The power allowing schemes to amend their rules by resolution to reflect the abolition of contracting out on a protected rights basis expires on 5 April 2018. Affected schemes need to take action now.
Prior to 6 April 2012, it was possible to contract out of the state second pension by means of a contracted-out money purchase scheme (often referred to as the "protected rights" basis due to the substitute benefits that had to be provided). This method of contracting out was abolished with effect from 6 April 2012.
The Pensions Act 2008 removed the statutory restrictions that applied to protected rights accrued up to 6 April 2012 (provided that those rights had not already come into payment). This meant that schemes no longer had to make special provision for protected rights in their rules – they could be treated in the same way as other scheme rights under pensions legislation.
However, it was not uncommon for scheme rules to have explicitly written into them the statutory restrictions and other requirements that originally applied to protected rights. Unfortunately, the legislation removing the statutory restrictions does not override scheme rules or apply automatically to "strike out" all of those provisions in the rules. As a result, to truly deal with protected rights, the scheme rules may need to be amended. Some schemes could find it difficult to make such amendments, for example, because of the wording of their power of amendment.
There is a statutory modification power providing a solution to this issue, as this allows trustees to amend their rules by resolution to reflect the abolition of protected rights. However, the statutory modification power is time-limited and will expire on 5 April 2018.
Trustees of formerly contracted-out schemes will need to understand whether their rules hardcode provisions relating to protected rights, and if so, whether they need to pass a resolution using the statutory modification power.
Given that there could be decisions which need to be made about exactly which provisions need to be amended, if trustees have not already begun to look at this, they need to act now.