Pensions Act 2014

New single tier state pension

The Pensions Act 2014 includes a number of provisions for a new single tier state pension for individuals who attain pension age on or after 6 April 2016. The current basic state pension and additional state pension will be replaced with a flat rate pension set above the level of means tested benefits.

A full rate state pension will be provided to an individual of pension age who has accrued 35 or more qualifying years, whilst a reduced rate of pension will be available for those individuals of pensionable age who have accrued less than 35 qualifying years but more than a minimum number of years (yet to be prescribed).

Transitional rate pensions will be available for individuals with both pre and post commencement (2016) qualifying years.

Increase to state pension age

The Act provides for the pension age to increase from age 66 to age 67 for males and females between 6 April 2026 and 5 April 2028. Every 6 years, the Secretary of State will be required to review and publish a report on pension age taking into account life expectancy and other factors. The first report will be due by 7 May 2017.

Abolition of contracting out for salary related schemes

As a consequence of introducing a flat rate state pension, the Act provides for the cessation of contracting out for defined benefit pension schemes from 6 April 2016.

The Act also contains a power for employers with private sector defined benefit pension schemes to amend the scheme to account for the loss of NI rebates going forward. This may be achieved by increasing member contributions and/or reducing benefit accrual. An actuary will be required to certify that the value of the adjustment is of equal or less value than the annual increase in the employer's NI contributions.

Automatic transfer of pension benefits & merger of pension accounts

The Act contains provisions for the automatic transfer of a members pension rights when they change employer. This is commonly known as 'pot follows member' (PFM). All defined contribution workplace pensions schemes (occupational and personal pension) will be required to transfer rights up to a certain value without needing a members consent to do so. However, members will have the right to opt out of the process.

The transfer value limit is yet to be prescribed (we currently expect this to be circa £10,000) and the Secretary of State will be required to review this limit every 5 years.

In addition, the Act allows the Secretary of State to introduce regulations which provide for a members dormant pension account (where relevant contributions have ceased) to be merged to their current pension account within the same scheme. Regulations may also require that the rules applying to the members current pension account applies to the merged pension account.

Ban on transfer incentives

The Act empowers the Secretary of State to make regulations which prohibit incentive exercises that induce members of defined benefit pension schemes to transfer their rights to any other occupational or personal pension scheme, annuity or other pension arrangement. Civil penalties may apply to persons who contravene these regulations.

Short service refunds

The option for a short service refund will be removed for early leavers of occupational money purchase pension schemes. Contribution refunds will only be available to early leavers with up to 30 days of qualifying service. This will only impact members who join the scheme after this section of the Act comes into force.

Automatic enrolment

The Act contains a power to exempt employers from the automatic enrolment duty. Details will be defined in regulations.

The Act also introduces an alternative quality requirement for defined benefit pension schemes which provide for a minimum contribution of 8% of relevant earnings.

Charges, administration & governance

The Act provides a power for the Secretary of State to set regulations which can restrict the charges that can be imposed on members of relevant schemes and set minimum standards relating to the governance and administration of relevant schemes. The Secretary of State is also required to introduce regulations on disclosing transaction costs and administration charges imposed on members of money purchase occupational pension schemes.

Corporate trustees

The Act contains a power to prohibit a company or Scottish partnership from acting as a trustee at any time when a director of the company has been banned from acting as a trustee. Where this occurs the corporate trustee will be removed as the trustee of the scheme.

Scheme returns

The current requirement to complete an annual scheme return every 3 years will be increased to 5 years for micro schemes with up to 4 members. This applies to occupational and personal pension schemes.

John BaxterComment