Occupational Pension Schemes (Contracting-out) (Amendment) Regulations 2009

Before I proceed further, I wish to state that in my view this statutory instrument is compatible with the European Convention on Human Rights. Before speaking on the content of the regulations, it may be helpful for the Committee if I set the regulations in context and explain a little of the history behind the accrual of guaranteed minimum pensions. Between 1978 and 1997, if a defined-benefit occupational pension scheme wanted to contract out of the state additional pension, the employer had to agree that the scheme would pay at least a statutory minimum level of benefits—the guaranteed minimum pension. When an employer provides a contracted-out pension scheme, both he and his employees pay a lower level of national insurance contributions. Employees who are contracted out into a defined-benefit occupational scheme forgo all or part of their state additional pension entitlement, and instead receive a private pension from their employer’s scheme. As I explained, the GMP was the minimum benefit that schemes were required to provide. Many schemes offered more generous pension benefits in excess of the GMP; consequently, those schemes have had to record both the GMP and the scheme excess. GMPs ceased to accrue in 1997, and for service beyond 1997 a new standard, the reference scheme test, applies. However, schemes retain liability for GMPs and therefore have to operate two different sets of rules. That has caused complications and extra costs for many schemes. The provisions of the draft Occupational Pension Schemes (Contracting-out) (Amendment) Regulations 2009, together with Sections 24A to 24H of the Pension Schemes Act 1993, will permit the trustees of defined-benefit contracted-out occupational schemes to simplify their scheme structure and reduce the regulatory and administrative burdens placed on them. This new legislation will allow the trustees to convert their GMPs into ordinary scheme benefits which are of at least equal actuarial value. The regulations are technical in nature and complement the detailed provisions for GMP conversion in Sections 24A to 24H of the 1993 Act, which were introduced by Section 14 of the Pensions Act 2007. Those sections set out the conversion conditions that occupational pension schemes must meet in order to convert GMP rights into scheme benefits, provided that the overall actuarial value of the benefit package is maintained. Sections 24B and 24C of the Pension Schemes Act 1993 provide for regulations to be made for the purposes of prescribing the method by which actuarial equivalence is achieved, and for setting out when the scheme receiving the converted GMPs must provide a survivor benefit. These regulations seek to fulfil those requirements. I turn to the detail. The new sections introduced by the Pensions Act 2007 set out five conversion conditions that must be met in order to convert the GMPs. It is only after these conditions have been met that a scheme can extinguish its liability for paying the GMP. The draft Occupational Pension Schemes (Contracting-out) (Amendment) Regulations 2009 facilitate conversion conditions one and four, so I will concentrate only on those two. Conversion condition one requires that the pension a member is entitled to after GMP conversion is actuarially at least equivalent to what it was before conversion. Actuarial equivalence allows the whole structure of benefits already accrued in a pension scheme to be changed while maintaining their actuarial value. It is a concept that has been in existence for some time and is often used for private pension schemes. For the purposes of GMP conversion, it is the scheme trustees who will decide whether the GMPs held in a scheme should be converted into equivalent scheme benefits. If the trustees do decide to convert GMPs, they are required to seek advice from an actuary about the actuarial assumptions to be used. In deciding what assumptions are to be used, the trustees and actuary will need to refer to the provisions set out in the draft Occupational Pension Schemes (Contracting-out) (Amendment) Regulations 2009. In order to ensure that actuarial equivalence has been achieved, the scheme trustees must arrange for the actuary to calculate the actuarial values of the pre- and post-conversion benefits. It is only after the actuary is satisfied that actuarial equivalence has been met that the actuary will provide a certificate to certify that condition one has been satisfied; that is, that the post-conversion benefits are actuarially at least equivalent to pre-conversion benefits. The actuary is also required to provide the trustees with a certificate within three months. I turn to conversion condition four, which seeks to protect the position of the spouse or civil partner post-conversion in the event of a member’s death. Currently, on the death of a member, a contracted-out occupational pension scheme is required to pay a survivor benefit based on the earner’s accrued GMP rights. Section 24D of the Pension Schemes Act 1993 sets out the current survivor benefit requirements, which are that in the relevant circumstances, a widow is entitled to a survivor benefit based on her husband’s accrued GMP from 1978 to 1997. A widower or surviving civil partner is entitled to a survivor benefit based on the earner’s accrued GMP from 1988 to 1997. After conversion, a requirement to provide a survivor benefit is retained based on the scheme pension earned from 1978 to 1997 or from 1988 to 1997 as the case may be. The requirement seeks to protect the position of the beneficiaries whose additional state pension will be subject to a contracted-out deduction following the member’s death. Section 24C of the 1993 Act requires regulations to be made for the purpose of prescribing the circumstances in which and the periods for which the survivor benefits are payable from the new scheme benefit; that is, after the conversion of the GMP. The circumstances under which a survivor benefit is payable after conversion remain the same as those which apply before conversion, as does the period for which it is payable. The survivor benefit rules are complex, and in their simple terms, the regulations require that the survivor benefit may be withdrawn where the survivor is not in receipt of a relevant benefit such as widowed carer’s allowance, widowed mother’s allowance, widow’s pension or bereavement allowance, or where the survivor is aged over 45 and has remarried, formed a civil partnership, or is living with somebody as husband and wife. In summary, although the regulations may appear complex, they simply ensure that post-conversion benefits are actuarially at least equivalent to the pre-conversion benefits and that the current rules which specify when and for what period a survivor benefit is payable are retained post-conversion. These regulations are to facilitate GMP conversion and thus enable contracted-out defined benefit occupational pension schemes to simplify their benefit structures by moving to one set of scheme rules. Schemes that undergo a conversion exercise will benefit from no longer having to purchase advice for GMP calculations, no longer having to deal with queries from members on GMPs, simpler awards of benefit where pensions become payable, and a single approach to the annual uprating of pensions in payment. Finally, I should point out that the facility to convert GMPs is purely an optional one which is being made available to schemes. The requirements of these regulations become mandatory only at the point at which a scheme decides it wishes to convert its GMPs. I commend these regulations to noble Lords.