Statute raises state pension age faster and finalises auto-enrolment
The Pensions Bill gained Royal Assent late in 2011. Its principal provisions increase state pension age and offer new flexibility on auto-enrolment. It also makes a number of other changes, including to second-tier state pensions, the indexation of pensions, the Pensions Regulator's powers, payments out of scheme funds to employers and the definition of money purchase.
On this page:
State pension age
Auto-enrolment
Certification
Other changes
Changes to PUCODIs
Consolidation of second-tier pension
Indexation and revaluation for occupational schemes
Pension Protection Fund
Financial Assistance Scheme
Payments to employers
Contribution notices and financial support directions
Defining "money purchase"
Judicial pensions
No indemnification for civil penalties
Grants to advisory bodies
Service of documents
Table 1: Changes to state pension age.
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Key points
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Two of the major issues facing the system of pensions in the UK are the need for more individuals to save more for their retirement and the impact of improving longevity. The main provisions of the Pensions Act 2011 address these two issues by putting the final touches to the auto-enrolment provisions that start to be introduced later this year and raising state pension age faster than originally planned.
Here we look at the Act's provisions.
State pension age
The Act makes various changes and provisions relating to the equalisation of state pension age (SPA) for men and women, and its increase for both sexes. It provides that, for men and women, only those born before 6 December 1953 (rather than those born before 6 April 1959), will continue to reach SPA on or before their 65th birthday. Men and women born after 5 October 1954, but before 6 April 1968, will now reach SPA on their 66th birthday.
The Act amends the timetable setting out when a woman born on a particular date reaches SPA during the transition from 60 to 65. This transition is to be accelerated from July 2016, so that it is completed by November 2018. The SPA for women born between 6 April 1953 and 5 December 1953 will now be between age 63 and 65, instead of being between 63 and 63 and eight months.
A new timetable replaces the original one that provided for the transition from an SPA of 65 to 66 for men and women between April 2024 and April 2026. The revised timetable provides for a transition between March 2019 and October 2020. This will apply to men and women who were born between 6 December 1953 and 5 October 1954.
Further amending measures made by the Act provide that SPA is the 66th birthday for men and women falling between the groups affected by the transition from 65 to 66, and from 66 to 67 (which, under the measures introduced by the Pensions Act 2007, is due to take place between April 2034 and April 2036).
The full timetable is contained in table 1.
Auto-enrolment
The Act makes a number of changes to the auto-enrolment provisions so as to introduce more flexibility. The main changes to the auto-enrolment regime contained in the Act are:
- the introduction of an optional waiting period allowing the auto-enrolment date to be deferred for up to six months, a move which the Government says will help firms employing short-term or seasonal staff;
- the simplification of the process by which employers certify that their scheme meets the requirements of the auto-enrolment regime;
- giving employers greater flexibility to choose an automatic re-enrolment date three months either side of the three-yearly re-enrolment date, which means that they do not have to go through the re-enrolment process every month; and
- increasing the annual earnings threshold for automatic enrolment to £7,475 per year and reviewing it annually.
In a late amendment to the Bill, the Government modified its existing power in respect of pension fund charges to clarify that it has the power to cap the charges imposed by schemes used for auto-enrolment (it was previously expressed so that employers had to apply a minimum proportion of contributions towards benefits). It also extended the power so that it relates to charges applicable to deferred members.
Certification
The 2011 Act amends the Pensions Act 2008 and introduces alternative self-certification arrangements for employers under auto-enrolment. Employers using money-purchase occupational pension schemes, personal pension schemes or hybrid schemes to discharge their enrolment duties will be able to use this provision to certify that their scheme (in the case of hybrid schemes, the money-purchase element) satisfies the relevant quality requirements, provided the scheme satisfies certain alternative requirements now set out in Regulations.
The 2008 Act is amended to provide that the certificate must state that, in the opinion of the person giving it, the scheme being certified either satisfies the relevant quality requirements, or alternative prescribed requirements, throughout the certification period.
New provisions are added into the 2008 Act to stipulate that the alternative requirements that the secretary of state prescribes must meet certain conditions. The requirements must be such that, if all jobholders were active members of schemes to which the legislation applies, for at least 90% of jobholders the total contributions paid by the employer, and the employer and the jobholder together, would not be likely to be less than if the schemes had met the relevant quality requirement.
The secretary of state was required to apply a test when Regulations were first made and thereafter carry out a review to ensure that the test continues to be satisfied. The first review must take place in 2017 and subsequent reviews must take place at least every three years.
The Act enables trustees and managers of occupational pension schemes to modify their scheme by resolution, provided they have the consent of any employer in relation to the scheme, to comply with the certification provisions.
Other changes
As noted at the outset, the Pensions Act 2011 makes a number of other changes.
Changes to PUCODIs
The 2011 Act removes the requirement to provide small top-up amounts known as payable uprated contracted-out deduction increments (PUCODIs). These small top-up amounts have been paid where a person is a member of a contracted-out salary-related scheme and has delayed taking their defined-benefit (DB) occupational pension and so earned increments on their guaranteed minimum pension (GMP), or is the survivor of such a member.
PUCODIs have been paid to take account of the fact that the occupational pension scheme is only responsible for providing limited indexation on the extra amounts gained by the individual for postponing their private pension - the GMP increments. Schemes are not required to provide any indexation on GMP increments accrued between 1978 and 1988, but must provide indexation at the rate of the general level of prices, capped at 3%, on GMPs accrued between 1988 and 1997. (The measure of general prices has now changed from the retail prices index (RPI) to the consumer prices index (CPI).) As a result, the state indexes any GMP increments at the rate of the RPI/CPI for any 1978 to 1988 accruals, and in the event that RPI/CPI exceeds 3% for accruals between 1988 and 1997.
PUCODIs do not apply to any periods of contracted-out employment after April 1997. It should be noted, however, that awards of such PUCODIs that have already been made and are in payment will not be affected.
Consolidation of second-tier pension
The Act provides for the consolidation of additional state pension (the state earnings related pension or the state second pension) to provide a single flat-rate pension. The flat rate replaces bands of different rates of earnings-related accrual. Consolidation will have no impact on a person's overall state pension income over the course of his or her retirement, but can affect the income flow for those who have been contracted out.
In payment, contracted-out pension rights are offset against additional state pension entitlement built up before 1997, meaning a number of individuals gain additional state pension for that period at some time after state pension age. This is because differences in the way private pension schemes increase rights in accrual and pensions in payment, compared with the state scheme, can mean that at SPA a person's additional state pension entitlement for that period might be small, or non-existent, but increase later on in retirement.
Under consolidation, actuarial factors would be applied to a person's contracted-out pension rights in order to smooth the disparities in entitlement that occur during retirement. This is likely to affect around 11 million people who built up contracted-out pension rights between 1978 and 1997. As a result, there are short-term costs to the Exchequer associated with consolidation, in that some additional state pension entitlement for the pre-1997 period would be brought forward to SPA to smooth income over retirement.
Indexation and revaluation for occupational schemes
The Act permits the indexation of DB pensions in payment and the revaluation of the deferred pensions of early leavers from DB schemes in line with the CPI rather than the RPI, as the measure of the "general level of prices". In normal circumstances, the CPI is likely to be the lower figure and therefore the Exchequer and sponsoring employers will benefit.
The Act amends the Pension Schemes Act 1993 so pension schemes that provide full, uncapped revaluation of deferred members' preserved pension rights, including 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". This is only possible where scheme rules require benefits to be revalued in this way.
Similarly, the Act changes 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 CPI, scheme rules may increase pensions in line with the RPI, or a combination of the RPI and CPI, subject to what amendments the rules of each pension scheme allow. In a late amendment, schemes that have used the RPI to uprate pensions in payment continuously since 2011 may continue to do so, even if their rules are silent on the matter. There is no requirement for any scheme to compare the increase under the RPI with the CPI increase and to pay the higher rate.
The Act also removes the requirement for cash-balance benefits to be indexed under the provisions of the 1995 Act. 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: for accruals from 1997 to 2005 this is the lower of the RPI and 5%, and for accruals since 2005 it has been the lower of RPI and 2.5%.
Pensions already in payment before the coming into force of these new provisions will continue to be indexed as previously 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.
Pension Protection Fund
The 2011 Act makes amendments to the Pensions Act 2004 permitting the Pension Protection Fund (PPF), where it is able to do so, to determine the funding position of an eligible pension scheme without obtaining a fresh actuarial valuation in accordance with the relevant requirements of the 2004 Act. These valuations are used by the PPF to decide whether it should accept responsibility for the scheme.
Equivalent provision is made in relation to valuations for closed schemes. Where a scheme has been through an assessment period and has not initially transferred to the PPF, but the scheme's assets have subsequently fallen below its protected liabilities, the PPF will also have the power to determine whether an actuarial valuation is required or whether it can use other information it has in order to decide if the scheme should transfer into the PPF.
The 2011 Act removes the requirement that an assessment period for the PPF must last for a minimum of 12 months.
A change is also made so that the calculation of pension compensation paid to pension credit members includes revaluation, if revaluation would have been applied under the rules of the relevant scheme to the pension credit member's benefits. The revaluation would be based on: the scheme rules for the period from the implementation of a member's pension credit to the day before the start of an assessment period for the PPF; and statutory rules for the period from the start of the assessment period to a member's normal benefit age (the equivalent, for pension credit members, to normal pension age).
The Act also allows for individuals to postpone payment of their pension compensation past their normal pension age. If a person does postpone payment of pension compensation:
- the pension compensation cap would apply as at the time the person first becomes entitled to compensation (their normal pension age);
- revaluation would apply up to a member's normal pension age;
- the PPF must provide an appropriate increase in pension compensation when it comes into payment, calculated on an actuarial basis to take account of the postponement of the start of the payment; and
- commutation of a portion of the pension compensation to which a person is entitled is possible at the time that postponed compensation comes into payment.
The 2011 Act also clarifies provisions of the Pensions Act 2004 requiring recent changes to scheme rules that have the effect of increasing the amount of a scheme's protected liabilities to be disregarded in calculating the amount of compensation to which members of the scheme are entitled. It also clarifies provisions stipulating that discretionary increases to pensions that are either in payment or postponed in the three-year period before the start of an assessment period, which have the effect of increasing the protected liabilities, are disregarded.
Financial Assistance Scheme
The Act makes changes intended to allow the Financial Assistance Scheme (FAS) Regulations to be simplified.
The Act also amends the Pensions Act 2004 by providing for the property, rights and liabilities of pension schemes that qualify for the FAS to be transferred to a "prescribed person" rather than "the scheme manager". It is the intention that the prescribed person will be the secretary of state. This change will allow for the FAS Regulations to make it explicit that assets are transferring to the secretary of state, making the system more transparent.
Payments to employers
The new legislation amends provisions of the Pensions Act 2004 in relation to payments to employers from a scheme. The 2004 Act's provisions had come into force from 6 April 2006 and allowed trustees to pass a resolution to confirm or amend powers in their scheme's rules to make payments to the employer, or to allow such powers to cease to be exercisable. Trustees were required to pass a resolution within five years of the commencement of the provision (ie before 6 April 2011) and to satisfy prescribed requirements for notifying scheme members.
The 2011 Act ensures that those provisions do not apply to payments that trustees can make without having to satisfy the general requirements relating to payments of surplus in relation to the Pensions Act 1995; so an overpaid contribution, for example, could be returned. The Act also extends the transitional period to 6 April 2016.
Contribution notices and financial support directions
The Pensions Act 2004 gave the Pensions Regulator a new power so it could issue contribution notices and financial support directions (FSDs). The regulator had to decide whether to issue a contribution notice or an FSD within a specified period, generally within six years. The 2011 Act provides that the regulator can issue a notice or FSD if the event occurred within six years prior to it issuing a warning notice. This gives the regulator more time in which to exercise these powers. An amendment to the legislation, however, creates a power to allow a period after giving a warning notice beyond which the regulator cannot exercise the relevant regulatory function.
Defining "money purchase"
In the light of the judgment given by the Supreme Court in Houldsworth v Bridge Trustees Ltd, the definition of the term "money purchase benefits" in the Pension Schemes Act 1993 (and equivalent definitions in the Pensions Act 2008 and the Building Societies Act 1986) are amended by the Act. In short, in order for a benefit to qualify as a money-purchase benefit, the amount or rate of the benefit must be calculated only by reference to the assets. The overall aim is to ensure that only benefits which cannot develop a deficit in funding can be money-purchase benefits.
In addition, in the case of a scheme pension in payment, that pension must be backed by an annuity contract or insurance policy to be a money-purchase benefit. Any deductions permitted by statute, such as a lien in respect of loss resulting from a criminal or negligent act, would not affect the classification of the benefit. Provisions introduced into the Pension Schemes Act 1993 and the Pensions Act 2008 provide for this new legislation to have retrospective effect.
Judicial pensions
The Act provides for changes to judicial pensions that will allow contributions to be required towards the cost of providing pension benefits to members of the judicial pension scheme. Contributions will only be taken during the period in which the individual judge is accruing full pension benefits. If the judge retires, resigns or is removed from accruing full pension benefits, such contributions will stop being taken from the date he or she leaves office.
The judicial pension scheme made under the Judicial Pensions and Retirement Act 1993 (JUPRA 1993) applies to specified salaried judicial office-holders who were appointed to judicial office on or after 31 March 1995 or to those judicial office-holders in other judicial pension schemes who have transferred their pension benefits into the JUPRA 1993 scheme.
No indemnification for civil penalties
The Pensions Act 2011 extends the prohibition made in the Pensions Act 2004 on a pension scheme trustee or manager being reimbursed out of scheme funds for fines or penalties payable by the trustee or manager. The extension relates to fines or penalties levied in respect of failings concerning auto-enrolment duties.
Grants to advisory bodies
An addition is made to the Pension Schemes Act 1993 so that the Government can make grants to advisory bodies as the secretary of state sees fit. In particular, the Pensions Regulator currently funds The Pensions Advisory Service, but this change will allow the Government to make grants direct.
Service of documents
In relation to the service of documents and electronic communications, the Act introduces a "service rule", which provides a means of proving that a notice or other document authorised or required by this legislation has been sent to its intended recipient.
Table 1: Changes to state pension age |
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EQUALISATION TIMETABLE FOR STATE PENSION AGE (SPA) |
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Period within which woman's birthday falls |
Date new SPA reached |
New SPA in years and months |
6 April 1953-5 May 1953 |
6 July 2016 |
63 yrs 2 mths-63 yrs 3 mths |
6 May 1953-5 June 1953 |
6 Nov 2016 |
63 yrs 5 mths-63 yrs 6 mths |
6 June 1953-5 July 1953 |
6 Mar 2017 |
63 yrs 8 mths-63 yrs 9 mths |
6 July 1953-5 Aug 1953 |
6 July 2017 |
64 yrs 11 mths-64 yrs |
6 Aug 1953-5 Sept 1953 |
6 Nov 2017 |
64 yrs 2 mths-64 yrs 3 mths |
6 Sept 1953-5 Oct 1953 |
6 Mar 2018 |
64 yrs 5 mths-64 yrs 6 mths |
6 Oct 1953-5 Nov 1953 |
6 July 2018 |
64 yrs 8 mths-64 yrs 9 mths |
6 Nov 1953-5 Dec 1953 |
6 Nov 2018 |
64 yrs 11 mths-65 yrs |
INCREASE IN STATE PENSION AGE (SPA) 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 May 2019 |
65 yrs 3 mths-65 yrs 4 mths |
6 Feb 1954-5 Mar 1954 |
6 Jul 2019 |
65 yrs 4 mths-65 yrs 5 mths |
6 Mar 1954-5 Apr 1954 |
6 Sep 2019 |
65 yrs 5 mths-65 yrs 6 mths |
6 Apr 1954-5 May 1954 |
6 Nov 2019 |
65 yrs 6 mths-65 yrs 7 mths |
6 May 1954-5 Jun 1954 |
6 Jan 2020 |
65 yrs 7 mths-65 yrs 8 mths |
6 Jun 1954-5 Jul 1954 |
6 Mar 2020 |
65 yrs 8 mths-65 yrs 9 mths |
6 Jul 1954-5 Aug 1954 |
6 May 2020 |
65 yrs 9 mths-65 yrs 10 mths |
6 Aug 1954-5 Sep 1954 |
6 Jul 2020 |
65 yrs 10 mths-65 yrs 11 mths |
6 Sep 1954-5 Oct 1954 |
6 Sep 2020 |
65 yrs 11 mths-66 yrs |
6 Oct 1954-5 Apr 1968 |
66th birthday |
66 yrs |
