The Pensions Act 2007 provides for the abolition of contracting-out for defined contribution pension schemes (both occupational and personal). The relevant provision is section 15(1) of the Act which provides that any contracting-out certificate for a money purchase occupational pension scheme and any "appropriate scheme certificate" (the certificate applicable to personal pension schemes providing contracted-out benefits) will cease to have effect on the date section 15(1) is brought into force (the "abolition date") thus effectively abolishing contracting-out on a protected rights basis for the future. The Act itself simply provides that section 15(1) will come into force on a date "to be appointed". It appears that the Government currently plans to bring section 15(1) into force around 2012, but in any event by the end of the next Government, which could make the date as late as 2015 – assuming of course that there is no change in Government policy between now and then.

When the legislation was first published, the Government's intention was apparently to retain all existing rules in relation to protected rights accrued up to the date of abolition. This was to be achieved through the addition of a new section 25A to the Pension Schemes Act 1993, providing that schemes with protected rights had to comply with the requirements of sections 26 to 32 of the Pension Schemes Act 1993. Section 25A also contains a power to make regulations containing further requirements with which schemes with protected rights would have to comply. The Explanatory Notes published with the original version of the Bill stated that the requirements set out in such regulations would be the requirements which are currently imposed in relation to appropriate personal pension schemes (i.e. personal pension schemes used to contract out) and COMPS (occupational pension schemes contracted-out on a money purchase basis) under section 9(3) of the Pension Schemes Act 1993. In fact, section 9(3) only imposes requirements in relation to occupational schemes, and it is section 9(5) which imposes similar requirements in respect of personal pension schemes. However, given the express reference to appropriate personal pension schemes in the Explanatory Notes, it seems reasonable to assume that the Government also intended to retain existing requirements imposed in respect of protected rights under appropriate personal pension schemes by section 9(5) of the Pension Schemes Act 1993.

On 6 June 2007, DWP Minister Lord McKenzie announced a change of policy in relation to the treatment of existing protected rights following their abolition for the future. Moving various amendments to the Bill, Lord McKenzie stated "… the amendments remove all the rules that apply to protected rights, except for the provisions concerning survivors. The consequence is that protected rights will be treated in the same way as non-protected rights when being invested or transferred." He also announced that at the point of annuitisation, members would no longer be required to purchase a unisex annuity.

Regarding protected rights requirements relating to survivors, Lord McKenzie stated that a decision on this issue must await the outcome of the review of the working of the open market option for annuities, and that if a decision is made to change the protected rights rules relating to survivors, the changes will be made in a future Act.

Section 15(1) of the Act effectively abolishes the concept of an appropriate personal pension scheme, but the new section 25A of the Pension Schemes Act 1993 inserted by the Act will provide that where an appropriate personal pension scheme ceases to be an appropriate scheme by virtue of section 15(1) then so long as there are protected rights under that scheme, the scheme must comply with:

1. 1 the requirements imposed by or by virtue of sections 26 to 32 of the Pension Schemes Act 1993; and
2. 2 such other requirements as may be stipulated in regulations made under the new section 25A.

As regards the requirements imposed by sections 26 to 32 of the Pension Schemes Act 1993, it should be noted that (as a result of amendments made while the legislation was going through Parliament) the Act now provides for the repeal of sections 28 to 29 of the Pension Schemes Act 1993 with effect from the abolition date. It is these sections which currently impose many of the detailed rules relating to protected rights. This is in many instances done by providing that protected rights must satisfy requirements set out in regulations. Many of the requirements contained in the Personal and Occupational Pension Schemes (Protected Rights) Regulations 1996 and the Protected Rights (Transfer Payment) Regulations 1996 derive from sections 28 to 29. Once sections 28 to 29 are repealed, requirements set out in regulations made under those sections will fall away.

Further requirements relating to appropriate personal pension schemes are currently to be found in the Personal Pension Schemes (Appropriate Schemes) Regulations 1997. These regulations deal with the requirements which have to be met in order for a scheme to be an appropriate personal pension scheme (including the current restrictions on how protected rights assets under an appropriate personal pension scheme may be invested). Once the concept of an appropriate personal pension scheme is abolished by section 15(1), the requirements imposed by the regulations will therefore become largely redundant (but see comments below regarding section 38 of the Pension Schemes Act 1993). When the Pensions Bill was originally introduced, it appeared that the Government's intention was to use its regulation-making power under the new section 25A of the Pension Schemes Act 1993 to retain existing requirements in relation to protected rights accrued up to the date of abolition. However, given the Government's change of policy as announced in the House of Lords, it now seems logical to assume that the Government will not use the power in this way.

One aspect of the legislation which is on the face of it surprising is the retention (in amended form) of section 38 of the Pension Schemes Act 1993. Section 38(1) in its revised form (the revisions being due to come into force on the abolition date) will provide that no alteration of the rules of a personal pension scheme which was an appropriate scheme shall be made so as -

(a) to affect any of the matters dealt with in sections 26 to 33; or

(b) to cause the scheme to take a different permitted form from that previously taken.

It appears that the Government intends to allow transfers of protected rights to schemes which have never been contracted out, given the planned repeal of section 28 of the Pension Schemes Act 1993, which provides the current authority for the restrictions which apply to transfers of protected rights. The new section 25A covers schemes which are former appropriate personal pension schemes or former COMPS and schemes which were not contracted-out prior to the abolition date but which have taken a transfer from a scheme which was contracted-out on a protected rights basis. As mentioned above, section 25A contains a very broad power to make regulations imposing additional requirements with which such schemes must comply.

The Pensions Act 2007 received Royal Assent on 26 July 2007. This means that the provisions of the Act itself can now only be amended by another Act of Parliament, and thus we have more certainty than before as to the form which the legislation will take. However the Act gives the Government broad powers to introduce detailed additional rules by means of regulations and in any event it appears that the Government does not plan to bring the relevant provisions into force for a few years yet. Recent experience in relation to the Finance Act 2004 shows that Government policy U-turns are far from unknown in the field of pensions law. Even if the legislation does ultimately remove all the rules that apply to protected rights, except for the provisions concerning survivors, schemes with protected rights will still need to retain the ability to "track" these to make sure the legislation concerning survivor benefits is complied with, so having any protected rights will inevitably add an additional layer of complexity to a scheme's administration processes. Removing the rules relating to survivor benefits too would certainly achieve a much greater degree of simplification, but it remains to be seen whether the Government will take this step.