HC Deb 07 November 1972 vol 845 cc116-8W
Mr. McCrindle

asked the Secretary of State for Social Services whether he will give an indication of the alternative methods likely to be prescribed for calculating the minimum personal pension needed under an occupational scheme to exempt the employee concerned from the reserve pension scheme.

Mr. Dean

Under the standard recognition test laid down in the Social Security Bill, 1972, for exempting employees and their employers from contributing to the reserve pension scheme, their occupational scheme must provide a minimum level of personal retirement pension based on their reckonable earnings throughout the whole of their relevant period of employment. This test can readily be applied to average salary pension schemes. The Bill enables alternatives to the standard test to be prescribed for money purchase and final salary schemes, and for schemes which provide death benefits by allocating a part of the man's personal pension. These alternative tests will be more precisely formulated after further consideration but our proposals are likely to be broadly on the following lines.

Money Purchase Schemes

To qualify for recognition, the Bill requires money purchase schemes to be based on a contribution of at least five per cent. of the employee's reckonable earnings—at least 2.5 per cent. coming from the employer—applied in accordance with an age-related scale. In addition we propose that the scale should include a guaranteed element, giving a personal pension which—subject to minor variations—is at least as high as the pension the employee would have been guaranteed on the same earnings under the reserve pension scheme—or 25 per cent. higher if the occupational scheme makes no provision for post-retirement increases. Where schemes have a higher contribution than five per cent., the conditions relating to minimum benefits in recognised schemes—precluding, for example, commutation—will not apply to benefits above the product of a 5 per cent. contribution, if these can be satisfactorily identified.

Final Salary Schemes

For schemes giving post-retirement increases, we envisage that the minimum personal pension required for recognition should be at least 0.6 per cent.—0.4 per cent. for women—of final reckonable earnings for each year of recognised pensionable employment, but, in order to protect the short service employee, the scheme should either—

  1. (a) substitute 1 per cent.—0.7 per cent. for women—for each of the first five years of such service, or
  2. (b) increase the deferred pensions of those who leave before pension age, over the period up to pension age, by 3 per cent. per annum compound or on one of the alternative bases open to recognised schemes for increasing pensions in payment.

In schemes not giving post-retirement increases the minimum pension would need to be 25 per cent. higher.

Final reckonable earnings would be earnings in the last year of service or average annual earnings over a longer period before leaving, but other formulae would be allowable such as the average of the best three years in the last ten.

Schemes using the Allocation Method for providing Widowhood Cover

Schemes providing widows' pensions on death after retirement by allocating a part of the man's personal pension at pensionable age will be able to satisfy the recognition requirements provided that allocation is made compulsory for married men and the minimum personal pension before allocation is higher than would otherwise have been the case: we have in mind setting the level at 25 per cent. higher.

General

Besides providing the required level of personal pension, recognised occupational schemes will need to satisfy the other tests laid down in the Bill—in particular, those relating to the level of widowhood cover. These other conditions will be adapted as necessary to fit in with the alternative tests outlined above relating to the level of personal pension.