Consulting Actuaries

Pensions Bill 2013 - the end of an era?

Royal London Consulting Actuaries

17 June 2013

We take a look at the key points of the Pensions Bill 2013 and consider how these might affect your pension scheme. 

In depth

Read our analysis of TPR's annual funding statement.

The Government's recently published Pensions Bill 2013 contains some significant changes that will alter the pension landscape in the UK.

A number of the fundamental features of UK pension provision will change. Employers and trustees will need to consider how these changes affect their scheme.

Key points of the Pensions Bill 2013 (the Bill)

  • The introduction of a new single tier state pension from 6 April 2016.
  • Contracting-out for defined benefit (DB) pension schemes is to be abolished with effect from 6 April 2016.
  • An additional objective for the Pensions Regulator (TPR) to support sustainable growth for employers with DB schemes.
  • A system of automatic transfers for small defined contribution (DC) pots, of initially up to £10,000.
  • The option of a refund of contributions for DC scheme members will be removed.

The Bill is likely to come into force in Spring 2014.

Single tier state pension

The current state pension system comprises the Basic State Pension, the additional state pension (commonly known as S2P but formerly SERPS), which is linked to earnings, and the pension credit (a means tested benefit). The main purpose of the Bill is to reduce this complexity and implement a new single tier state pension (STP) from 6 April 2016.

The current state pension arrangements are to remain in place for people attaining state pension age before 6 April 2016 and complex transitional arrangements will be introduced to ensure that, at the date of change, people do not lose out. However the details of how this will be achieved are still to be decided.

The Bill also introduces an accelerated timeframe for increasing state pension age from 66 to 67. The new timeframe to do this is now by 2028, eight years earlier than previously planned. Consequently people born between 6 October 1954 and 6 April 1960 will receive their STP at age 66 but those born between 5 March 1961 and 5 April 1977 will receive their STP at age 67. The plan to increase state pension age to 68 for those born after 5 April 1978 is unchanged.

Employers and trustees of DB schemes may wish to review their scheme rules to ensure these changes do not have any unforeseen consequences.

Abolition of DB contracting-out

As a result of the move to a single tier state pension, contracting-out of DB schemes will be abolished with effect from 6 April 2016.

Employers and members of a DB scheme that is still open to future service accrual will see an increase in their National Insurance Contributions (NICs). The Government has indicated its awareness that, in order to mitigate this increase in NICs, and possibly to maintain employees' take home pay, employers may wish to change future service benefits from April 2016.

If the DB scheme's existing amendment rule prevents, for whatever reason, the employer from implementing any changes to future service benefits, the Bill will give the employer overriding power, for a limited period of 5 years, to amend the rules without the consent of the trustees. There will be restrictions on the extent of any changes which can be introduced using this overriding power, including actuarial certification requirements, and prescribed procedures will need to be followed.

Employers should plan to review any DB schemes still open to future service accrual in 2014 or 2015.

New TPR objective

The Bill introduces a new statutory objective for TPR. The new objective will mean that, in the context of its DB scheme funding functions, TPR will be required “to minimise any adverse impact on the sustainable growth of an employer". But what will this mean in practice?

We expect TPR to be more flexible in its regulation of DB scheme funding, particularly around contribution requirements. Indeed, TPR has already given some point to this new objective in their recent annual funding statement.

TPR plans to consult later this year on revisions to its DB scheme funding Code of Practice to reflect the new objective and this should give more insight into the practical impact of the new objective.

Measures impacting DC schemes

Two significant changes are to be introduced which will impact occupational DC schemes.

  • A system of automatic transfers is to be introduced for DC workplace pension schemes. This means that small DC pots, of up to £10,000, will be automatically transferred to a new employer's pension scheme. Although people will be given the opportunity to opt-out. This should help move small pots out of your arrangement.
  • If a member leaves a DC scheme having completed less than 2 years service, the member will no longer be able to take a refund of their contributions. This may lead to an increase in administration costs and employer contributions paid in respect of that member will no longer be available to offset against the cost of future employer contributions. This change only applies to members who join a DC scheme after the Bill is enacted (expected to be Spring 2014).

Find out more

If you would like to discuss the topics above, please contact us.