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The end of contracting-out
In the raft of proposed changes coming our way in 2012, it’s easy to forget that this is also the year that contracting-out of the State Second Pension (S2P) for defined contribution (DC) schemes ends. The abolishment comes into effect on 6 April 2012 and The Department for Work and Pensions (DWP) has now issued a 51 page consultation outlining the draft legislation.
Although the regulations aren’t designed to come into effect until 2012, the paper includes plenty of meaningful suggestions for replacing the existing legislation. DWP HQ are also using the paper as a vehicle to remind trustees of their duty to make sure DC scheme members are aware that come 6 April 2012, contracting-out will soon be a distant memory. The main points raised in the consultation include the following:
- A three year transitional period which will allow the current automated rebate and recoveries process between HMRC and DC schemes to continue in order to ease administrative burdens.
- Amendments will be made to the Occupational Pension Schemes (Contracting-out) Regulations 1996 and The Contracting-Out (Transfer and Transfer Payments) Regulations 1996. In addition to removing references to contracting-out terms, these will also remove references to transfers between contracted-out defined benefit (DB) and contracted-out DC schemes. If this rather controversial proposal goes ahead, transfers from contracted out DB schemes to DC schemes won’t be possible. This could lead to many such transfers being done while they still can, putting further pressure on the funding of DB schemes.
- The amount of rebate payable can be impacted by changes in individual NI records - the introduction of a ‘de minimis’ (minimum) limit. This will restrict the amount of rebate paid to the individual to avoid HMRC making a payment less than the cost of making it.
- A flat-rate 50% contracted-out deduction will be applied to survivors’ State Earnings Related Pension Scheme (SERPS) benefits in all cases – this accounts for the fact that schemes will no longer be required to track protected rights separately.
The consultation goes into much more detail on these points and the rest of the draft regulations. The consultation period closes on 19 October 2010.
Published 3 August 2010
Updated 16 August 2010
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