604.Paragraph 5(1) substitutes subsection (4) and introduces a new subsection (4A) in section 58 in the Pension Schemes Act 1993 to ensure that Contributions Equivalent Premiums (CEPs) continue to be equivalent to the National Insurance contribution (NIC) rebate. The CEP is the amount that a contracted-out salary related scheme is required to pay in order for someone with less than two years’ qualifying service in the scheme to be reinstated into the State Earnings Related Pension Scheme (SERPS).
605.At present, section 58(4) provides for the CEP to be the difference between the amount of Class 1 contributions payable in respect of the earner’s contracted-out employment and the amount of those contributions that would have been payable had the employment not been contracted-out. This method of calculation ensures that CEPs relating to periods prior to April 1999 are equivalent to the contracted-out rebate. Following the introduction of a new Earnings Threshold (the level of earnings at which an employer becomes liable to pay Class 1 contributions) on 6 April 1999, the existing method of calculation no longer ensures that the CEP is equivalent to the rebate. All CEPs in respect of periods after 6 April 1999 would be lower than the rebate.
New section 58(4) and 58(4A) ensure that the CEP will be equal to the amount of the NIC rebate payable in respect of contracting-out for periods after 6 April 1999 (as it is already for periods before 6 April 1999).
New section 58(4A) provides that where trivial or fractional amounts were not included in the calculation of the rebate they are not included in the calculation of the CEP.
606.Paragraph 5(2) amends subsection (2) of section 61 of the Pensions Schemes Act 1993 to ensure that the employee’s share of the CEP continues to be equal to the actual reduction in his primary Class 1 contributions paid throughout the period of contracting-out.
607.At present, section 61(2) provides for the employee’s share of the CEP to be based on the contracted-out rebate, which is currently equal to the actual reduction in the primary Class 1 contribution. When a new Primary Threshold (the level of earnings at which an employee will become liable to pay Class 1 contributions) is introduced on 6 April 2000, section 61(2) will permit schemes to recover from employees more than that actual reduction in certain cases.
608.Paragraph 5(3) substitutes a new paragraph (b) in section 63(1) of the Pensions Schemes Act 1993 so that the reference to section 58 in that paragraph takes account of the changes being made by paragraph 5(1).
609.Paragraph 5(4) ensures that the amendments made by paragraphs 5(1), 5(2) and 5(3) have effect in relation to any CEP payable on or after 6 April 1999.
Part II: Pensions. Commentary on Sections Schedule 5 Paragraph 5: Contributions equivalent premiums