Personal Pension  

DWP starts rewriting contracting out rules

DWP starts rewriting contracting out rules

The Department for Work and Pensions has confirmed that where rules are no longer necessary after the end of contracting out, some will remain in place for a limited period to enable a smooth ending of this option.

A government consultation is asking for views on proposed further legislative changes in the draft Pensions Act 2014. The order contains for the most part minor and technical changes to other secondary legislation to take account of the abolition of contracting out, with the more major proposed changes following on from regulations published in September.

In March 2013, the chancellor confirmed that the introduction of the single-tier state pension would begin a year earlier than expected in 2016 to 2017, meaning defined benefit members could no longer contract out and would have to pay more national insurance.

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At that time, George Osborne stated that the single-tier pension would help the low paid, self-employed and women.

“Of course, if there is no longer the old state second pension, there is no longer anything to contract out of,” he pointed out. “For employers that means paying the same employer national insurance as those without DB schemes.”

Three years ago, Mr Osborne said while private sector employers could adjust their pension benefits to accommodate the extra cost, public sector employers would have to absorb the burden.

John Reeve, senior consultant at Premier Pensions, explained that inevitably when something like this changes, there are knock on effects to other areas of legislation and regulation which need to be tidied up.

“However, this is a timely reminder to employers to bite the bullet and deal with the consequences of the end of contracting out quickly. The end of contracting out will have an effect on employers and on members - members will pay more National Insurance and will see a reduction in take home pay.

He also pointed out that employers will see an increase in their NI bill. “We have been surprised how slow employers have been to address the issue and decide what they are going to do. Given that any scheme changes are subject to consultation they are running very short of time.

“This is largely an employer issue. Trustees could take the view that if the employer does not want to make any changes (or just doesn’t get around to it) then this is probably in their members interests and so they should keep a low profile.”

Neil MacGillivray, head of technical support at James Hay Partnership, pointed out that people who are contracted out still qualify for the same basic state pension.

“The bit that is concerning is the single tier pension. It’ll be interesting to see whether or not it is affordable to continue with the single tier pension in the longer term.

“For people who would be entitled to a larger state pension, they are now going to get a flat rate, so there will be winners and losers. It’ll be interesting to see how this will work out in the longer term.”