Select Committee on Delegated Powers and Deregulation Thirteenth Report


PART II PENSIONS

CHAPTER I - STATE PENSIONS - STATE SECOND PENSION

INTRODUCTION.

139.  The State Second Pension will reform SERPS by boosting the Additional (second tier) Pension of low earners and providing Additional Pension for the first time for carers and long-term disabled people with broken work records.

140.  State Second Pension will be calculated by reference to the surplus in an individual's earnings factor. An individual's earnings factor corresponds to the whole of his earnings up to the Upper Earnings Limit and the surplus to the amount of those earnings between the Lower Earnings Limit and the Upper Earnings Limit.

141.  The method of calculating the amount of State Second Pension is set out on the face of the Bill, both for someone who is contracted-in to the State scheme, and also for those low and moderate earners who are contracted-out of the State scheme and who qualify for a State Second Pension top-up payment.

142.  This section of the memorandum sets out how the Department intends to use the delegated powers in Chapter I of Part II of the Bill, and its associated Schedule.

143.  The delegated powers in this part of the Bill serve a number of functions. They follow the approach taken elsewhere in pensions legislation, for example, the Pensions Act 1995, and will allow legislation to include detailed provision (such as the qualifying criteria for Home Responsibilities Protection) which is not appropriate for primary legislation. In addition, they will allow the Department to amend detailed provisions and formulae more easily in the light of operational experience or other developments, without having to take up a substantial amount of parliamentary time to amend primary legislation. Thirdly, they will enable the Department to ensure that the value of State Second Pension accruals are maintained in earnings terms by providing for the uprating of the Low Earnings Threshold (Clause 32(1))

Clause 30 - Earnings from which pension derived

144.  Subsection (3) inserts new section 44A into the Social Security Contributions and Benefits Act 1992.

145.  New section 44A provides for a person to be deemed to have an earnings factor equal to the Low Earnings Threshold when calculating Additional Pension under the State Second Pension provisions if they qualify in any of the ways set out in new section 44A(2). (In 1999/00 terms the Low Earnings Threshold is £9,500.)

146.  New section 44A(2) sets out all but one of the criteria by which a person can be deemed to have such an earnings factor. The exception is those who can qualify because they meet the criteria for Home Responsibilities Protection due to caring for a sick or disabled person. The qualifying criteria for Home Responsibilities Protection are already set out in regulations (The Social Security Pensions (Home Responsibilities) Regulations 1994 - S.I. 1994/704). As such, the Department believes that it is not appropriate to include a reference to them on the face of the Bill.

147.  New section 44A(2)(c)(ii), therefore, provides a power to prescribe conditions by reference to which someone can be treated as precluded from regular employment by responsibilities at home and, thereby, be treated for State Second Pension purposes as if they had an earnings factor at the Low Earnings Threshold in that year. It is intended that regulations under this power will reflect the conditions set out in paragraphs 3 and 4 of the Social Security Pensions (Home Responsibilities) Regulations 1994 (S.I. 1994/704):

    "(3) The conditions specified in this paragraph are-

      a) that he was regularly engaged, for at least 35 hours a week, in caring for a person in respect of whom there was payable any of the benefits specified in paragraph (4) below;

      b) that those benefits were payable to that person for at least 48 weeks in that year.

    (4) The benefits referred to in paragraph (3) above are an attendance allowance under section 64 of the [Social Security Contributions and Benefits Act 1992], the care component of disability living allowance at the highest or middle rate prescribed in accordance with section 72 of the Act, a constant attendance allowance under any Service Pensions Instrument, Personal Injuries Scheme or 1914-1918 War Injuries Scheme, an increase of disablement pension under section 104 of the Act in respect of constant attendance and any benefit corresponding to such an increase under a Pneumoconiosis and Byssinosis Benefit Scheme or under Regulations under paragraph 7(2) of Schedule 8 to the Act ."

148.  Paragraph 7(2) of Schedule 8 of the Contributions and Benefits Act concerns those entitled to Unemployability Supplement, Constant Attendance Allowance or Industrial Injuries Benefit under the Workmen's Compensation Acts or by virtue of an injury pension awarded for an injury received or disease contracted prior to 5 July 1948.

Clause 31 - Calculation

149.  Subsection (3) inserts new Schedule 4A into the Social Security Contributions and Benefits Act 1992. New Schedule 4A sets out how Additional Pension will be calculated under the State Second Pension provisions.

CLAUSE 31: SCHEDULE 4A - ADDITIONAL PENSION

SECOND FLAT-RATE STAGE OF STATE SECOND PENSION

150.  Part II of new Schedule 4A sets out the method of calculating State Second Pension entitlement for anyone contracted-in to the State scheme throughout the year in question.

151.  Sub-paragraph (5) of Part II provides a power to make regulations to calculate State Second Pension entitlement only on earnings, actual or treated, at the Low Earnings Threshold (£9,500 in 1999/00 terms) for those who will reach state pension age after a date to be prescribed.

152.  The intention is that State Second Pension will become a flat-rate scheme focussing resources on low earners, carers and long-term disabled people with broken work records. However, this flat-rate second stage will not be introduced until stakeholder pension schemes have become established as a low-cost flexible means for moderate earners to contract-out of State Second Pension into a funded scheme. This is likely to be some 5 years after stakeholder pension schemes are introduced in April 2001. (Contracted-out rebates will continue to be earnings-related for those in funded schemes.)

153.  It is not possible to set the date for the introduction of the second stage at the outset, because it is important to ensure that suitable alternative provision is available. This will depend on many factors, such as how many providers enter the market with stakeholder pension schemes and the numbers of people taking them up. The Department believes it is more prudent to wait and assess the situation later rather than set a specific date. It is therefore more appropriate for the date to be set in secondary legislation.

154.  Similar constraints apply to determining those people who will be included in the flat-rate second stage. It is intended that the flat-rate second stage of State Second Pension will only apply to those who have a significant part of their working life ahead of them, since they will have the most opportunity to benefit from a funded scheme. Therefore, secondary legislation will provide for the second stage of State Second Pension to apply only to those who reach pensionable age after a prescribed date.

OTHER CASES

155.  Part IV of the Schedule provides a power to deal with those "other cases" not provided for in other parts of the Schedule.

156.  Low and moderate earners who contract-out of the State scheme will also benefit from the extra help the State Second Pension brings. This help will be delivered through a combination of earnings-related National Insurance rebates and a State Second Pension top-up payment. The calculation of the top-up payment is set out in Part III of this Schedule. However, this deals only with the circumstances where an individual is contracted-out on one basis for the whole year.

157.  Paragraph 9 of Part IV provides for regulations to be made to calculate the appropriate amount of State Second Pension entitlement for people who move between contracted-in and contracted-out employment, or between different categories of contracted-out employment (personal and occupational pensions), during the course of the year.

158.  In such cases it will be necessary to apportion the amounts calculated according to the length of employment in each circumstance. This will require a detailed, and carefully drafted, formula. There is already a precedent for having such calculations in secondary legislation - the calculation for someone who is contracted-in to SERPS for part of a year, and contracted-out for the remainder, is in the Social Security (Contracting-out and qualifying earnings factor) regulations 1996 SI 1996 24 77). The calculations here will be even more complex, given the variety of circumstances they will need to cover. The Department, therefore, believes that it is more appropriate for the formula to be set out in secondary legislation.

159.  The guiding principle for the regulations will be to provide a State Second Pension top-up for anyone who would have received more from State Second Pension than the amount they are deemed to have received in respect of their National Insurance rebate.

160.  Paragraph 9 also provides for regulations to be made in "such other cases as the Secretary of State thinks fit". It is intended that the provision will be used to set out how the provisions regarding the Contribution Equivalent Premium and the restoration of state scheme rights will operate under, and interact with, the State Second Pension provisions. These are the requirements which deal with the necessary calculations for those who are contracted back into the State scheme because, for instance, their contracted-out employment terminates after less than 2 years. This power may also be used to deal with any further exceptions to the general rule, which may arise. As above, this power is to be used to ensure that no one loses out because they had a period in contracted-out, rather than contracted-in, employment. Again, given the complexity of these calculations, the Department believes that it is more appropriate for the formula to be set out in secondary legislation.

CLAUSE 33 - REVALUATION

161.  Subsection (1) inserts new section 148A into the Social Security Administration Act 1992. New section 148A (3) provides a power to make an order to increase the Low Earnings Threshold both before the first appointed year and annually thereafter. (The first appointed year is the year in which State Second Pension is introduced.)

162.  The Low Earnings Threshold is set at £9,500 on the face of the Bill (new section 44A(5)). This is in 1999/00 price terms. New section 148A provides for the Secretary of State to increase the Low Earnings Threshold in line with the rise in the general level of average earnings to ensure that it maintains its value relative to earnings. The power to uprate by order provides the flexibility to increase the Low Earnings Threshold without the need to amend primary legislation on a regular basis.

163.  This power is similar to that in section 148 of the Social Security Administration Act 1992, which gives the Secretary of State the power to make an order revaluing earnings factors to be used in the calculation of the current Additional Pension in the form of the State Earnings Related Pension Scheme (SERPS). The Department does not consider that it is appropriate to incorporate this on the face of the Bill. The methodology for calculating the annual increase is a complex matter which is dependant upon the data produced by the Office for National Statistics.

164.  It is intended that the method used to calculate the increase in national average earnings will be similar to that used to revalue earnings factors and will be based on the Average Earnings Index (All employees) compiled by the Office for National Statistics.

CLAUSE 35 - SUPPLEMENTARY

165.  Subsection (14) inserts a definition of first and second appointed years into section 122(1) of the Social Security Contributions and Benefits Act 1992. The first appointed year is the year, "no earlier than 2002/03", in which State Second Pension will be introduced. The second appointed year is the year in which State Second Pension will become a flat-rate scheme.

166.  Subsection (14) provides a power for both dates to be appointed by order.

167.  It is not possible at the present time to say with certainty when State Second Pension will be introduced. Implementation depends on the necessary operational systems being in place to deliver it. These are being developed as a matter of priority and it is expected they will be ready for State Second Pension to be introduced from April 2002.

168.  For the reasons explained in paragraph 167, the Department does not believe it would be prudent to set a specific date at this stage for the introduction of the second, flat-rate, stage of State Second Pension. It is important to be sure that suitable alternative provision is available for people to contract-out if they choose to do so.

EARNINGS FACTORS

CLAUSE 37 - MODIFICATION OF EARNINGS FACTORS

169.  Clause 37 provides for the situation in which people who have earnings in a single tax year both from contracted-out employment and from contracted-in employment have that taken into account in the calculation of their additional pension under SERPS. Section 128 of the Pensions Act 1995 replaced Section 44(5) of the Social Security Contributions and Benefits Act 1992 dealing with the calculation of additional pension under SERPS with a new Section 44(5A) as from 5 April 2000. The existing Social Security (Contracting-Out and Qualifying Earnings Factors) Regulations do not refer to this new clause and would be ineffective from that date. Clause 37 therefore provides the power to make a new set of regulations, but as these cannot be made until after this Bill receives Royal Assent, it also allows for the existing regulations to continue to have effect in the meantime (subsection (3)).

170.  The overall effect of this clause is to ensure that the calculation of additional pension under SERPS is able to continue on the same basis as at present (subsection (4)). The regulations will be additional to the existing regulations and will be subject to the negative procedure.

171.  Subsection (1) amends the power to make regulations modifying the provisions of section 44(5A) of the Social Security Contributions and Benefits Act 1992 so that the SERPS calculation takes account of part-year earnings from employment which is not contracted-out. This is done by means of a formula which is set out in the existing regulations and will be replicated in the new set. As mentioned above, this is necessary because after April 2000 there will no longer be a power to make regulations to deal with part-year earnings.

172.  Subsection (2) applies the modification to the calculation of additional pension payable with Widowed Parent's Allowance, Category B Retirement Pension where the claimant has previously received Widowed Parent's Allowance or Bereavement Allowance or where the spouse dies after 5 April 2000 and with Category A Retirement Pension where the pensioner reaches pension age after 5 April 2000.

173.  Where by virtue of subsections (3) and (4) a pension is calculated in accordance with the existing provisions pending the making of new regulations under subsection (1), subsection (5) provides for those new regulations to allow for a pension of the kind referred to in subsection (2) to be recalculated and paid in accordance with the new method.

174.  The calculation of additional pension for part-years is a complex matter which is currently dealt with in regulations (The Social Security (Contracting-out and Qualifying Earnings Factor) Regulations 1996 SI 1996 No 2477). The provisions covering the period between 6 April 2000 and when the new regulations are made are purely transitory. As such, the Department considers that this is a matter which is appropriate to secondary legislation.

OTHER PROVISIONS

CLAUSE 38 - INHERITED SERPS

175.  This clause amends section 52 of the Welfare Reform and Pensions Act 1999 in three ways, all of which will be reflected in affirmative regulations made under that Act.

176.  Firstly, subsections (1) and (2) provide that the introduction of the reduction in the proportion of a SERPS pension from 100% to 50% which can be inherited by a surviving spouse should be postponed from 6 April 2000 to 6 October 2002. Subsection (3) provides a new power to further amend the period of postponement by regulation, for example if large numbers of claims are received by the scheme to be established under section 52(4) of the Act (the Inherited SERPS Scheme) shortly before the end of the period in which such claims are to be determined.

177.  Subsection (4) widens the nature of the claims which may be determined under the Inherited SERPS Scheme so as to also encompass people who were denied the opportunity of considering taking relevant steps to protect their spouse's position because they relied on incorrect or incomplete information.

178.  Subsection (5) allows the regulations establishing the inherited SERPS scheme to set specific criteria for the matters and presumptions that may be used to determine whether a claim under the scheme has been successful. This is necessary to reduce the risk of fraudulent claims whilst ensuring that claims cannot be dismissed solely because they cannot be supported by documentary evidence.

179.  These matters are to be dealt with under delegated legislation because of the need to consult with interested parties before bringing forward the details of the scheme and the need to allow for greater flexibility should the need for change arise. The Welfare Reform and Pensions Act 1999 provides that these regulations shall be subject to the affirmative procedure. As such there will be a further opportunity for both Houses of Parliament to debate the detail of the inherited SERPS scheme before it is established.

CLAUSE 39 - HOME RESPONSIBILITIES PROTECTION

180.  This clause inserts sub-paragraph (7A) into paragraph 5 of Schedule 3 to the Social Security Contribution and Benefits Act 1992. Paragraph 5 of Schedule 3 to that Act concerns the contribution conditions which must be satisfied for Retirement Pension and Widow's Benefits.

181.  One of the conditions is that National Insurance Contributions must have been paid or credited for "the requisite number of years in the working life". Paragraph 5(7) allows for the number of years to be reduced by those years in which a person has been precluded from regular employment by responsibilities at home, provided that National Insurance Contributions have been paid or credited for at least 20 years (22 years from 2020).

182.  As described above, the power provided by new section 44A(2)(c)(ii) of the Social Security Contributions and Benefits Act 1992 (as inserted by subsection (3) of clause 30) is intended to include within State Second Pension those people precluded from regular employment because they are caring for a sick or disabled person.

183.  New paragraph 5(7A) provides for regulations to be made regarding the provision of information to the Secretary of State when a person wishes to show that they have been precluded from regular employment by responsibilities at home.

184.  Home Responsibilities Protection for basic pension is given automatically to someone receiving Child Benefit for a child under 16 for any year in which they have not earned and paid enough National Insurance Contributions to acquire an earnings factor sufficient to make the year count for pension purposes. Under State Second Pension, someone receiving Child Benefit for a child under 6 will automatically be treated as if they had an earnings factor at the Low Earnings Threshold in any year in which they have no earnings or earnings below the Lower Earnings Limit for that year.

185.  However, those meeting the prescribed conditions (see the note on the delegated power in clause 30(3) above) for caring for a sick or disabled person have to supply the necessary information for this to be taken into account when assessing their pension entitlement. Currently such notifications can be made at any time up to state pension age for periods back to 1978 (when Home Responsibilities Protection was introduced).

186.  It is intended that regulations will require such notifications to be made by the end of the third year following the year in which the caring activity took place. This requirement will only apply to qualifying periods after the introduction of State Second Pension. The purpose is to ensure that entitlement to State Second Pension on the grounds of caring activity is established and recorded timeously. It will also determine any years to be excluded from the requisite number of years in the calculation of basic pension.

187.  The criteria for Home Responsibilities Protection are set out in regulations (the Social Security Pensions (Home Responsibilities) Regulations 1994 (S.I. 1994/704)). The Department does not, therefore, consider it appropriate to include the detail of this change on the face of the Bill.

CLAUSE 40 - SHARING OF STATE SCHEME RIGHTS

188.  Clause 40 amends Section 49(4) of the Welfare Reform and Pensions Act (WRPA) 1999 which deals with the creation of state scheme pension debits and credits for the purpose of pension sharing. Subsections (2) - (4) of clause 40 make symmetrical amendments to sections 45B(7), 55A(6), and 55B(7) of the Social Security Contributions and Benefits Act 1992 (inserted by Schedule 6 to the 1999 Act). Section 45B of that Act is concerned with the reduction in the additional pension of the member whose pension has been shared; section 55A deals with the calculation of the additional pension acquired by the former spouse who was the beneficiary of the pension share (who receives a "shared additional pension"); section 55B makes provision for the reduction of a shared additional pension which has itself been the subject of a pension sharing order or agreement.

189.  The provisions relating to cash equivalent calculations in other pensions legislation are necessarily complex (matters) and therefore left to delegated legislation and the Department believes that the calculations to place a cash equivalent on state scheme rights should be dealt with in the same way.

190.  The provisions in subsection (1) of clause 40 enable the Secretary of State to make regulations providing for the calculation and verification of the cash equivalents of state scheme additional pension rights which have been the subject of a pension sharing order or agreement.

191.  The clause provides a sub-delegation power (new subsection (4A)) which may be used when a valuation of state scheme rights is required for the purposes of creating a pension debit and credit. The power does two things: it allows the valuation to be calculated and verified in such a manner as may, in the particular case, be approved by or on behalf of the Government Actuary; and, that in carrying out a valuation, the Government Actuary will act in accordance with guidance from time to time prepared by a person prescribed by the regulations. The reference to "guidance" and "person prescribed", relates to actuarial guidance in relation to the calculation of cash equivalents prepared by the Institute of Actuaries and the Faculty of Actuaries.

192.  Similar provisions are already in place for other pension sharing provisions in the WRPA 1999 where a valuation of pension rights is needed. Without these provisions, detailed tables would have to be provided in regulations which would themselves have to be amended, by a further statutory instrument, each time the Government Actuary decided that the methods and/or the assumptions underlying the tables needed to be changed.

CLAUSE 41 - DISCLOSURE OF STATE PENSION INFORMATION

193.  This clause provides that state pension information can be passed to employers and pension scheme providers unless individuals have indicated that they do not want such information disclosed by "opting-out". It also provides that state pension details can be passed to other third parties provided the express consent of the individual concerned has been obtained.

194.  In the Department's view the detail of the "opt-out" procedure is appropriate to secondary legislation. Regulations provide the flexibility to allow the detailed operation of the "opt-out" procedure to be amended following consultation with employers and pension providers and to be adjusted in the light of operational experience. This will allow the procedure to be refined to ensure that its operation achieves a high level of take-up of the new service and minimises the administrative burden on employers and pension providers.

195.  Subsection (2) enables regulations to confer a power on Secretary of State to disclose state pension information to the persons described in subsection (3)(a) to (e) (trustees and managers of occupational and personal pension schemes, employers and third parties engaged in the provision of financial information services). Subsection (2)(a) provides that an application to the Secretary of State for disclosure of the information must be made in a prescribed manner. It is intended that regulations made under this clause will provide that applications should be made in writing and should only relate to those individuals who have indicated that they wish their state pension information to be disclosed either by giving their express consent or where appropriate by not opting-out. Subsection (2)(b) provides that the prescribed conditions in subsections (4) and (5) must be complied with for such a disclosure to be made.

196.  Subsection (4) specifies the minimum conditions that must be included in regulations made under this section. Subsection (4)(a) provides that, with regard to third parties engaged in the provision of financial information services, regulations must include the condition that disclosure can only take place with the consent of the individual concerned.

197.  Subsection (4)(b) provides that, for other persons referred to in subsection (3) i.e. trustees or managers of occupational and personal pension schemes and employers, regulations must include the condition that disclosure can only take place with the consent of the individual concerned or the alternative condition provided for in subsection (5).

198.  It is not envisaged that regulations will impose any further conditions. However, setting the conditions in regulations provides the flexibility to set additional conditions in the light of operational experience.

199.  The alternative condition in subsection (5) relates to the "opt-out" procedure and is intended to be used to prescribe in regulations the steps that have to be taken by the employers or pension providers concerned to ensure that individuals who would receive the new combined forecast are aware that they can opt-out of the process. Steps will include a clear indication to individuals of what is intended and how they may opt out of the process by a written notification. Minimum time limits for the process will be set to ensure that individuals have adequate time to consider what is intended and to take opt-out action if they wish to do so.

200.  Employers and pension providers will be consulted on the detail of the "opt-out" procedure. It is intended that once regulations are in place it will be trialled in a number of pilots before the full service is rolled out. It will then be decided whether any adjustments need to be made.

201.  Subsection (6) confers a power on the Secretary of State to make regulations to specify what information relating to an individual may be used by an applicant for state pension information to ensure that the right information is identified and disclosed by the Secretary of State. This information is likely to include the surname and forenames of the individual concerned, date of birth, National Insurance Number and any identifying staff or pension scheme number.


 
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