Pensions Act 2007 Explanatory Notes

Part 2: Occupational and personal pension schemes

Section 14: Conversion of guaranteed minimum pensions

262.Section 13(1) of the PSA1993 requires a contracted-out scheme to make provision to pay a pension to a member from pensionable age of an amount no less than his guaranteed minimum, as specified under sections 14 to 16. Section 17(1) contains a requirement for the payment of a guaranteed minimum pension to a widow, widower, or surviving civil partner.

263.Subsection (1) of section 14 of the Act allows a scheme to omit provision for a guaranteed minimum pension, as required under section 13(1) of the PSA1993, where certain conditions are satisfied.

264.Subsection (2) similarly allows a scheme to omit provision for a survivor's guaranteed minimum pension under section 17(1), where the specified conditions are met.

265.Subsection (3) sets out the conditions which a scheme must meet in order to be relieved of the liability to pay guaranteed minimum pensions (as well as the rules applying to transfers, scheme amendments and enforcement). This is achieved by the insertion of a number of new sections into the PSA1993. The inserted sections provide as follows:

  • Section 24A sets out definitions of terms used in sections 24B to 24H.

  • Section 24B specifies the conditions which a converting scheme must satisfy: actuarial equivalence of the value of members' conversion benefits with those they possessed pre-conversion; no reduction of pensions in payment; conversion benefits not to include money purchase benefits; survivors' benefits to be provided (see section 24D), and specified procedural requirements to be met (see section 24E).

  • Section 24C provides a power for regulations to be made concerning how actuarial equivalence is to be determined.

  • Section 24D sets out the detailed requirement for the scheme to provide conversion benefits which include provision for pension to be paid to a widow, widower or surviving civil partner following the death of the member.

  • Section 24E sets out requirements in relation to obtaining the agreement of the scheme's sponsoring employer, and providing information to members and survivors and to the Commissioners for HMRC about the guaranteed minimum pension conversion.

  • Section 24F provides a power for regulations to be made concerning conditions for transfers of pension rights out of a guaranteed minimum pension-converted scheme. Subsection (3) provides that the trustees of a scheme which is not guaranteed minimum pension-converted are allowed, for the purpose of transferring a member's rights out of the scheme, to adjust the member’s guaranteed cash equivalent to reflect rights that would have accrued on guaranteed minimum pension conversion, providing the member consents.

  • Section 24G provides powers for trustees to amend schemes to facilitate guaranteed minimum pension conversion. Subsection (4) makes it clear that trustees may adjust rights under a scheme which is being wound up in order to reflect what would have happened on guaranteed minimum pension conversion.

  • Section 24H provides powers for the Pensions Regulator in respect of enforcing the conditions for guaranteed minimum pension conversion, and provides for the power under section 10 of the PA1995 (civil penalties) to apply to trustees undertaking a guaranteed minimum pension conversion.

266.Subsection (5) of section 14 inserts provisions into section 47 of the PSA1993 in order to make clear that a person who has had his guaranteed minimum pension converted shall continue to be treated as entitled to that guaranteed minimum pension for the purpose of calculating entitlement to additional state pension (the 'contracted out deduction').

267.Subsections (8) and (9) of section 14 ensure the continuation of the partial protection against inflation of GMP increases included in the payments of state retirement pension where a person has their GMP converted.

268.Subsection (10) of section 14 concerns the situation where a person with an increase to his guaranteed minimum pension such as is mentioned in subsection (8) has his GMP converted prior to his death. This subsection ensures that his widow, widower or surviving civil partner will continue to have entitlement to certain GMP additions awarded with the survivor’s state retirement pension, and that these additions will be protected against inflation.

269.Subsection (12) of section 14 provides that regulations made under the new section 24B (5) - the provision of survivor benefits post-conversion - are subject to the affirmative procedure.

Section 15: Abolition of contracting out for defined contribution pension schemes

270.Subsection (1) provides that contracting-out certificates for money purchase occupational pension schemes and appropriate scheme certificates (i.e. contracting-out certificates for personal pension schemes) will be cancelled from the date that this subsection is brought into force (“the abolition date”).

271.Subsection (2) defines various terms.

272.Subsection (3) introduces Schedule 4. Parts 1 and 2 of the Schedule contain amendments, mostly to the PSA1993, that arise from the abolition of contracting-out on a defined contribution basis and the removal of certain rules applying to protected rights which will take effect on the abolition date. Part 2 of the Schedule contains amendments relating to the abolition of contracting-out which can be brought into force at a later date. The purpose of bringing the amendments in Part 2 of the Schedule into force at a later date is to ensure that the existing statutory mechanisms for HMRC to deal with administrative matters concerning the contracted-out rebate and certification of schemes etc. remain in place until any matters outstanding at the date of abolition of COMPs and APPs have been dealt with before the amendments are brought into force. Part 3 of the Schedule contains saving provisions relating to amendments made under Part 1 of the Schedule. As with Part 2, the purpose of Part 3 is to ensure that any administrative matters relating to a scheme’s contracted-out status prior to the date of abolition can be completed after that date.

273.Subsection (4) provides for the consequential amendments contained in Part 1 of Schedule 4 to have effect from the abolition date (but where any powers to make regulations are conferred by the amendments, such powers may be exercised before that date so as come into force on that date).

274.Subsection (5) provides a regulation-making power to allow for consequential etc. provision to be made if required as a result of the abolition of contracting-out for money purchase schemes and personal pension schemes, or as a result of the amendment, repeal or revocation of any protected rights provisions.

275.Subsection (6) provides that the power contained in subsection (5) can be used to amend, repeal or revoke any provision of any Act or subordinate legislation whenever passed.

276.Subsection (7) specifies that any use of the power in subsection (5) to modify primary legislation is subject to affirmative resolution.

277.Subsection (8) provides that any other use of the power in subsection (5) is subject to the negative resolution procedure.

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