Commentary on Sections Part 1 – State Pension Section 24: Abolition of contracting-out for salary related schemes etcSchedule 13: Abolition of contracting-out for salary related schemesSchedule 14: Power to amend schemes to reflect abolition of contracting-out
108.Since 1961 sponsoring employers of salary-related occupational pension schemes have been allowed to contract their employees out of the additional pension on the condition that they would provide an occupational pension meeting certain statutory requirements (these have changed over the years).
109.In return for the employer providing a pension meeting the statutory minimum, both the employer and employee pay reduced rates of National Insurance (employer contributions are currently reduced by 3.4 per cent and employee contributions by 1.4 per cent).
110.In 1988 it became possible for employers to contract out their employees into a defined contribution occupational pension scheme, and for individuals to contract out into a personal pension scheme. However, the PA 2007 abolished these options from 6 April 2012.
111.Introduction of the new state pension will abolish the additional pension for those reaching pensionable age after the start date. Section 24 and Schedules 13 and 14 make provision for the ending of the option for sponsoring employers of salary-related occupational pension schemes to contract their employees out of the additional pension. This option will end on the start date of the new state pension.
112.As well as removing redundant provisions, the amendments to the PSA 1993 and other pensions legislation in section 24 and Schedules 13 and 14 are intended to serve two main purposes.
113.Firstly, to ensure that all contracted-out rights accrued by employees through salary-related contracted-out schemes before the abolition of contracting-out are fully protected. To protect accrued rights, Schedule 13, paragraph 13 inserts new section 12E into the PSA 1993. Section 12E requires former salary-related contracted-out schemes to meet the requirements in the PSA 1993 in relation to Guaranteed Minimum Pensions. Section 12E deems scheme rules to comply with all the requirements, overriding the rules if necessary. Schedule 13, paragraphs 16 and 38 amend sections 16 and 87 of the PSA 1993 (the revaluation requirements for Guaranteed Minimum Pensions for early leavers and the anti-franking rules) so that abolition of contracting-out does not trigger either of these requirements. This will ensure that someone who stays in a scheme at abolition will not be treated as having left simply because contracting-out has ended. Schedule 13, paragraph 17 amends section 17 of the PSA 1993 to reflect the end of the old retirement pension so that inherited Guaranteed Minimum Pensions will be payable in the same circumstances as now.
114.Secondly, to enable sponsoring employers of contracted-out schemes to change the rules of their pension schemes (where they are prevented from doing so) to adjust members’ future pension accruals or pension contributions to take into account the loss of the employer’s rebated National Insurance contributions. Section 24(2) and Schedule 14 provide a power for sponsoring employers to amend their scheme rules in order to offset the increase in their National Insurance contributions - by reducing scheme benefits for future accruals or increasing member contributions. Following the end of contracting-out, employers and members of contracted-out salary-related schemes will have an increase in National Insurance contributions. They will pay the same rate of National Insurance as other employers and employees. This power will be available for five years (section 24(8)). The power cannot be used to change the rules of public service pension schemes or other types of scheme (which may be prescribed in regulations under section 24(4)(b)). The power can also not be used to make changes in respect of scheme members who are ‘protected persons’. In certain formerly nationalised industries (rail, including Transport for London, electricity, coal and nuclear waste and decommissioning) legislation was made at the time of privatisation which prevents changes to the pension schemes in relation to some employees. Regulations under section 24(5) must define what is meant by a ‘protected person’.