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On 25 May 2006, the Government published the White Paper Security in retirement: towards a new pensions system, which included proposals to abolish contracting out on a defined contribution (DC) basis. This would apply to both occupational and personal pension schemes and the intention is for this to occur at the same time as the basic State Pension is uprated in line with earnings. This will commence from a date yet to be announced but no earlier than 2012.
The proposal to abolish contracting out for DC schemes will affect COMPS and APPs (including contracted-out Stakeholder Pension schemes) as well as the money purchase sections of Contracted-Out Mixed Benefit Schemes (COMBS). From the date of repeal of DC contracting out, membership of these schemes will no longer attract rebates and active members will cease to accrue new protected rights.
The Government has already introduced some changes that bring the protected rights rules into line with some of the rules which apply to non-protected rights. These include:
- removing the indexation requirement on annuities purchased on or after 6 April 2005
- allowing for protected rights to be taken from age 50 (rising to 55 by 2010)
- a provision for up to 25% of the protected rights fund to be taken, in certain circumstances, as a tax-free lump sum
- a provision for the whole of the fund (50% of the fund where the member is married or in a civil partnership) to be taken as a tax-free lump sum at any age where the member is suffering from serious ill-health.
However, unless the remaining rules that apply only to the protected rights are removed, the existing complexity and administrative burdens will continue. Schemes would have to continue to track these rights separately.
The Government is therefore proposing to remove the remaining conditions that apply to protected rights so that all scheme members' entire money purchase pension funds can always be treated in the same way, e.g. rules applying to purchase of annuities, transfers, payment after death of member etc. This approach presents a number of advantages for schemes and members because it would:
- reduce the administrative burden for schemes as it would no longer be necessary for the protected rights to be tracked separately from the non-protected rights
- in some circumstances, reduce the costs borne by scheme members, for example, in some "with profits" arrangements
- maintain the value of the members' pension funds
- allow members a greater say in how their fund is invested
- potentially make the open market option more straightforward to exercise because members would have just one pot of money that could all be treated in the same way and subject to the same rules
- simplify the annuity purchase process for members, improve members' understanding and reduce members' costs
- allow members and their spouse or civil partner to make a decision about the provision of survivor benefits that is best suited to their circumstances - for example, members could opt for a higher starting pension rather than providing for a survivor benefit.
Particular questions arise out of the proposals and the Government is seeking the views of interested parties. The issues relate to:
- whether the requirement for a scheme to provide a survivor benefit out of protected rights
- whether, when contracting-out is abolished, contracting-out certificates should be surrendered or should automatically cease to have effect
- the nature of the information that should be given to scheme members in advance of abolition and how the communication should take place
- how, after HMRC stops tracking contracted out money purchase schemes, a surviving partner's additional state pension rights should be recorded.
The consultation period is short, running until 13 October 2006.
...back to 21 September 2006
Source:
Abolition of defined contribution (DC) contracting out: treatment of protected rights accrued in the past and proposed operational arrangements
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For Payroll and Human Resource Professionals
