STATE PENSION SCHEME
OVERVIEW
There will be a minimum income guarantee for all pensioners, paid through Income Support, increasing year by year as resources allow with the aim over the longer term of matching earnings inflation. From April 1999, the minimum income will be at least £75 a week for single pensioners and £116.60 a week for couples.
The basic state pension will remain a non-means tested benefit and will increase at least in line with price inflation.
The State Earnings Related Pension Scheme (SERPS) will be replaced by a new second-tier pension called the State Second Pension which will be implemented from April 2002 at the earliest. The contracting-out option for occupational pension schemes will continue in relation to the State Second Pension.
STATE SECOND PENSION - FIRST STAGE
There will be three bands of entitlement to the State Second Pension.
Those earning up to £9,000 a year ("low earners")
Low earners will be treated as if they earned £9,000 and as a result will receive at least double the value of pension which they would have received from SERPS.
Carers (including those looking after children under the age of 5) and disabled people with broken work records will also receive credits into the State Second Pension as if they had earnings of £9,000 a year.
Those earning between £9,000 and £18,500 a year ("moderate earners")
Moderate earners will also get double the value of a SERPS pension on their first £9,000 a year of earnings, with a more modest increase on earnings above £9,000 tapering to zero at £18,500 a year. To encourage more people to fund for their own pension, contracting-out rebates will be increased for moderate earners.
Those earning above £18,500 a year ("higher earners")
The position of higher earners will remain the same as it is under SERPS.
It is expected that most low earners will remain in the new State Second Pension unless they can join an employer's pension scheme which offers a better deal. Moderate earners and higher earners will have a choice of remaining in the new State Second Pension or contracting-out by joining a funded pension arrangement. Those already in good occupational pension schemes would be expected to remain in them.
STATE SECOND PENSION - SECOND STAGE
It is proposed that once stakeholder pension schemes (see below) have established themselves, the State Second Pension will become a flat-rate scheme for lower earners, with moderate earners and higher earners joining a funded pension arrangement (with contracted-out rebates continuing to be earnings related). The move towards the second stage might begin five years after the introduction of stakeholder pension schemes i.e. not before April 2007.
The continued higher level of rebates at the second stage means that there will be a strong incentive for anyone earning over £9,000 a year to contract-out of the State Second Pension through a funded pension arrangement.
Although there have been many calls over the years for the simplification (or even abolition) of contracting-out arrangements, it seems likely that the position will become more complicated and the choices more difficult to make.
STAKEHOLDER PENSION SCHEMES
REGULATORY FRAMEWORK
The Government intends to introduce a new regulatory framework for stakeholder pension schemes, aiming to ensure that everyone who is not already in a pension scheme will have easy access to one. Stakeholder pensions will be available to all, but are primarily designed to help moderate earners start their own pension arrangement, including the self-employed who are not in SERPS anyway. However, in due course, it is expected to benefit those on higher incomes too, in particular, those who have personal pensions which are subject to higher charges.
Stakeholder pension schemes will be available no earlier than April 2001.
The proposed regulatory requirements will be, in summary:
- a collective arrangement established under trust, akin to an occupational pension scheme (other types of governance may be considered at a later stage)
- simple charging structure, with maximum charging levels
- annual information about the level of expected pension, contributions paid and charges deducted
- minimum contributions not more than a specified amount, and one-off or regular contributions above this amount accepted at any time
- the right to stop and re-start contributions without penalty, make outgoing transfers without penalty and require the acceptance of incoming transfers
- limitations on when and how benefits can be taken similar to those applying to a personal pension
- in certain circumstances, those working to be able to make contributions for their non-working spouses/partners
- tax regime yet to be decided, but indicated to be similar to other pension schemes, with a maximum contribution limit of £3,600 a year (which can be continued for up to 5 years after ceasing work), and savings held in the new individual savings accounts (ISAs) able to be transferred in
- members of a stakeholder pension scheme cannot also at the same time participate in an occupational pension scheme or a group or individual personal pension scheme
- employers who do not offer an occupational pension scheme to all their employees must offer access to at least one nominated stakeholder pension scheme, provide information about it to their employees and deduct contributions from their pay and pass them to the scheme (at this time there will be no compulsion on employers to contribute, but it will be open to employers to do so). It is suggested that employees should have some say in the choice of the nominated stakeholder pension scheme.
KEY FEATURES
Stakeholder pension schemes will provide money purchase benefits, which depend on the value of the accumulated fund and the annuity rates available at the time of retirement. Individuals will be able to contract out of SERPS using stakeholder pension schemes.
Employers who already offer an occupational pension scheme to all employees will not be directly affected. Occupational money purchase (defined contribution) pension schemes could qualify as stakeholder pension schemes if they meet all the requirements, but not personal pension schemes which allow the provider to retain overall control. Therefore, it seems that employers who currently offer group personal pension schemes will also (or instead) have to offer access to a stakeholder pension scheme.
As stakeholder pension schemes are expected to be considerably simpler to manage than occupational money purchase pension schemes, it is possible that employers will choose to apply to have their occupational money purchase pension schemes authorised as stakeholder pension schemes for the majority of their employees, and keep a separate occupational pension scheme only for the more highly paid.
Stakeholder pension schemes will generally be large and the provider, administrator, and investment managers could all be different organisations appointed by the trustees. Providers might be an employer or group of employers, trade unions or financial services companies. An insurance company could set up a stakeholder scheme, but the trustees would be under an obligation to review the insurance company's performance and appoint another provider if appropriate.
Stakeholder pension schemes may replace existing personal and occupational pension schemes for all but the largest employers (and the more highly paid individuals) as for the great majority of employers and individuals the new arrangements are likely to represent a better deal. It is suggested that only the largest employers will find it attractive to continue to provide final salary (defined benefit) occupational pension schemes where a specific level of pension is promised.
Stakeholder pension schemes will be regulated by the Occupational Pensions Regulatory Authority (OPRA) and the main relevant provisions of the Pensions Act 1995 will apply. The Financial Services Authority (FSA) will be responsible for the marketing of stakeholder pension schemes and the investment management of their assets.
One area of debate is certain to be the availability of financial advice about the most suitable pension option for an individual, particularly since it seems that most of the current options will remain. The Government appears to be emphasising self-help and the use of standardised decision-making "trees". The emphasis on low charges, and the relatively low levels of contributions, suggests that little professional advice will be available.
OCCUPATIONAL PENSION SCHEMES
UPDATING THE REGULATIONS
The Government has produced a separate consultation document - Strengthening the Pensions Framework - about its proposals to update the legislation governing occupational pension schemes. Comments to the DSS are invited by 12 February 1999.
The Government acknowledges that occupational pension schemes provide affordable and secure pensions for millions of people. It proposes to encourage more people to join them, simplify their operation and strengthen their regulatory framework.
To encourage people to join, it is suggested that employers will be allowed to make membership of their occupational pension scheme a condition of employment, subject to employees having the right to opt out if the following requirements are met (although the Government is still seeking views on this):
- the employee receives a clear statement of the rights he/she is giving up, and confirms explicitly his/her wish to opt out
- the employee certifies that he/she has alternative adequate provision
- the employee shows that he/she has taken advice and that advice confirms that the alternative provision is adequate or equivalent.
SIMPLIFICATION
The Government intends to simplify regulations for occupational pension schemes provided that this does not jeopardise security. Its proposals include:
- simplifying the contracting-out regime in relation to SERPS (suggestions include converting Guaranteed Minimum Pensions (GMPs) into pension benefits of an equivalent value)
- simpler and more flexible procedures for selecting member-nominated trustees. However, employers would no longer be able to opt out of the requirements entirely (currently allowed under the Pensions Act 1995) so that most schemes would be required to have at least one third member-nominated trustees, and large mature schemes would be required to have a pensioner trustee
- removing some of the regulatory requirements for certain types of scheme, including where all members are trustees or directors of the trustee company (usually small self-administered schemes), insured money purchase schemes, frozen schemes, industry-wide schemes and money purchase schemes in the course of winding up.
Other possible changes include:
- late payment by an employer of employees' contributions to be made a civil offence rather than a criminal offence (except in the most serious cases) to enable OPRA to apply penalties more readily
- changes to the compensation scheme where assets have been improperly removed from pension schemes
- requiring occupational money purchase pension schemes to provide members with annual statements of their projected pensions at retirement in terms of today's spending power
- extending the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) to cover rights under occupational pension schemes for employees on the sale of a business
- requiring trustees to disclose their stance on ethical investments in their statement of investment principles.
The change to TUPE is likely to create significant problems for employers, particularly those involved in the contracting-out of services such as cleaning and catering.
TAX CHANGES
Proposed changes to the tax regime for occupational pension schemes include:
- flexible payment of pensions between ages 50 and 75, irrespective of whether the member has actually retired
- additional voluntary contribution benefits to be taken at any age between 50 and 75, irrespective of when the corresponding benefits under an employer's pension scheme are taken
- income drawdown for insured money purchase schemes from age 50 with the ability to postpone the purchase of an annuity to age 75.
Members are likely to welcome these changes, while trustees will find that this will add even greater complexity to the arrangements they have to administer.
FURTHER INFORMATION
If you would like further information on the Green Paper, or any aspects of the law relating to pensions, please call the Human Resources Department at Norton Rose.
This note is intended to provide general information about some recent and anticipated developments which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.