Legal experts have called for a statutory override in scheme rules to avoid members getting more benefits than originally intended from bridging pensions, as the industry approaches the switch to a single-tier state pension in 2016.
Bridging pensions are used by schemes to address the gap between male and female state pension ages by giving members who retire before age 65 an additional amount of income until their second state pension kicks in.
[Schemes] won’t be able to save money and so they’ll be giving current members an increased pension for a period of time
Rosalind Connor, Taylor Wessing
Under the Pensions Act 2014 the additional state pension will be scrapped and members will receive only the basic state pension from April 1 2016.
But how the state pension is referred to in the scheme’s rules could have unintended consequences, lawyers said.
Schemes could end up paying more benefits than originally intended if, for example, a basic state pension deduction to a member’s pensionable salary was deemed no longer to apply, meaning the value of their past-service rights were inflated.
Lucky pensioners
Members receiving a bridging pension will no longer need this additional amount of income, said Rosalind Connor, partner at law firm Taylor Wessing, but schemes may not be able to claw it back.
“[Schemes] won’t be able to save money and so they’ll be giving current members an increased pension for a period of time,” she said.
The government is currently considering whether regulations should be put in place to allow trustees to make the necessary changes to scheme rules to deal with the issue.
Other schemes use a state pension offset, which reduces a member’s pensionable earnings to take account of the amount of state pension a member will get.
“The problem that all this [creates is] if they have got that written into their scheme rules they will have it defined around the way the state pension is calculated today,” said Richard Kandler, of counsel at law firm Linklaters.
Under section 67 of the Pensions Act 1995 trustees and employers are restricted from making changes to their scheme that would have a detrimental impact on members’ past-service benefits.
In addition, some schemes have restrictions written into their rules on making changes to benefits going forward.
The impact on schemes will depend on the precise wording of their rules, said Jill Clucas, of counsel at law firm Hogan Lovells.
“Some scheme rules will define pensionable salary as being the member’s regular salary less one-and-a-half times the basic state pension,” said Clucas.
“If you’re defining pensionable salary by reference to something that no longer exists [you need to] put in place something instead of that.”
Power to amend rules
Clucas said a statutory override power would enable schemes to make the necessary changes to their scheme rules.
She called for provisions before 2016 “so schemes can have some certainty on how they operate their scheme under the single-tier state pension”.
For the moment, schemes should review their rules to see whether they make reference to the state pension, she added.
Kandler agreed a statutory override would be the most obvious way of dealing with the issue.
“The problem is [with] most schemes – even if a scheme has other amendment powers – there’s legislation that says you can’t amend benefits that are already accrued, but with this you need to amend benefits that are already accrued,” he said.
The government is currently consulting on whether to give trustees the power to modify their rules to account for the abolition of defined benefit contracting-out.
The government is currently consulting on whether to give trustees the power to modify their rules to account for the abolition of defined benefit contracting-out.
A spokesperson for the Department for Work and Pensions said: “The government is considering whether regulations should be made so that trustees can make the necessary changes to ensure scheme rules will continue to have the same effect, notwithstanding changes to contracting-out and state pension legislation following the passage of the pensions bill 2013-14.”
However, Connor said a statutory override may be difficult for the government to issue since the way that scheme rules deal with the state pension varies dramatically.
“Statutory override might be a bit more difficult because you might find that the government doesn’t want to give people too much freedom to change the pension they have got,” said Connor.
