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Pensions Act 2014

Section 39: Alternative quality requirements for UK defined benefits schemes

167.To be a qualifying defined benefits scheme capable of being used under automatic enrolment, a pension scheme must either be contracted-out of the state second pension or meet the ‘test scheme standard’ in relation to all jobholders concerned. The test scheme is a hypothetical scheme used as a benchmark against which a scheme can be measured. To meet the test scheme standard the scheme must provide benefits to members which are broadly equivalent to, or better than, those which would be provided under a test scheme.

168.Section 39 provides a power to prescribe alternative quality requirements for defined benefits schemes. It amends the PA 2008 to enable the Secretary of State by regulations to prescribe that a defined benefits scheme satisfies the quality requirements in one of three ways, as set out in new section 23A (1)(a), (b) and (c):

  • subsection (1)(a) provides for an alternative defined benefits quality requirement to be satisfied in relation to a jobholder if the scheme in question is of a prescribed description and satisfies the money purchase quality requirement in relation to that jobholder, i.e. the scheme provides a total contribution of 8 per cent of qualifying earnings with at least 3 per cent contributed by the employer;

  • subsections (1)(b) and (1)(c) provide for alternative defined benefits quality requirements to be satisfied if the cost to the scheme of funding the future accrual of active members' benefits is at least a prescribed rate. The rate is to be expressed as a prescribed percentage of members’ relevant earnings over a relevant period either on an aggregate (scheme) level or at an individual level for at least 90 per cent of the relevant members.

169.Subsection (3) of new section 23A provides that the prescribed percentage in both of the cost of future accruals tests in (1)(b) and (c) must be at least 8 per cent, in line with the minimum level for total contributions into a qualifying money purchase scheme.

170.Subsection (7) of new section 23A provides for any regulations made under section 23A(1) to be reviewed on an ongoing basis to check that the Government’s policy intentions are being achieved. The first review will be in 2017, with subsequent reviews being no more than three years after the previous review.

171.The PA 2008 provides transitional arrangements for the implementation of automatic enrolment. These transitional arrangements differ depending on whether a jobholder is enrolled into a money purchase pension scheme or a defined benefit pension scheme. In the case of the latter, the transitional arrangements allow the employer to defer automatic enrolment until the end of the transitional period. Sections 39(5) to 39(8) provide that where a defined benefit pension scheme or hybrid pension scheme (a pension scheme which offers both money purchase and defined benefit pensions under a single scheme) is a qualifying scheme by virtue of satisfying the alternative quality requirement at section 23A(1)(a) then the employer can not defer automatic enrolment. Instead the transitional arrangements in respect of money purchase pension schemes apply.

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