Employers undecided on what to do when contracting out ends
29 May 2015
Employee Benefits has published some interesting research by Towers Watson where two thirds of organisations surveyed do not know how they will respond to the change in legislation.
Employers with defined benefit (DB) pension schemes facing a scramble to avoid higher national insurance (NI) bills when contracting out ends in 2016 have yet to decide how they will respond, according to research by Towers Watson.
Its Cessation of contracting-out research, which surveyed 154 organisations, found that more than two-thirds (69%) do not know how they will responded to the change in legislation.
Under the current rules, employers providing DB pensions have typically chosen to replace part of the state pension as well as topping it up. ‘Contracting out’ of the state second pension in this way reduces NI bills for employers and employees. With the introduction of the single-tier state pension on 6 April 2016, this will no longer be possible and the increase in employer NI cost can add up to 2.9% of pay, depending on the employee’s earnings.
If no action is taken, employers face higher NI costs and employees will see a reduction in take-home pay, offsetting potential gains from an annual pay rise. It could also force employers to cut employee benefits spend.
However, of those that have made a decision about what they will do, half will close their DB pension scheme to future accruals, while more than a third (37%) suggest they will not change their pension plan design, leaving the employer to pay higher NI contributions. The remainder say they will make changes to the scheme without closing it all together.
Only 8% of respondents have considered using the statutory override, which allows employers to change scheme design without the trustee’s agreement.
Previous CIPP News
- Changes due to the end of contracting out - 20 May 2015
- Timeline and key considerations on the countdown to the end of contracting-out - 21 April 2015