Schedule 13 - Abolition of contracting-out for salary related schemes

Pensions Bill – in a Public Bill Committee at 3:45 pm on 4th July 2013.

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Question proposed, that the schedule be the Thirteenth schedule to the Bill.

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

With some menace, I take my ring-binder in my hand at this point, because schedule 13 is detailed, and I am sure that the Committee will want to know what it does.

We are abolishing contracting out, which has been in the pensions system for many decades. I take great pride in abolishing contracting out. It has been a complete nightmare and creates great complexity in pensions. I still meet constituents, as I am sure do all Members, who are baffled by contracting out and do not understand why something has been knocked off their state pension. Contracting out has some extraordinary consequences. We have people whose state pension goes down as a result of being widowed because of interactions with contracted-out occupational pensions schemes. The whole thing is a complete mess, and I am very pleased that schedule 13 paves the way for what is perhaps an underrated aspect of simplification.

I will run through a few things that schedule 13 does. It makes a number of minor amendments to other legislation to take account of the fact that contracting out for salary-related schemes has ceased, so we have to change the tense of the references to contracting out. It includes some new definitions, because contracting out for DC pensions no longer happened after 2012, whereas for DB it will no longer happen after 2016, so we have to introduce the concept of first and second abolition dates. It removes the certification requirements for salary-related schemes to provide a pension of at least the statutory minimum—they are not contracted out any more, so they do not have to meet that test.

Schemes that were contracted out before abolition were expected to comply with the rules relating to the provision of a guaranteed minimum pension, or GMP, at the appropriate age for scheme members who were contracted out before April 1997. Schedule 13 ensures that in the event that the rules of a scheme did not fully comply with those requirements, they will be treated as being compliant with them. That is in order to ensure that such schemes will continue to provide scheme members with GMPs at the appropriate age. The schedule removes the requirement for the Secretary of State to review national insurance rebates every five years, because there ain’t gonna be one.

Although primary legislation is being repealed, the Bill will include transitional arrangements to ensure that contracting out activities do not stop abruptly. For example, notifications that take place before abolition will still be valid afterwards. Schedule 13 amends the early leaver and anti-franking rules so that the abolition of contracting out does not trigger either requirement. That ensures, for example, that someone who stays in a scheme at abolition will not be treated as having left simply because contracting out has ended. The schedule also makes consequential amendments to other primary legislation to take account of the end of contracting out.

I want briefly to flag up one paragraph of schedule 13, on which I know the Committee will be desperate for information. It is on the subject of GMP equalisation, which exercises the industry a great deal, so it would be helpful to put on the record what paragraph 20 of schedule 13 does, and in the commentary on that, I will give the House and the wider world the update for which they are waiting.

GMP equalisation relates to the fact that many schemes have not met what the Government believe to be their legal duty, which is to correct for the effects of uneven state pension ages as part of their pension scheme through the GMP arrangements. It is a contentious issue, but our legal advice on this is unambiguous.

The question of how schemes should best meet their GMP equalisation obligations is a complex one. Paragraph 20 allows for the Secretary of State to provide guidance on something called GMP conversion. Because it is not possible to convert GMPs into scheme benefits unless they have been equalised, this will provide guidance on an alternative method by which schemes can equalise benefits, including GMPs, prior to carrying out conversion.

We have a working group that has met twice so far. It includes such luminaries as representatives of the Association of Consulting Actuaries, the Association of Pension Lawyers, the Institute and Faculty of Actuaries, the Society of Pension Consultants and many of the relevant trade bodies. They have agreed that guidance on GMP conversion would be welcome, and they are working with us on that guidance. Our expectation is that the guidance will be provided by spring 2014. I hope that will be helpful to schemes in relation to those rather knotty and contentious issues, and I hope that schedule 13 contains everything that members of the Committee would expect it to contain.

Question put and agreed to.

Schedule 13 accordingly agreed to.