Since the introduction of the state earnings-related pension scheme (SERPS) in 1978, employees who have adequate private provision have been able to "contract out", that is to give up all or part of the benefits of SERPS. In return they pay lower National Insurance contributions, or receive rebates of National Insurance contributions paid into their defined-contribution (money purchase) pension schemes or personal pensions.
This principle continued following the introduction of the state second pension (S2P), which replaced SERPS in April 2002.
Rates of reductions in National Insurance contributions and rebates are generally reviewed every five years. The Secretary of State for Work and Pensions is required to present to the UK parliament a report by the Government Actuary on the reductions in contributions and rebates.
The Pensions Act 2007 has made some changes to the arrangements for contracting out of S2P. In particular, the Act provides that contracting out on a defined contribution basis (via contracted-out money purchase schemes (COMPS), mixed benefit schemes contracting out on a money purchase basis and appropriate personal pension schemes (APPS)) will be abolished from a date appointed by the Secretary of State (currently not expected to be before the 2012-13 tax year). In addition, the Act specifies a move to a system of two bands of S2P accrual with effect from the 2010-11 tax year and this will affect rebates paid to APPS. All readers should ensure they have regard to the relevant legislation, particularly concerning those areas of contracting out affected by changes introduced by the Pensions Act 2007.
Review for the quinquennium from 6 April 2007 to 5 April 2012
Consultation on assumptions
The Government Actuary consults on the assumptions that will be used in his report to parliament on the reductions in contributions and rebates. A consultation document relating to rebates for the period 6 April 2007 to 5 April 2012 was issued on 19 September 2005, along with an accompanying press release. A short supplementary note was issued on 24 November 2005.
Report to UK parliament
Following careful consideration of the responses to the consultation document, the Government Actuary prepared his report to the Secretary of State for Work and Pensions on the rates of contribution reductions and rebates for the period of 6 April 2007 to 5 April 2012.
That report, together with the Secretary of State's own report, was laid before parliament on 1 March 2006.
Review for the quinquennium 6 April 2002 to 5 April 2007
Following a previous consultation exercise, the Secretary of State for Social Security presented, on 1 March 2001, a report to the UK parliament on the rates of contribution reductions and rebates for the period 6 April 2002 to 5 April 2007, together with the relevant Government Actuary’s report.
Rebate rates for years beyond 2011 to 2012 for illustrations
of money-purchase benefits
For some purposes, particularly illustrations of money purchase benefits (including the statutory illustrations to be provided under Pensions Technical Memorandum TM1: Statutory Money Purchase Illustrations), it may be necessary to know the contracted-out rebate rates as a percentage of earnings for years beyond the end of the quinquennium covered in the latest rebate orders.
The technical memorandum can be obtained from the website of the Board for Actuarial Standards:
The Excel files below give rebate rates for the entire future working lives
of those aged 15 and above as at 5 April 2011, as described in paragraph
B1.2 of appendix B of the technical memorandum.
The rates are based on the
assumptions adopted in the Government Actuary’s report for the quinquennium
from 6 April 2007 to 5 April 2012, with the additional assumption that the
cap of 7.4% is retained throughout.
In applying these projected rebate rates, it is important to have regard to the provisions of the Pensions Act 2007. As noted above, this Act provides that contracting out on a defined contribution basis will be abolished from some future date. Furthermore, the file attached below for APPS shows the projected rebate rate for Band 3 earnings, which is currently based on a 20% accrual rate. However, under the Pensions Act 2007, this earnings band will no longer exist from 2010-11 and it will instead be included in band 2 earnings (based on a 10% accrual rate). The Department for Work and Pensions intends to amend the current rebate Order (S.I. 2006 No. 1009) so that it reflects these changes.
Contact us
If you have any queries on the above, please email
enquiries@gad.gov.uk, or phone +44 (0)20 7211 2723.
