§ The Secretary of State for Work and Pensions (Mr. Andrew Smith)In our document "Action on Occupational Pensions" (Cm 5835), published on 11 June, the Government stated their intention to make it easier for employers to provide pensions by simplifying key areas of legislation while at the same time offering appropriate protection to scheme members. In particular, we proposed to explore options for a workable and affordable solution to the problems created by the complexity of the Guaranteed Minimum Pension (GMP) element of contracted-out schemes. I am now able to announce the results of this work.
We intend to introduce measures that will permit contracted-out defined benefit schemes to convert GMPs into scheme benefits. Where a scheme converts its liabilities in this way, it will no longer be required to offer a scale of benefits incorporating the complex GMP rules for the period 1978 to 1997 and will be free to design a benefit structure that best reflects the needs of its members. If schemes take up this option they will have to convert on the basis of actuarial equivalence: the trustees will be required to offer scheme benefits of equal accrued value in exchange for the benefits given up, including the GMP.
As a result of this and other measures announced previously, pension schemes will be able to achieve significant simplification in their administration. On top of the other proposals for simplifying contracting out in "Action on Occupational Pensions", we estimate that these measures should result in administrative savings for pension schemes of up to £16 million a year.
Because of the process of actuarial conversion, any resulting changes will not affect the value of individual accrued rights. Members' interests will also be protected by other measures already outlined in our Green Paper "Working and Saving for Retirement" and "Action on Occupational Pensions".
For example, the new Pensions Regulator will be able to issue a code of practice aimed at protecting the interests of members of schemes wishing to take advantage of the GMP conversion measure. Also, the Pensions Advisory Service and the Pensions Ombudsman will be able to consider any complaints that members have as a result of any change.
Nothing in these proposals forces schemes to change and we appreciate that many of them may not wish to do so. We are simply offering schemes the option to design their benefits more flexibly across the piece in this way, while protecting the value of members' accrued rights. This means we are striking the right balance between making it easier (and more cost effective) for employers to run schemes and safeguarding members' rights.