Commentary on Sections Part 1: Pension scheme membership for jobholders Chapter 1: Employers’ duties Section 21: Quality requirement: UK defined benefits schemesSection 22: Test scheme standardSection 23: Test scheme
64.Section 21 provides that the quality requirement for defined benefit schemes depends on whether or not the jobholder is in contracted-out employment, as defined under the PSA 1993. If a jobholder is in contracted-out employment, evidenced by a certificate issued under section 7(1) of the PSA 1993, the scheme satisfies the quality requirement in relation to that jobholder. Subsection (3) enables the Secretary of State to change, by order, the quality requirement where the jobholder is in contracted-out employment. The quality requirement may be changed so that the scheme no longer qualifies on the evidence of contracting out alone but is required to meet a modified version of the test scheme standard (see sections 22 and 23) with an accrual rate of no more than 1/80th, should this prove necessary in the future.
65.For jobholders who are members of a defined benefit scheme and are not in contracted-out employment, the scheme must meet the test scheme standard. Section 22 provides that a scheme satisfies the test scheme standard if it provides benefits that are broadly equivalent to or better than the benefits provided by a model test scheme – set out in section 23. The comparison to the test scheme must be made by the employer for all of the jobholders they employ who are active members of the scheme and are not in contracted-out employment.
66.In making a comparison when applying this section, the pensions of relevant members must be considered together as a whole (section 22, subsection (3)). There is a regulation-making power (subsection (4)) enabling the Secretary of State to set out detail on how comparison with the model test scheme will be done and the regulations may provide for the comparison to be conducted in accordance with guidance (subsection (5)). Regulations may provide that an actuary will be required to confirm that the scheme meets the test (subsections (6) and (7)).
67.The model test scheme on which the comparison is made is set out at section 23. It provides a pension for life based on no more than 40 years of accruals at an annual rate of 1/120th of average qualifying earnings.