End of contracting out - benefit reviews and Protected Persons

Published by Nick Griggs on

Employers whose staff are currently contracted out of the state second pension through a defined benefit pension scheme will see an increase in their national insurance costs from April 2016, due to implementation of the single tier state pension.

April 2016 is not as far off as it may seem.  We expect that many employers will conduct a thorough review of defined benefit provision, rather than simply making a cost-neutral change to offset the additional National Insurance cost.  Employers expecting to do so should start the process as early as possible.

One spanner has already been thrown into the works today for employers with Protected Persons among their scheme membership.  A statutory override will enable employers to adjust pension benefits without member consultation to cancel out the additional national insurance, but the government has announced today (following consultation) that the override will not apply in relation to Protected Persons.  (Protected Persons Legislation prevents employers from making changes to the pension benefits offered to employees who were employed within previously nationalised industries).

This means that any employers wishing to achieve a cost neutral staff cost before and after the end of contracting out will probably need to negotiate a salary adjustment with relevant staff, rather than applying the same pension adjustment as for other members.  This increases administrative burden by adding an extra tranche of benefit accrual, as well as the time and cost of the necessary negotiations.

Although only a small proportion of private sector pension scheme members are Protected Persons (around 4%, or 60,000 people) they are concentrated within certain industries and so some employers will have a high proportion of Protected Persons.  For those employers, the issue will further increase the divide between their staff who are protected and those who are not.

Indeed, the government’s response noted that Protected Persons already have more generous benefits than even those who remained within public sector schemes.  Many of these members might prefer a pension deduction to a salary deduction, when presented with only these options.  Following the consultation response, though, the pension deduction will not be a straight forward possibility.