Members benefits could to be eroded further under several of Pickering proposals for changes to cont...
Members benefits could to be eroded further under several of Pickering proposals for changes to contracting-out, including suggestions that occupational pension schemes be allowed to base all pensions calculations on a minimum of 1/100th pensions accrual rate rather than 1/80th.
A simpler reference scheme test (RST) needs to be adopted for contracted-out salary related scheme, says Pickering, which all schemes must meet under the Guaranteed Minimum Pension (GMP), but schemes will also be allowed to offer more than the minimum requirement to members if they prefer.
Under changes to the Reference scheme test (RST) Pickering recommends actuaries calculate final salary payments so each year worked represents 1/80th of their salary, however changes mean all earnings - rather than the 90% of earnings between Lower Earnings Limit (LEL) and Upper Earnings Limit (UEL) - will be used to make these calculations, subject to government restrictions yet to be defined.
And rather than basing calculations on the member's earnings for the last three years, Pickering recommends the government "explores moving towards career average earnings" - a move which could either benefit those who do not earn as much as they head for retirement, or penalize people who end up with a strong final salary but have had a reasonably low salary for a substantial amount of their career.
Before any of these decisions are even taken, the scheme has to decide whether or not it is in the interest of members for the scheme to contract out.
Rules on this decision could also be changed to the detriment of members, as current requirements say no more than 10% of members or one in ten should be worse off from contracting out. Pickering now proposes this rule should be changed so no more that 20% or one in five members are worse off.
Schemes would also no longer be required to provide 50% of the member's pensions as a spouse's pension.
And there will no longer be a set date which contracted-out rights must be paid or based on, as this will now be based on the pension scheme's rules, as long as it is no later than 65, say the Pickering report.
A mechanism to allow schemes to convert GMPs to RST benefit equivalents or protected-rights would need to be created but how this will be done should be subject to further consulation, suggests Pickering.
Officials at Scottish Life say they are outraged by proposals to change the contracting-out calculations because they appear to significantly erode members rights and the benefits they will receive rather than simplify processes and administration of pension schemes.
Employers will be financial benefactors to the changes, not just in terms of decreased administration, as they will be required to put less money in to pay for a member's future benefits.
Who made the cut?
Transferring out of DB scheme
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