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Pensions Act 2011

Section 21: Indexation requirements for cash balance benefits

118.Section 21 removes the requirement for cash balance benefits to be indexed under section 51 of the PA 1995.

119.Cash balance benefits are benefits which the member accrues in the form of a lump sum or fund, the level of which can be determined in advance, is guaranteed to reach a particular minimum, or is determined by the application of a notional accrual rate or rate of interest. The fund is then used to buy an annuity or to provide a pension from scheme funds.

120.Current legislation requires that members with cash balance benefits buying or receiving an annuity or being paid a scheme pension must receive Limited Price Indexation. This means that pensions or benefits in relation to accruals between 1997 and 2005 must, once section 19 is brought into force, be indexed to at least the lower of CPI or five per cent and pensions or benefits in relation to accruals post 2005 must be indexed to at least the lower of RPI or 2.5 per cent.

121.Pensions or annuities already in payment prior to this section coming into force will continue to be indexed and will not be affected by the changes in section 21.   This section also does not apply to cash balance benefits under any scheme which is or has been contracted-out by virtue of satisfying the requirements of section 9(2) of the PSA 1993 on or after 6 April 1997, for as long as accrued rights or pensions attributable to a period of contracting-out are retained within the scheme.

122.Section 21 therefore also ensures that the relaxed indexation requirement does apply to schemes which were contracted out on a guaranteed minimum pension basis prior to 6 April 1997. It is not necessary to exclude such schemes from this relaxed requirement, because there are separate indexation requirements for guaranteed minimum pensions.

123.The indexation requirements are not relaxed for career average schemes or schemes which promise a guaranteed rate of conversion of the accrued ‘pot’ to a rate of pension. Section 51ZB(6) ensures that schemes offering pension commencement lump sums or survivors’ benefits of a set percentage of the member’s benefit are not excluded from the definition of cash balance schemes for the purposes of this easement.

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