Schedule 2: Additional pension: simplified accrual rates
Part 1 - New Schedule 4B to the SSCBA
196.Paragraph 1 of Schedule 2 inserts new Schedule 4B into SSCBA1992 to provide for the new method of calculation of additional state pension.
197.Paragraph 1 of new Schedule 4B provides that the amount of additional state pension accrued for the years from the flat rate introduction year onwards is to be the aggregate of the appropriate amounts in respect of each year in which the pensioner was in contracted-in employment, calculated in accordance with Part 2 of Schedule 4B (see paragraphs 198-202 below) and the appropriate amounts in respect of each year in which the pensioner was in contracted-out employment, calculated in accordance with Part 3 of the Schedule (see paragraphs 203-209).
198.Paragraphs 2 to 5 (Part 2) set out the calculation for the amount of additional state pension in respect of years of contracted-in employment.
199.Paragraph 2 provides that Part 2 applies to a tax year if the “contracted-out condition” (see paragraph 12) is not satisfied for any tax week in the year.
200.Paragraph 3 provides that the appropriate amount for the year is to be either the flat rate amount where a person’s total earnings factor does not exceed the low earnings threshold or, where there is a surplus earnings factor exceeding the low earnings threshold, the aggregate of the flat rate and earnings related amounts.
201.Paragraph 4 provides that the ‘flat rate amount’ of additional state pension will be the ‘FRAA’ – £72.80 initially and then as uprated annually under new section 148AA of the SSAA1992 (see paragraph 213 below).
202.Paragraph 5 provides that the ‘earnings related amount’ is calculated by:
identifying the surplus earnings between the low earnings threshold and the upper accrual point; then
multiplying that figure by the relevant amount under the last order under section 148 of the SSAA1992; then
multiplying that amount by 10%; then
dividing that amount by 44.
203.Paragraphs 6 to 10 (Part 3) set out the calculation for the amount of additional state pension in respect of years of contracted-out employment.
204.Paragraph 6 provides that Part 3 applies to a tax year if the contracted-out condition is satisfied for each tax week in the year.
205.Paragraph 7 prescribes that the appropriate amount for the year is to be calculated by subtracting Amount B from Amount A.
206.Paragraph 8 provides that Amount A is the ‘flat rate amount’ of additional state pension, i.e. the ‘FRAA’ – as uprated annually under new section 148AA of the SSAA1992, where there is no surplus above the low earnings threshold.
207.Paragraph 9 provides that where there is a surplus exceeding the low earnings threshold, Amount A is to be calculated by:
identifying the assumed surplus for the relevant year between the low earnings threshold and the upper accrual point; then
multiplying that figure by the relevant amount under the last order under section 148 of the SSAA1992; then
multiplying that amount by 10%; then
dividing that amount by 44; then
adding this amount to the flat rate amount for the year (paragraph 8 refers).
208.Paragraph 10 provides that Amount B is to be calculated by:
identifying the assumed surplus for the relevant year between the qualifying earnings factor and the upper accrual point; then
multiplying that figure by the relevant amount under the last order under section 148 of the SSAA1992; then
multiplying that amount by 20%; then
dividing that amount by the number of years in the pensioner’s working life.
209.Paragraph 10(2) provides that section 44B of the SSCBA1992 (deemed earnings factors) is to be ignored in applying section 44(6) for the purposes of calculating Amount B. This ensures that a person’s actual earnings factors are used in the calculation, thereby producing an amount by way of top-up to the benefits provided by their private pension scheme.
210.Paragraph 11 allows the Secretary of State to make regulations so as to vary any of the calculations described above in circumstances where a person has a combination of contracted-in and contracted-out employment within a tax year or where a contracted-out pension scheme makes arrangements to buy back state scheme rights of their members.
211.Paragraph 12 defines the terms “assumed surplus”, “contracted-out condition”, “the FRAA” “the LET”, “the QEF”, “relevant year”, and “the UAP”.
212.Paragraph 13 further defines “the FRAA”.
Part 2 - Revaluation of Flat Rate Accrual Amount
213.Paragraph 2 of this Schedule inserts new section 148AA into the SSAA1992.
214.Subsection (1) of the new section requires the Secretary of State to review the general level of earnings in the tax year prior to the flat rate introduction year and in subsequent tax years.
215.Subsection (2) defines “review period”.
216.Subsection (3) requires the Secretary of State to make an order under this section where the general level of earnings has increased over the review period.
217.Where a revaluation order is made, subsection (4) requires the FRAA to be increased by not less than the percentage by which the general level of earnings increased during the review period.
218.Subsection (5) refers to the initial rate of the FRAA at £72.80 per year, which equates to a weekly amount of £1.40.
219.Subsection (6) allows the amount of the FRAA as determined by subsections (4) and (5) to be rounded up or down as the Secretary of State considers appropriate.
220.Subsection (7) allows the Secretary of State not to increase the FRAA where an increase would be inconsiderable.
221.If the Secretary of State determines that he is not required to make an order under this section, subsection (8) requires the Secretary of State to lay a report before Parliament explaining his decision not to do so.
222.Subsection (9) allows the Secretary of State to estimate the general level of earnings as he sees fit. In practice this means the Secretary of State will be able to decide which measure or index of earnings growth is to be used for the purposes of earnings uprating.
223.Subsection (10) defines the terms “the flat rate introduction year” and “the FRAA”.
Part 3 - Consequential and Related Amendments: Social Security Contributions and Benefits Act 1992 (c.4)
224.Paragraph 3 amends section 39 of the SSCBA1992 to remove redundant references to Schedule 4A (which has no effect in the context of the benefits under section 39) and to repeal subsection (3) of that section (which no longer has any legal effect).
225.Paragraph 4(3) makes a clarificatory drafting amendment to section 39C of that Act.
226.Paragraph 5 amends section 44 of that Act to insert the necessary references to the new State Second Pension accrual regime introduced by the new Schedule 4B. The effect is that from the flat rate introduction year, those accruing state second pension for the purpose of their entitlement to a Category A pension will do so under the new rules.
227.Paragraph 6 inserts a new subsection (4) into section 46 of that Act, the effect of which is to provide that the component of widowed parent’s allowance relating to state second pension will continue to be calculated under the existing regime set out in section 45 (and Schedule 4A) after the flat rate introduction year rather than under the new regime introduced by section 11 (and the new Schedule 4B). Paragraph 4(2) amends section 39C of that Act as a consequence of this.
228.Paragraphs 7 to 10 amend respectively sections 48A, 48B, 48BB and 48C of that Act to insert the necessary references to the new state second pension accrual regime introduced by the new Schedule 4B. The effect is that from the flat rate introduction year, people bereaved after reaching state pension age will have their inherited state second pension entitlement in their Category B pension calculated under the new rules. The same will apply in respect of the state second pension component payable to bereavement allowance recipients.
229.Paragraph 11 removes a redundant reference to section 39(1) in Schedule 4A to that Act to reflect the amendment made by paragraph 3.
230.Paragraph 12 amends section 42 of the PSA1993 to make reference to the new Schedule 4B.
Section 12: Additional pension: upper accrual point
231.Subsection (1) amends section 22 of the SSCBA1992 to replace the reference to the upper earnings limit, which represents the current end point for additional pension accruals, with a reference to the new “applicable limit”. Prior to the flat rate introduction year, the applicable limit will remain as the upper earnings limit. From the flat rate introduction year, however, the applicable limit will be the new “upper accrual point”.
232.Subsection (2) amends section 44 of the SSCBA1992 in line with the provisions of subsection (1) to replace the upper earnings limit with the upper accrual point as the cap for earnings factors as from the beginning of the flat rate introduction year.
233.Subsection (3) amends section 122 of the SSCBA1992 to define the “upper accrual point”. This is defined as an amount equivalent to the upper earnings limit multiplied by 52 for the flat rate introduction year, except that there is power for the Secretary of State by order to specify a different amount should the forecast earnings growth not result in the low earnings threshold and the upper accrual point converging before 2030.
234.Subsection (4) introduces Part 7 ofSchedule 1 which contains consequential amendments relating to the simplified accrual rates.
235.Subsections (5) to (9) allow the Secretary of State to abolish both the low earnings threshold and the upper accrual point when the two converge, which is expected to happen in around 2030. (This will happen because the low earnings threshold increases at each up-rating in line with average earnings while, in contrast, the upper accrual point upon introduction will remain a fixed amount.) Subsection (5) activates these provisions when the low earnings threshold would otherwise be of an amount not less than the upper accrual point. At this time subsection (6) allows the Secretary of State by order to abolish both limits. Subsections (7) and (8) allow such an order to make any transitional or consequential amendments to primary legislation. Subsection (9) requires that any such abolition order must be approved by affirmative resolution of both Houses of Parliament. The effect of the convergence of the limits would be that, from that point, accruals for the state second pension would consist only of the flat rate accrual for any earnings factors over the qualifying earnings factor for the relevant year.
