Employer actions for the end of contracting-out of the state pension

07 October 2015

Legal Week Law has written a useful summary of the steps employers with open contracted-out schemes should be taking as well as implications for schemes holding deferred contracted-out benefits.

Contracting-out of the state second pension is to be abolished from 6 April 2016, coinciding with the introduction of the new single-tier state pension. This will increase national insurance contribution liability for employers currently offering a contracted-out scheme.

Legislation is now in place enabling employers to amend schemes to take account of the increase in NICs which will take effect when contracting-out is abolished. The power to amend can be exercised by the employer before 6 April 2016 but cannot be effective until that date, and can be used more than once.

In other words, amendments made under the regulations cannot be used to create a windfall for the employer. They can only be used to set off the additional NIC liability the employer will have as a result of the abolition of contracting out (3.4% of relevant earnings).

Key considerations for employers at this stage include:

  • what (if any) changes are to be made to benefit accrual or contributions;
  • entering the reconciliation process with HMRC to ensure the correct data is held; and
  • making plans for the communication of changes to employees.

The change in state pension provision could also impact on schemes operating state pension offsets or offering bridging pensions. It is vital that employers check their rules to asses whether there will be any cost or benefit implications and if so urgently consider what changes they may wish to make.

The DWP has issued a series of factsheets for employers, trustees and employees summarising what is happening and any steps they should be taking.