change to the original Pensions Bill, the Act now has a comparable provision for the revaluation of deferred pensions.

Steve Webb explained the impact of this change at committee stage and said it would depend on whether the scheme provided indexation and revaluation in accordance with the statutory minimum, or whether it had RPI written into its rules. Three quarters of schemes had RPI written into their scheme rules for indexation, but only a quarter had done this for both indexation and revaluation. The one quarter of schemes with RPI-linked indexation and revaluation would not see a change in their liabilities. Those with RPI-linked indexation but revaluation by the statutory minimum would see liabilities reduce by an average of 16%. Those schemes which did both indexation and revaluation according to the statutory minimum (less than one in five schemes) would see a 20% reduction in liabilities.

As regards the impact on scheme members, the Minister said:
“If a person gets done by CPI on revaluation and CPI on indexation, and they are an average person leaving the scheme 15 years before the end on an average income with average characteristics, it might be a 20% impact over the course of their retirement. So it is an average worst case scenario.”

The impact on individuals would “vary enormously according to age, length of service and so on”.

Finally, a welcome change in the Pensions Act related to indexation is that it also exempts cash balance benefits from the requirement to increase pensions in payment.

Repayment of surplus

Under s251 of the Pensions Act 2004, ongoing schemes, which had a power to repay surplus to the employer, had to adopt a resolution by 5 April 2011 if they wished to retain that power.

There was a lot of confusion over the ambit of this provision and the DWP subsequently announced that s251 would be amended to:

• extend the deadline for passing a resolution to 6 April 2016 and
• to clarify that the provision only applies to payments under s137 of the Pensions Act 1995 (payments of surplus to employers in ongoing scheme). (The Pensions Act 2011 makes it clear that s251 does not apply to payments of surplus to employers on a scheme wind up or payments such as administrative expenses.)

The Act also provides that schemes which have already passed a resolution may, if necessary, pass another one; ie if there is any concern that the first resolution does not have the desired effect or may not be valid then there is an opportunity for a “second bite at the cherry”.