New Clause 1 - Test scheme standard for schemes that produce sum of money for provision of benefits

Pensions Bill [Lords ] – in a Public Bill Committee at 6:15 pm on 12th July 2011.

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‘(1) In section 22 of the 2008 Act (test scheme standard) after subsection (7) insert—

“(8) In the case of a scheme under which a sum of money is made available for the provision of benefits to a relevant member, references in this section to pensions are to be read as references to such sums.”

(2) For section 23 of the 2008 Act substitute—

“23 Test scheme

(1) A test scheme is an occupational pension scheme which satisfies—

(a) the requirement in subsection (2),

(b) the requirement in subsection (4) or requirements prescribed under subsection (6) (as appropriate), and

(c) any further requirements that are prescribed.

(2) The scheme must either—

(a) provide for a member to be entitled to a pension commencing at the appropriate age and continuing for life, or

(b) provide for a sum of money to be made available for the provision of benefits to a member commencing at the appropriate age and continuing for life.

(3) The appropriate age is 65 or any higher age prescribed.

(4) In the case of a scheme that provides entitlement to a pension as mentioned in subsection (2)(a), the annual rate of the pension at the appropriate age must be—

(a) 1/120th of average qualifying earnings in the last three tax years preceding the end of pensionable service,

multiplied by

(b) the number of years of pensionable service, up to a maximum of 40.

(5) Section 13(1) (qualifying earnings) applies for the purposes of subsection (4) as if the reference to a pay reference period were a reference to a tax year.

(6) In the case of a scheme that provides for a sum of money to be made available as mentioned in subsection (2)(b), regulations must prescribe requirements relating to that sum.”’.—(Steve Webb.)

Brought up, and read the First time.

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

I beg to move, That the clause be read a Second time.

I will explain what new clause 1 does. I hope that members of the Committee will have had the letter that I sent explaining the Government amendments and that they will be familiar with the material.

Sections 21 and 23 of the Pensions Act 2008 set out the quality requirements for defined-benefits schemes used by employers to discharge their enrolment duties. Quality requirements are based on a test of overall scheme quality, which requires employers to compare the pensions from their scheme against a benchmark or model scheme. For some schemes this will be against a test scheme. Certain defined-benefits schemes, in which a member accrues an entitlement to a sum of money to be used to secure a pension within the scheme or purchase an annuity, have been inappropriately classified as hybrid schemes when compared to the benchmark test scheme. This erroneous categorisation means that those schemes are being regulated in a way that is inconsistent with the definition of hybrid scheme in the legislation. As a result, the existing regulations could be outside the scope of the Secretary of State’s powers, and we do not want that. That is ultra vires, as it says in my notes.

New clause 1 is essentially minor and technical. It amends sections 22 and 23 of the Pensions Act 2008 by including a reference to such schemes and introducing a regulation-making power that will enable the Secretary of State to provide for the detailed requirements for a test scheme for such schemes. The introduction of a new equivalent test scheme will allow the test scheme to operate as a straightforward benchmark for employers to use for their previously mis-classified defined-benefits schemes.

I shall clarify the effect of the new clause. The quality requirements have been set at a level that balances promoting individual responsibility for saving towards retirement with ensuring that workplace pensions remain affordable for employers. The new clause will correct an error by ensuring that a certain type of defined-benefits scheme, incorrectly classified as hybrid, can be treated as a defined-benefits scheme and meet the test scheme standard for defined-benefits schemes. It does that by inserting a regulation-making power under section 23, which enables the Secretary of State to prescribe further features of the test scheme under regulations. I stress that the reclassification does not alter the quality requirements for those schemes, except that the quality requirement is now provided for under the legislation relating to defined-benefits schemes rather than the legislation relating to hybrid schemes. I commend new clause 1 to the Committee.

Question put and agreed to.

New clause 1 accordingly read a Second time, and added to the Bill.