The DWP has launched a new consultation document [PDF] seeking views on

1. the treatment of protected rights accrued before the abolition of defined contribution (DC) contracting out; and
2. the operational arrangements to be put in place to cater for the abolition of DC contracting out.

This stems from the White Paper Security in retirement: towards a new pensions system, published on 25 May 2006, which included proposals to abolish contracting out on the protected rights basis at the same time as the Basic State Pension is uprated in line with earnings (no earlier than 2012). This would apply to COMPS and APPs as well as the money purchase sections of Contracted-Out Mixed Benefit Schemes (COMBS). From the date of repeal of DC contracting out, membership of these schemes will no longer attract rebates and active members will cease to accrue new protected rights. The intention is that all scheme members' entire money purchase pension funds can thereafter always be treated in the same way e.g. rules applying to purchase of annuities, transfers, payment after death of member etc.

This sounds like genuine simplification, but of course there's a snag: the current requirement to provide a survivor benefit out of protected rights. If this were to be removed, the scheme member would be able to buy a single-life annuity from his or her protected rights fund. After death his or her surviving spouse or civil partner would receive no inherited benefit from the protected rights pension. Worse still, where the member was contracted-out pre-1997, although the survivor is entitled to some or all of the deceased member's State Additional Pension rights, a contracted out deduction (COD) is made. The DWP is known to be worried this might further impoverish spouses or civil partners without any adequate pension provision of their own, and wants to know how this circle might be squared (ie simplification achieved without jeopardising survivor pensions).

On the operational side, further difficulties are envisaged. There are two ways in which the contracted-out status could cease:

• Schemes could be required to surrender their certificates in the same way as currently applies, or
• Legislation could provide for automatic cessation of contracting out for all schemes.

Requiring schemes to surrender their certificates in the normal way would place an additional requirement on schemes and would have costs for HMRC. The Government therefore proposes to introduce arrangements for automatic cessation of scheme certificates. The members need to be told what's going on, though, so they can take informed action. The Government is seeking your views on how the changes could be communicated to the 3.5 million members of contracted-out DC schemes, presumably without triggering another scandal.

A second and potentially even more problematic issue is the necessary reconciliation exercise to ensure that NIC records are up to date at the point DC contracting out is abolished. This will involve HMRC and schemes in agreeing and confirming membership of schemes. The Government recognises that such an exercise is likely to make demands on resources for pension providers and for occupational schemes (to say nothing of NICO's computer systems), so views are sought from the industry on how this might be achieved.

A third problem concerns the DWP’s need to know whether or not a deceased person had secured their protected rights, in order to identify whether a half or full COD should be applied to a survivor benefit from the inherited State Additional Pension. Is there a straightforward way in which this information could be provided and by whom, once protected rights have been turned into scheme rights and/or transferred to another scheme?

A postcard is unlikely to be sufficient. The consultation closes on 13 October 2006.

A second consultation [PDF] launched by DWP this week* seeks views on two sets of draft regulations:

• The Pension Protection Fund (Miscellaneous Amendments) Regulations 2007; and
• The Pension Protection Fund (Waiver of Pension Protection Levy and Miscellaneous Amendments) Regulations 2007

*NB. An early, incomplete, version of this condoc was inadvertently posted on the DWP website on Tuesday 12 September (and subsequently removed, we think later that day). Any copy downloaded on Tuesday should be scrapped.

These regs make largely technical amendments. The Waiver regs also cover five categories of pension scheme that may apply to the Board of the PPF for it to consider waiver of either or both the scheme-specific or risk-based levy. These categories are:

• 'Old Code' (ICTA 1970) schemes
• Closed (PA 2004 s.153) schemes
• schemes where the DB element is fully insured to the Board's satisfaction
• schemes where the sponsoring employer is in voluntary liquidation and this is anticipated to be completed by 31 December of the levy year
• where two schemes would otherwise be liable to pay levies in respect of the same group of people who are entitled to benefits under each scheme in respect of the same service in the same employment, the later established scheme.

The regs also prescribe conditions for waiver.

This consultation closes on 5 December 2006.

Meanwhile, The Board of the Pension Protection Fund on 11 September published its proposals [PDF] for the 2007/08 risk based levy.

The proposals reflect feedback from stakeholders during the 2006/07 levy consultation which called for stability in the second year, and operational experience of implementing the 2006/07 pension protection levy. The Board is therefore recommending limited changes to the way the levy is distributed between eligible schemes.

The key changes proposed, which according to the official press release are consistent with the Board's principles of fairness, simplicity and proportionality, are:

• revised standard documentation for contingent assets, available from November 2006, including new standard documentation for a Type C contingent asset (letter of credit or bank guarantee) in support of a schedule of deficit-reduction contributions;
• revised section 179 guidance for the risk-based levy valuation, following earlier consultation with the actuarial profession (the effect could be a reduction of about 5% in s.179 liabilities, according to the PPF's estimates); and
• a revised approach to the inclusion of insured liabilities within section 179 valuations.

The document also highlights that the Board is working with Dun & Bradstreet to consider whether aspects of the D&B methodology, such as the weighting applied to County Court Judgements (widely regarded as disproportionately great in 2006/07), and the application of the methodology to certain types of employers such as large employers and the not-for-profit sector, need to be adjusted for the 2007/08 levy.