Schedule 3 - Early leavers: transfer values

Pension Schemes Bill – in a Public Bill Committee at 2:15 pm on 28th October 2014.

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Amendment made: 57, in schedule 3, page 31, line 15, at end insert—

‘( ) In subsection (2A)—

(a) in paragraph (a), after sub-paragraph (ix) insert—

“(x) regulations made under Part 3 of the Pension Schemes Act 2014;”;

(b) in paragraph (b), after sub-paragraph (vii) insert—

“(viii) regulations made under section (Regulations under Part 3: overriding requirements) of the Pension Schemes Act 2014.”’—(Steve Webb.)

This inserts additional references into the definition of “relevant legislative provision” in section 94 of the Pension Schemes Act 1993 and is consequential on NC11.

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

I beg to move amendment 5, in schedule 3, page 32, line 29, at end insert—

“Pension credits: transfer values

10 Chapter 2 of Part 4A of the Pension Schemes Act 1993 (pension credit benefit: transfer values) is amended as follows.

11 In section 101F (power to give transfer notice), in subsection (4)(a), for “salary related occupational pension scheme” substitute “scheme to which section 101H applies”.

12 In section 101G (restrictions on power to give transfer notice), in subsection (1), for “salary related occupational pension scheme” substitute “scheme to which section 101H applies”.

13 (1) Section 101H (salary related schemes: statements of entitlement) is amended as follows.

(2) For subsection (1) substitute—

“(1) This section applies to a qualifying scheme that is—

(a) a defined benefits scheme,

(b) a shared risk scheme, or

(c) a defined contributions scheme that is not a scheme under which all the benefits that may be provided are money purchase benefits,

other than a scheme that falls within a prescribed class.

(1A) The trustees or managers of a scheme to which this section applies must, on the application of any eligible member, provide the member with a written statement of the amount of the cash equivalent of the member’s pension credit benefit under the scheme.”

(3) In subsections (2) and (3), for “(1)” substitute “(1A)”.

(4) In subsection (4)—

(a) for “to whom subsection (1)” substitute “of a scheme to which this section”;

(b) for “that subsection” substitute “subsection (1A)”.

(5) In the heading, for “Salary related schemes” substitute “Schemes with a promise or target”.

14 (1) Section 101J (time for compliance with transfer notice) is amended as follows.

(2) In subsection (1), for paragraphs (a) and (b) substitute—

“(a) in the case of a scheme to which section 101H applies, within 6 months of the valuation date, and

(b) in the case of any other scheme, within 6 months of the date on which the notice is given.”

(3) For subsection (7) substitute—

“(7) In subsection (1)(a), “valuation date” means the date by reference to which the amount shown in the relevant statement under section 101H is determined.”

15 (1) Section 101P (interpretation) is amended as follows.

(2) Omit subsection (2).

(3) In subsection (3), for “salary related occupational pension scheme” substitute “scheme to which that section applies”.”

Schedule 3 to the Bill makes changes to the general rules about transfers from one pension scheme to another (for reasons related to the new definitions in Part 1). This amendment makes similar changes for cases where benefits are derived from pension sharing on divorce.

Schedule 3 amends chapter 4 of part 4 of the Pensions Schemes Act 1993, which sets out provisions governing how members of an occupational or personal pension may apply for, take and use the cash equivalent value of their rights in the scheme and how that transfer value is to be calculated. In this section of the Bill we are saying, “Where you have a pension scheme, you need rules for what happens when people leave and rules for the terms on which you can transfer out. What do those rules look like for DA, DB, DC and so on?” We are trying systematically to go through all of the things that pension schemes need legislation about and setting that out. We are on to transfer values at this point.

The existing provisions provide for two ways to calculate and give effect to transfer rights. If the rights are to money-purchase benefits, the transfer value is the realisable value of the members’ rights in the scheme on any given date. This will be the product of contributions and investment return less any charges. For salary-related benefits, the situation is more complex, as trustees have to convert a promised benefit into a cash equivalent. Trustees are required to give the member a guaranteed cash equivalent that is valued for a prescribed period of time.

The schedule amends existing legislation to reflect the new scheme categories defined in part 1 of the Bill and to take account of collective benefits. Under the  changes there will still be the same two methods to offer a transfer value. Members of defined-benefits schemes, members of shared-risk schemes and members of defined contribution schemes that provide benefits other than money-purchase benefits will get a guaranteed cash equivalent. Members of a defined contribution scheme providing only money-purchase benefits will get the realisable value of their assets. As now, the details about how trustees and managers calculate a cash equivalent will be described in regulation.

The key point here is that the policy for transfers remains unchanged as a result of the new scheme categories. We are making sure that the current transfer provisions apply appropriately when the new scheme definitions introduced in part 1 of the Bill take effect. We will retain the two basic methods and apply first, a cash equivalent method for benefits under DB schemes, DA schemes and collective benefits under DC schemes—effectively the same as the current salary-related requirements —and a realisable value method for benefits under DC schemes other than collective benefits, effectively the same as the current money-purchase requirements.

This will bring all DA or risk-sharing schemes within the scope of section 93A of the 1993 Act—the right to a statement of entitlement—but we can use the regulation-making power in section 93 to exclude schemes of a prescribed description, in prescribed circumstances, if we need to, in respect of any particular models where it might not be appropriate. As now, we can modify how the law applies in relation to schemes, where not all the benefits are money purchased, so that we can apply a realisable value method for money-purchased benefits in any type of scheme.

The amendment makes similar changes to the legislation about transferring the pension credit benefit. As with transfers for ordinary scheme rights, the policy for transfers of pension credit rights remains unchanged. The existing rights to a transfer continue to apply to all benefits, including rights accrued in shared risk schemes and schemes providing collective benefits. The amendment inserts the new definitions to make it clear that a pension credit member in any of the new categories of schemes will have the same rights as current credit members to transfer their pension credit benefits and that these rights will also apply in schemes which are for collective benefits. In simple language, we are taking the current rules about rights to transfer, working out what they should look like in each of our new categories of pension schemes and broadly replicating the current approach in a fairly intuitive way. I commend amendment 5 to schedule 3.

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

I thank the Minister for that explanation. I want to pick up one point. He referred to some models that might not be appropriate and excluded under the terms of schedule 3. Can the Minister elaborate on what sort of models he was thinking of and why they might be excluded?

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

As the hon. Gentleman observed earlier, this is permissive legislation. I hesitate to use the cliché of letting a thousand flowers bloom; but, if in doubt, one reaches for cliché. The point is that we do not know what models people will come up with. It is fairly obvious, if we have a kind of vanilla DB scheme, what  the right transfer arrangements should be to mirror the current regime of a vanilla DC scheme. We have seen cash balance and know what that looks like. However, it is hard to sit down in advance and specify in the Bill exactly how we should do transfers in some type of scheme we have never thought of.

I will give the hon. Gentleman a sense of the complexity of some of this. He will be familiar with the Bridge case and the definition of money-purchase schemes. We talk about little else over our tea table at home. In that case we found out that there are many different permutations—for example, things that look like money purchase but have an underpinning, so that it is money that is invested and if things go well that is what you get, but if things go badly you get something else, such as a floor amount. What is the right transfer value in those cases? The point about giving ourselves regulation-making power is simply to say that we have not thought of every possible scheme that might arise; we have set out a general approach that we think is right for the categories we have come up with. However, in the event that someone invents something else and what is in the Bill does not seem appropriate, we are reserving the right to say, “Although technically this belongs to this category, it looks more like that, so we will have a different set of transfer rules”. I cannot give you an example, because to do so would be trying to anticipate things that have not been invented yet.

Amendment 5 agreed to.

Schedule 3, as amended, agreed to.