Clause 11 - Extension of preservation of benefit under occupational pension schemes

Pension Schemes Bill – in a Public Bill Committee at 2:00 pm on 28th October 2014.

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Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions 2:00 pm, 28th October 2014

I beg to move amendment 9, in clause 11, page 5, line 42, leave out “non-salary related benefit,”.” and insert

“benefit falling within subsection (1A),”;

(b) after subsection (1) insert—

“(1A) The following fall within this subsection—

(a) collective benefits;

(b) benefits calculated otherwise than by reference to the member’s salary.””

This amendment makes it clear that collective benefits are subject to the 30 day preservation rule for the purposes of obtaining short service benefit.

Photo of Peter Bone Peter Bone Conservative, Wellingborough

With this it will be convenient to discuss Government amendments 10 and 11.

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

Good afternoon, Mr Bone. It is pleasure to have you rejoin our proceedings. As I did on several occasions this morning, I will explain the purpose of the clause and then how the amendments improve it. I hope that will avoid the need for a separate clause stand part debate.

Clause 11 amends part 4 of the Pension Schemes Act 1993, which concerns what is known in pensions jargon as the preservation of benefit for early leavers of occupational pension schemes. What happens to the rights that people who leave a scheme leave behind? At the moment, members of occupational pension schemes who leave the scheme early are entitled to payment of the benefit accrued up to that point when they reach normal pension age, provided they have two years’ qualifying service or have previously transferred their rights into the scheme from a personal pension.

Members who leave with more than three months but less than two years’ service are entitled to transfer the value of the benefits they have accrued or receive a refund of their own contributions. The preserved benefit to which deferred members are entitled—termed “short service benefit”—has to be calculated in the same way as it would have been had they remained in pensionable service in the scheme until pension age. The Pensions Act 2014 introduces a requirement that where all the benefits are money purchase benefits, a preserved pension must be provided after 30 days’ qualifying service.

The clause provides that schemes must provide a short service benefit where leavers have at least 30 days’ qualifying service and all the pension benefit is not salary related—that is, not calculated by reference to the member’s salary. If any of the pension benefit is salary related, the two-year rule still applies. Collective benefits will also  be subject to a 30-day preservation period. Where a benefit may be calculated on a salary-related basis in some circumstances and a non-salary-related basis in others—for example an underpin benefit, which pays the higher of the two calculations—it will be treated as salary related for these purposes and the two-year period will apply. If a member’s pensionable service began before the amendments came into force, the previous requirements for preservation of benefits will continue to apply.

Just to explain what is going on here, we have these new types of pension schemes and categories of benefit and we have had to ask, throughout the Bill, what they mean for the features of pension schemes. What do they mean for people who get divorced? What do they mean for people who leave schemes early? What do they mean for companies that wind up? We have had to deal with each one of those different categories. We are dealing here with preservation of benefits.

The clause ensures that the preservation requirements apply appropriately when the new scheme definitions are introduced. Amendments to the Pensions Bill 2014 reduce the period after which the member is entitled to a preserved pension from two years to 30 days in the case of money purchase benefits. The purpose of the clause is to preserve the position that money purchase benefits in an occupational pension scheme should be subject to 30-day preservation and to extend that 30-day period to cover all benefits that are not salary related. That will include all benefits under DC schemes, collective benefits and some benefits in shared-risk schemes.

Shared-risk schemes potentially cover a wide variety of benefit types. Without further amending existing legislation, benefits in shared-risk schemes would be subject to the two-year preservation rule, apart from any benefits arising out of transfers from personal pensions. A two-year preservation period is appropriate for benefits calculated by reference to salary under the current rules. A 30-day preservation period is appropriate for other benefits. It does not impose any additional administrative burdens, and is consistent with Government policy on automatic transfers, automatic enrolment and the contractual rights that apply to members of personal pension schemes.

The amendments put beyond doubt the treatment of collective benefits under the preservation requirements. In part 3 of the Bill we set out a framework for collective benefits. The framework creates the opportunity for a number of different models, and there is the possibility that some collective benefits could arguably fall within the strict legal definition of “salary related” that we drafted for the purpose of the preservation benefits. This would mean the two-year preservation rule might apply with all that goes with it, and that is not appropriate for collective benefits. Collective benefits are not salary related as there is not a promise or benefit related directly to the member’s salary.

Amendments 9 and 10 add a separate reference to collective benefits that puts it beyond doubt that a 30-day rule will apply to collective benefits. The uniform accrual rules are intended to ensure that early leavers are not unfairly treated where the benefit accrues at different rates at different times. For example, if the accrual rate in a salary-related scheme increases after a specified period of time, someone leaving early may not get the benefit. Those rules were crafted for a defined-benefits world and have no relevance to the world of  collective benefits. The usual rule should apply to collective benefits, that is, that short service benefit should be computed on the same basis as long service benefit. Amendment 11 ensures that the uniform accrual rules will not apply to collective benefits.

I hope that is helpful in setting out the purpose of the amendments and of clause 11, and I commend amendment 9 to the Committee.

Amendment 9 agreed to.

Amendments made: 10, in clause 11, page 6, line 15, leave out paragraph (c)

This is consequential on amendment 9.

Amendment 11, in clause 11, page 6, line 47, at end insert—

‘( ) In section 74 (computation of short service benefit), in subsections (3) and (4), after “so much of any benefit” insert “, other than collective benefit,”.”

As a general rule schemes are required to provide for short service benefits to be computed on the same basis as long service benefit. In cases where this doesn‘t apply benefits are subject to a uniform accrual rule. This amendment ensures collective benefits will not be subject to the uniform accrual requirements—(Steve Webb.)

Clause 11, as amended, ordered to stand part of the Bill.