3 draft Orders have been issued by the DSS setting out the contracted-out rebates to be offered for the quinquennium 2002/3 to 2006/7. Although under the Pension Schemes Act 1993 these must be approved by resolution of each House of Parliament, for practical purposes we now know the outcome of the recent consultation exercise over the GAD's recommendations [PDF].

Employers offering a salary-related scheme which meets the requisite benefits test for contracting-out are to receive a 16.6% increase in the rebate they enjoy, as the Class I secondary rebate jumps from 3 to 3.5%. The primary rebate is to remain unchanged at 1.6%, making a total reduction of 5.1% in NICs payable on upper band earnings. All this is precisely what the GAD had recommended.

For Appropriate Personal Pension Schemes, the Government proposes to introduce a three-tier rebate structure (corresponding to the new three-band S2P accrual basis), whereby for the first time for many earners, the employer's share of the age-related percentage will apparently exceed the NIC liability.

The Government has adopted the GAD's proposed specific percentages for band 3 earnings, except to apply a cap of 10.5% from age 51 (currently 9.0% from age 50). Similar increases are to apply to the caps on bands 1 and 2 (ie 21.0% and 5.25% instead of the 18% and 4.5% the GAD said would apply if the present levels were retained).

The GAD's report unfortunately does not offer figures for the lower S2P bands, which makes it difficult to say just how much more generous - or otherwise - the Government is being. However, one possible conclusion is that except for people aged 54+, the new rebate structure will supplement the GAD's likely estimate of the value of the benefits given up by contracting-out.

The potential boost to APPS funds once contracting-out commences under S2P is substantial. In comparison with 2001/02 rates, low and middle-income APPS members (ie those earning up to £9,500 and up to around £21,600, respectively) will enjoy substantially increased minimum contributions. For a 51-year-old employee on £15,000 pa, for example, the new rebate structure will increase the total minimum contributions by nearly 50%.

For a COMPS, the employer's share of the flat-rate rebate is to rise from 0.6% to 1%, which together with the Class I primary rebate (unchanged at 1.6%), must be passed on to trustees within 2 weeks of the end of the month in which the liability arose. The DSS pay trustees the difference between the appropriate age-related percentage and the flat rate. The Government proposes to increase the age-related percentage for 2002/03 by between 0.4% and 0.6% on 2001/02 levels, up to age 50, in line with the GAD's recommended structure, and to retain the 2002/03 figures throughout the quinquennium up to age 39 (rebates for ages 40 to 54 show a gradual decline).

The only difference the Government has chosen to make to the GAD's recommended rebates is to impose a cap, amounting to 10.5% from age 52 (cf. 9.0% from age 51 in 2001/02). This cap is thus very similar to that imposed on APPS "band 3" rebates (see above). The overall result is that minimum payments are set to rise by much less than minimum contributions to personal pensions, although it must be remembered that COMPS [and COSRS] Members earning below £21,600 (in terms of 1999/2000 earnings) will receive a S2P top-up from the DSS.

In summary, the Government would appear to have largely adopted the GAD's report, but reduced the recommended COMPS rebates for older earners and increased the overall APPS rebate for younger earners. Insofar as any level above that estimated to be necessary to replace the value of the benefits being given up represents an incentive funded by the taxpayer, this is a political decision. Whether it should prove to be money spent more wisely than the original 2% incentive, offered by the Conservative government in launching the previous personal pension, remains to be seen.