Pension schemes: off-setting the cost of state pension changes

United Kingdom

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

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 the National Insurance (NI) liability for employers currently offering employees a contracted-out scheme.

Regulations enable employers to reduce benefit accrual and/or increase member contributions in order to offset the additional NI costs.

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.

Our pensions team can offer expert advice on the issues in this alert and have issued this more detailed briefing on the issues.