Contracting-out on a Defined Benefit basis was abolished on 6 April 2016 and the single tier state pension came into effect. We explore the consequences for schemes and action that may now be required.
Increase in NI contributions
The end of the contracted-out rebate in relation to contributions will result in increased employer contributions being payable for members. A statutory override has been introduced to allow schemes to be amended to the extent required to offset these increased costs by increasing member contributions and/or altering accrual rates under the scheme. The increase in costs should be assessed and steps taken if thought appropriate.
Offsets and Bridging Pensions
Schemes which have a benefit structure which operates by reference to elements of the state pension scheme may require amendment.
Particular points to note are that:
- Anybody reaching their State Pension Age after 6 April 2016 will not trigger an entitlement to Basic State Pension (becoming entitled to new single tier pension instead) so triggers based on entitlement to Basic State Pension should be reviewed.
- The government has announced that they will continue to publish a notional Basic State Pension figure to allow calculations incorporating the level of Basic State Pension to be calculated. Provisions including calculations based on this figure will therefore still be possible, but consideration should be given to whether these still operate as intended.
For schemes where the revaluation provisions are drafted such that the basis of revaluation alters when a member, for example, "ceases to be in contracted-out employment by reference to the Scheme", amendments may be required to tackle any unintended consequences and tackle any conflict between the scheme revaluation provisions and the statutory revaluation requirement . The government has introduced a mechanism to allow amendment by resolution prior to April 2017 which can be backdated to April 2016. Although this transitional period of a year has been put in place, Schemes should act as soon as they can to carry out the appropriate amendment.
Requests for reconciliation data had to be made to HMRC by 5 April 2016. Trustees now have until April 2018 to complete the reconciliation after which time HMRC will withdraw their support for contracting-out reconciliation queries and assume that its records are correct.
A Guaranteed Minimum Pension (GMP) Checker has been introduced which allows scheme administrators to request GMP calculations and contracted-out contributions and earnings information.
Communication with members
The DWP has confirmed that they expect trustees to inform members that their contracted out employment has ceased in line with the requirements under the Disclosure Regulations which means that members must be informed within three months.
An assessment should be carried out in relation to any scheme that is being used as a qualifying scheme for Automatic Enrolment purposes to ensure that this continues to meet the requirements under legislation.
At this stage employers and trustees of all schemes (not necessarily just those which were contracted out as at April 2016) will should at least conduct a detailed review documentation governing their scheme to assess if all of the provisions still operate as intended and whether any amendments will be required.
Author: Vicki ThomasThis information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.