(DPRR/10-11/34)

House of Lords Select Committee on Delegated Powers and Regulatory Reform

Pensions Bill

Memorandum from the Department for Work and Pensions

Introduction

  1. The Pensions Bill was introduced in the House of Lords on 12th January 2011.
  1. This memorandum identifies the provisions for delegated legislation in the Pensions Bill. It explains:

the purpose of the powers,

the reason why matters have been left to delegated legislation,

the parliamentary procedure selected for the exercise of these powers, and

why that parliamentary procedure has been chosen.

Background and summary

  1. The measures contained within this Bill implement recommendations from three Government and independent reviews and amend legislation introduced by previous Acts.
  1. As part of the Coalition Agreement, in June 2010 the Government announced a review of the timetable for increasing State Pension age to 66. The response to this review was published in the Government’s White Paper, A sustainable State Pension: when the State Pension age will increase to 66 (Cm 7956), in November 2010 which proposed changes to the timetable for increasing State Pension age to 66. This Bill implements the revised timetable set out in the White Paper.
  1. A second review was announced by the Government in June 2010 on automatic enrolment into workplace pensions. The recommendations from the independent review on automatic enrolment were published in October 2010 in the report,Making Automatic Enrolment Work.These recommendations provide the basis for several of the measures contained within this Bill and build on the existing regime provided by the Pensions Act 2008.
  1. The Independent Public Service Pension Commission (IPSPC) published its interim report in October 2010, which recommended that the most effective way to make short-term savings on public sector pensions is to increase member contributions. Primary legislation is required in respect of contributions from members of the judiciary. The Bill will introduce provision to allow pension contributions to be made by members of the judiciary towards the cost of providing personal pension benefits.
  1. The Bill is organised into the following five parts:

Part 1 (clauses 1 to 3 and Schedules 1 to 3) – State Pension;

Part 2 (clauses 4 to 13) – automatic enrolment;

Part 3 (clauses 14 to 23 and Schedule 4) – occupational pension schemes;

Part 4 (clause 24 and Schedule 5) – judicial pensions; and

Part 5 (clauses 25 to 29) – miscellaneous and general.

Part 1 –State Pension

  1. Part 1 sets out the provisions for amending the State Pension framework. This includes changes to the timetable for increasing State Pension age to 66 and changing the reference period and group for whomthe additional state pension will be consolidated.

Part 2 – automatic enrolment

  1. Part 2 contains measures to amend the automatic enrolment provisions for workplace pension schemes. This includes:the introduction of an “earnings trigger” for automatic enrolment, so that those earning below the trigger amount will not be required to be enrolled in a workplace pension, and new up-rating provisions for the qualifying earnings band on which contributions are made; the introduction of provision allowing for a period of up to three months before the automatic enrolment duty commences; a change to the timing of automatic re-enrolment, so that regulations must secure that there is not more than one automatic re-enrolment date in any period of two years and nine months, rather than in any period of three years; and changes to the way an employer can certify that their pension scheme meets the necessary quality test.

Part 3 – occupational pension schemes

  1. Part 3 sets out the provisions for occupational pension schemes. These include amendments to existing pension legislation to ensure consistency in indexation requirements for occupational pensions and pension compensation. Part 3 contains provisions relating to the Pension Protection Fund, the Pensions Regulator, and the Financial Assistance Scheme. It also includes minor technical amendments to pension legislation.

Part 4 – judicial pensions

  1. Part 4 makes provision in respect of contributions towards personal pension schemes for members of the judiciary.

Part 5 –miscellaneous and general

  1. Part 5 contains miscellaneous amendments to existing pension legislation and provisions as to extent, commencement and short title of the Bill.

Extent

  1. The amendments made by the Bill generally extend to England and Wales and to Scotland. The amendments made by the following provisionshave UK extent:

clause 18 (Financial Assistance Scheme: amount of payments),

clause 19 (Financial Assistance Scheme: transfer of assets).

Clause 24 and parts of Schedule 5(Contributions towards cost of judicial pensions etc)also have UKextent.

Parliamentary Scrutiny

  1. The Department for Work and Pensions has considered in each case the appropriate parliamentary procedure to be followed in exercising the delegated powers under the Bill. The commentary below on each power sets out which parliamentary procedure has been proposed and why that procedure is considered appropriate.

Consultation requirements

  1. The Department for Work and Pensions is required to consult on policy in respect of proposed regulations under certain social security enactments with the Social Security Advisory Committee.
  1. It is only Part 1 of this Bill that is relevant to social security; no delegated powers taken in Part 1 will attract this obligation.

Other matters

  1. All of the delegated powers are to be made by way of statutory instrument. In respect of Parts 1 to 3 and 5, these are exercisable by the Secretary of State.In respect of Part 4, these are exercised by the Lord Chancellor (or, in relation to certain offices in Scotland, by the Secretary of State) with the concurrence of the Treasury.
  1. A list of all the provisions of the Bill containing powers to make delegated legislation is contained in an annex to this memorandum.

Analysis of delegated powers by clause

Part 1 – State Pension

Clause 3 and Schedule 3 – consolidation of additional pension

  1. Currently, the Pensions Act 2008 ties the consolidation start date to the flat rate introduction year. The consolidation of additional State Pension is a measure to provide a single value for a person’s additional pension,the method for calculation of which has changed over time, so as to enable easier prediction of entitlement in retirement. The flat rate of additional pension is a measure by which, instead of bands of different rates by which additional pension is calculated, one flat rate is applicable. These measures were introduced to simplify the additional pension by the Pensions Acts 2007 and 2008; both are yet to have effect.
  1. These provisions have since been found to be too restrictive.
  1. Consolidation will have no impact on a person’s overall State Pension income over the course of their retirement. As contracted-out pension rights are offset against additional State Pension entitlement built up before 1997, a number of people would only gain additional State Pension for that period at some time after pensionable age. This is because differences in the way private pension schemes increase rights in accrual and pensions in payment compared to the State scheme can mean that at State Pension age a person's additional State Pension entitlement for that period might be small, or non-existent, but increase later on in retirement. Under consolidation, actuarial factors would be applied to a person’s contracted-out pension rights in order to smooth the disparities in entitlement that occur during retirement. This is likely to affect around 11 million people who built up contracted-out pension rights between 1978 and 1997. As a result, there are short-term costs to the Exchequer associated with consolidation, in that additional State Pension entitlement for the pre-1997 period would be paid from State Pension age. However, the measure would provide some flexibility as to when these costs would be incurred.
  1. Clause 3introduces Schedule 3. Paragraphs 2 and 4 of Schedule 3 amend sections 45 and 122 of the Social Security Contributions and Benefits Act 1992 to enable the Secretary of State to specify the tax year from which consolidation will occur and also the applicable date after which persons reaching pensionable age will be affected. This power is required to ensure there is sufficient flexibility to determine when the short-term costs outlined above will be incurred.
  1. The order will designate a particular date or tax year from which the existing statutory provisions will have effect. As such, it is similar in nature to a commencement order and accordingly has not been assigned a parliamentary procedure.

Part 2 – automatic enrolment

Clause 4 – automatic re-enrolment where employer interrupts scheme membership

  1. Section 2 of the Pensions Act 2008 provides that where a jobholder is an active member of a qualifying scheme, the employer must not take an action or make an omission by which the jobholder ceases to be an active member of the scheme, or the scheme ceases to be a qualifying scheme, except in certain cases.
  1. The clause substitutes a new section 2(3) to provide that one case is where the employer makes arrangements to re-enrol the jobholder into an automatic enrolment scheme within the prescribed period.
  1. This clause also amends section 5(4) of the Pensions Act 2008 (automatic re-enrolment) to give the Secretary of Statethe power to provide in regulations that the duty to re-enrol does not apply in prescribed circumstances where the jobholder has ceased to be an active member of a qualifying scheme because of any action or omission by the jobholder (or by the employer at the jobholder’s request) or has opted out of pension saving under section 8 of the Pensions Act 2008.
  1. This clause also amends section 54 of the Pensions Act 2008 (inducements) so that a link is no longer made between that section and the period prescribed in section 2 in the situation (under s54(1)(b)) where an employer has induced a jobholder to opt out of scheme membership. A separate power is proposed to prescribe a period within which an employer may make arrangements to offer alternative scheme membership in order to avoid a contravention of the inducements measure.
  1. These powers give the Departmentthe flexibility to consult on what period or circumstance is appropriate and to keep the matter under review. The negative resolution procedure is appropriate because these powers are uncontroversial.

Clause 5 – earnings trigger for automatic enrolment and re-enrolment

Clause 8 – review of earnings trigger and qualifying earnings band

Clause 9 – rounded figures for earnings trigger and qualifying earnings band

  1. The purpose of these powers is to provide a mechanism for the Secretary of State by order to revise the amount of the earnings trigger that is provided for in clause 5 of the Bill, to provide a new mechanism for the Secretary of State by order to revise the amounts of the upper and lower limits of the qualifying earnings band that is provided for in section 13 of the Pensions Act 2008 and to allow the Secretary of State to specify rounded figures for a pay reference period in place of the proportionate figures that would otherwise apply.
  1. Clause 8 provides that, when considering whether an amount should be increased or decreased, the Secretary of State may take into account the income tax personal allowances, the national insurance earnings limits and thresholds, the general level of prices and earnings, the level of the basic state pension for single adults, and any other factors that the Secretary of State considers relevant.
  1. Clauses 8 and 9 are Henry VIII powers because the Secretary of State may by order amend an amount initially set in primary legislation. This amends an existing Henry VIII power in the Pensions Act 2008. The reason an order-making power is needed is to provide flexibility, given that the relevant factors to which the thresholds are linked will change over time.
  1. Clause 8 also provides that where an order is made under section 14(2) of the Pensions Act 2008,as substituted by the clause, the affirmative resolution procedure will apply. This is to ensure an appropriate level of Parliamentary scrutiny in recognition of the significance of the amount of the earnings trigger and of the limits of the qualifying earnings band.

Clause 6 – postponement or disapplication of automatic enrolment

  1. The clause is intended to allow employers to apply an individual waiting period of up to three months to an individual jobholder’s automatic enrolment date. In order to apply a waiting period, the employer will have to inform their workers of this intention via a notice.
  1. The delegated power will allow the Secretary of Stateto specify in regulations when the notice must be served and what requirements in relation to the notice apply.
  1. The power to prescribe these matters allows flexibility to consult on what period for service of the notice is appropriate and what requirements should be set, and to keep those matters under review.
  1. While the overall concept of waiting periods may be controversial, the regulations specifying timing and content of the notice are not. The Departmenttherefore does not feel that this regulation needs an affirmative procedure. The overall waiting period policy will be debated as a matter of course as the Bill goes through Parliament.

Clause 7 – timing of automatic re-enrolment

  1. This clause amends a regulation making power in section 6 of the Pensions Act 2008, which currently enables the Secretary of State to make regulations for securing that, for any employer, there is not more than one automatic re-enrolment date within any period of three years. This clause amends the period to two years and nine months.
  1. It is intended that the regulations will allow for three months of flexibility either side of the three year anniversary of the staging date and, thereafter, the three year anniversary of the previous re-enrolment date. Primary legislation will therefore make it clear that automatic re-enrolment will not be required more frequently than once in any period of two years and nine months. The power is not controversial and the Departmenttherefore thinks that the negative resolution procedure is appropriate.

Clause 10 – certification that alternative to quality requirement is satisfied

  1. Section 28 of the Pensions Act 2008 already provides for money purchase occupational pension schemes, personal pension schemes and certain hybrid schemes to which subsection (1)(a) of section 24 applies to be certified as having satisfied the relevant quality requirement and enables regulations and guidance to prescribe the detail. However, feedback from stakeholders has indicated that the certification model envisaged should be further simplified. The regulatory framework, however, remains the same with detailed requirements set out in a combination of regulations and guidance.
  1. Using regulations and guidance to prescribe the finer details enables the Secretary of State to road test the detailed processes with employers who will be the end users of certification. This approach is also consistent with the regulatory framework in which scheme quality requirements for defined benefits schemes operate.
  1. The regulation making power in section 28(1) enables regulations to prescribe that a scheme satisfies the relevant quality requirements, if there is a certificate in force in relation to the employer. Section 28(2) provides that the person giving the certificate must state that in their opinion it is able to satisfy the relevant quality requirements. The clause amends section 28(2) to provide that the person giving the certificate may state instead, that in their opinion, the scheme is able to satisfy prescribed alternative requirements.
  1. The regulation making power in amended subsection (5) of section 28 will be used to set out the detailed certification processes in regulations and in particular regulations may provide for:

the person(s) that can give a certificate,

the period for which a certificate can be in force,

the procedures to be complied with for giving a certificate,

requiring the person giving the certificate to comply with guidance,

arrangements for phasing in contributions,

a modification for certain hybrid schemes,

the timeframe for completing certain processes,

the employer to calculate the amount of contributions that should have been paid during the certification period,

cases where the requirements or any section 26 agreements in relation to the contributions payable in respect of any relevant jobholders during the certification period did not satisfy prescribed conditions, and

where the payment of contributions did not satisfy prescribed conditions, for the scheme not to be treated as having satisfied the relevant quality requirement unless prescribed steps are taken.

  1. The parliamentary procedure for this power is affirmative because it is recognised that a power to prescribe an alternative requirement is a wide power and that Parliament will wish to consider the detail of proposed regulations.

Clause 11 – transitional period for defined benefits and hybrid schemes to be optional

  1. The clause is intended to correct a flaw in section 30 of the Pensions Act 2008. Section 30 currently provides that where an employer offers a defined benefit or hybrid scheme, the automatic enrolment date is deferred where certain conditions are satisfied. The clause amends section 30 such that employers are able to choose whether or not to defer the automatic enrolment date.
  1. As a part of the process, the employer will be required to provide the jobholder with an appropriate notice at a prescribed time to the effect that it intends to defer the automatic enrolment date.
  1. The delegated powers in the clause will allow the Secretary of State to specify in regulations the period within which the notice must be served and what the form and content of this notice should be. The Department will need to consult with employers as to what that period should be and will need the flexibility to be able to amend this provision in the future if necessary.
  1. The parliamentary procedure for this power is the negative resolution procedure. This procedure has been selected because the power is uncontroversial.

Part 3 –occupational pension schemes

Clause 17and Schedule 4– Pension Protection Fund

  1. Paragraphs 1 to 13 of Schedule 4 (requirements to obtain actuarial valuations) make amendments to the Pensions Act 2004 so as to permit the Board of the Pension Protection Fund (“the Board”), where it is able to do so, to determine the funding position of an eligible pension scheme without obtaining a fresh actuarial valuation in accordance with the requirement in section 143(2) or 158(3) of the Pensions Act 2004.