Schedule 3: Consolidation of additional pension
39.Schedule 3 makes amendments to remove the references in the SSCBA 1992 and other relevant enactments (as inserted by the PA 2008) that link the start date for additional state pension consolidation to the flat rate introduction year. The amendments provide a power to set the consolidation start date by order.
40.The consolidation of additional state pension is a measure to provide a single value for a person’s additional pension, the method for calculation of which has changed over time, so as to enable easier prediction of entitlement in retirement. The flat rate of additional pension is a measure by which, instead of bands of different rates by which additional pension is calculated, one flat rate is applicable. These measures were introduced to simplify the additional pension by the PA 2007 and the PA 2008; both are yet to have effect.
41.Consolidation will have no impact on a person’s overall state pension income over the course of their retirement, but can affect the income flow for people who have been contracted-out.
42.In payment contracted-out pension rights are offset against additional state pension entitlement built up before 1997, meaning a number of people gain additional state pension for that period at some time after pensionable age. This is because differences in the way private pension schemes increase rights in accrual and pensions in payment, compared to the state scheme, can mean that at state pension age a person’s additional state pension entitlement for that period might be small, or non-existent, but increase later on in retirement.
43.Under consolidation, actuarial factors would be applied to a person’s contracted-out pension rights in order to smooth the disparities in entitlement that occur during retirement. This is likely to affect around 11 million people who built up contracted-out pension rights between 1978 and 1997. As a result, there are short-term costs to the Exchequer associated with consolidation, in that some additional state pension entitlement for the pre-1997 period would be brought forward to state pension age to smooth income over retirement.
44.This Schedule also removes the references which define those to whom the consolidation would apply, that is, those reaching state pension age from 6 April 2020, instead providing a power to set the relevant retirement date by way of order.
45.These measures provide flexibility to determine when the short-term costs outlined above will be incurred.