Pensions: the statutory override and ‘protected persons’

When some nationalised industries were privatised in the 1980s and 1990s, arrangements were put in place requiring the new private sector employer to continue to provide pension benefits for existing scheme members that were at least as good as those they were receiving in the public sector. The employer was prevented from making changes which reduced future pension accruals or increased employee contributions. These ‘protected persons regulations’ are specific to a number of industries namely electricity, rail (including London Transport) and coal.

The current state pension is made up of two tiers – a basic State Pension and an additional State Pension (which is partly earnings-related). Since introduction, it has been possible to contract out of the additional State Pension into a pension scheme that meets certain requirements. In return for the fact that the employee is not accruing rights to the additional State Pension for that period, they and their employee pay a reduced rate of National Insurance contributions (NICs), via a contracted-out rebate. The Pensions Bill 2013/14 would introduce a single-tier State Pension, replacing the current two-tier state pension, for future pensioners from April 2016. Because there will no longer be an additional State Pension, there will also no longer be an option to contract-out. Employers sponsoring contracted-out pension schemes (and their employees) will therefore start to pay NI at the standard rate. Clause 24 of the Bill would provide sponsoring employers with a limited override of scheme rules, to enable them to make changes to adjust for the additional NI cost.

In March 2013, the Government launched a consultation on whether the override should include members covered by the protected persons regulations. Employer representatives argued that, in the interests of fairness and affordability, the rule changes should be allowed for all employees, including those who are ‘protected persons’. On the other hand, trade unions and pension scheme trustees argued that the protection arrangements put in place at privatisation should not be undermined. In its response to the consultation published in February 2014, the Government said it had decided the promises made at privatisation should be honoured. Accordingly, it amended the Pensions Bill to prevent the statutory override being applied in respect of scheme members with protected person status.