We introduced the Pension Schemes Bill to Parliament on 26 June 2014. The Bill received Royal Assent on 3 March 2015 and became the Pension Schemes Act 2015.
You can find details of the Bill’s passage through Parliament, including links to the Bill, the Act and explanatory notes on the Parliament website.
Main provisions of the Pension Schemes Act 2015
The Pension Schemes Act sets out a new legislative framework for private pensions. This aims to make greater risk sharing between employers, individual members and third parties easier.
The Act is intended to encourage and enable ‘shared risk’ pension schemes and ‘collective benefits’.
They will both be potentially more affordable for employers than what are commonly known as traditional final salary schemes (where the member is promised a retirement income based usually on their final salary and years of service).
Categories of pension schemes
The structure of the current pensions system has developed historically from a binary (or 2-way) structure. The Act provides for 3 definitions, or categories, of scheme. This is to ensure there is a clear ‘shared risk’ category and thereby encourage more innovation.
These 3 categories describe what is promised to members, while they are saving, about what they will get when they access their savings or receive their retirement income.
These schemes offer a full promise while members are saving for their pension about what their income will be from that pension.
Shared Risk (also known as Defined Ambition)
These schemes offer a promise while members are saving for their pension about some of the outcome from the scheme, but not all. For example, it might promise:
- some, but not all, of the income the member will receive
- the size of the savings they will accrue based on a contribution level
- the rate of income their savings will buy them
‘Shared risk’ schemes offer more certainty to members while they are saving about the outcome than a Defined Contribution scheme does.
These schemes don’t offer a promise while members are saving for their pension about what their income will be from that pension.
The Act includes measures that will enable workplace and personal pension schemes to provide ‘collective benefits’. These are provided by allowing schemes to be run in a way that shares risks among members by pooling their assets. This means that when a member retires, they can receive an income from the shared assets of the scheme.
Evidence from other countries suggests that by sharing the risks among members, schemes providing ‘collective benefits’ may provide more stable outcomes than individual Defined Contribution schemes currently available in the UK. For example, while members are saving for retirement they can get some degree of protection from fluctuations in the financial markets.
Under the new definitions introduced in the Act, ‘collective benefits’ could be a feature of a Shared Risk or a Defined Contribution scheme.
Additional flexibilities for savers with Defined Contribution pensions
In the 2014 Budget, the government set out its intention to introduce new flexibilities to the way savers can access their Defined Contribution pension pots. These will give people more choice about how they fund their retirement.
The Pension Schemes Act 2015, along with the Taxation of Pensions Act 2014, will mean that from April 2015, individuals from the age of 55 will be able to access this pension flexibility if they wish. This will be subject to their marginal rate of income tax (rather than the current 55% tax charge).
Provisions in the Pension Schemes Act ensure that the new flexibilities operate as intended. These include:
- a guidance guarantee where everyone with a Defined Contribution pension arrangement is offered free, impartial guidance so they are clear on the range of options available to them at retirement
- prohibiting transfers (other than in very limited circumstances) from unfunded public service Defined Benefit schemes into schemes with Defined Contribution arrangements
- new safeguards to support individuals if they wish to transfer out of their existing Defined Benefit scheme to access the new flexibilities
As set out in our response to the ‘Freedom and choice in pensions’ consultation, the Taxation of Pensions Act 2014 legislates for the required tax changes.
Impact assessments relating to the Pension Schemes Act Bill and Act
We have published impact assessments about the provisions introduced by the Pension Schemes Act on the Parliament website.