Pension Costs – mixed news for employers

Auto-enrolment

The Government has announced that the timetable for increasing the employer contributions has been extended by 6 months. The phasing of contributions will now be as follows:

In the short term this may save employers who are simply contributing the minimum amounts some money in employer contributions.

The earnings trigger for auto-enrolment has been frozen for this year at £10,000, as has the qualifying earnings band at £5,824 - £43,000. This is likely to mean that more employees qualify either to be automatically enrolled or to opt in to enrolment. This is likely to increase employer contribution costs.

Additional National Insurance Costs

For employers with staff in public sector pension schemes, this will not be offset by higher employee pension contributions or any reduction in the pension benefits which need to be funded.

The Government has decided to introduce a single tier state pension with effect from 6 April 2016. Currently many schemes paying salary-related benefits are contracted out of SP2 which means that participating employers and employees are entitled to pay a lower rate of national insurance contributions. The end of contracting out means that they will no longer be eligible for this lower rate. This will result in additional costs for both employers and employees.

Employers will need to pay an additional 3.4% of earnings between the lower earnings limit (£5,824 for the 2015/2016 and 2016/2017 tax years) and the upper accrual point (£40,040 for the 2015/2016 and 2016/2017 tax years). Employees who are members of contracted out pension schemes will pay an additional 1.4% of their earnings between these 2 thresholds. If this applied in the current tax year, this could mean the employer paying up to an additional £1,163 a year for each employee who was previously contracted out and the employee paying up to an additional £479 a year.

The Pensions Act 2014 does include a power which allows the employer to unilaterally amend scheme benefits in order to offset the costs of additional employer national insurance contributions. Employers can use this “statutory override” to either increase members’ contributions or to reduce the accrual rate of salary related schemes.

However, this power is not available in respect of public sector pension schemes such as the Local Government Pension Scheme, the Teachers’ Pension Scheme and the NHS Pension Scheme. It is also only available for 5 years. Where employers do want to make use of the statutory override, they will need to carry out a consultation process lasting at least 60 days with staff or their appointed representatives.

Employers will also need to ensure that they comply with their duty of good faith which will involve some or all of the following:

• considering their employees’ reasonable expectations in relation to future service benefits;
• considering any previous promises or assurances made regarding the continuation of pension benefits at a particular level;
• ensuring that they have a business case for the changes that they are making; and
• that they have considered alternative options.

At a time where many employers are feeling the squeeze, these unwelcome extra costs may lead employers to consider whether they wish to continue to participate in salary related schemes at all. Employers may therefore decide that they would prefer to close the scheme to new joiners or even to all members.

For more information

If you wish to discuss consultation with staff about changes to benefits or contribution rates or scheme closures, please contact Doug Mullen.