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Contracting-out: Upper accrual point

In the May 2006 White Paper, the Government announced reforms to the State Second Pension (S2P).  Its intention is to make S2P a simple, flat rate top-up to the basic State pension by around 2030.  The Government stated in the 2007 Budget that, with effect from 6 April 2009, the upper earnings limit would be harmonised with the threshold for higher rate income tax “simplifying the system”.

To ensure that the reforms to S2P take place as originally intended, with effect from 6 April 2009, a new threshold was introduced, the upper accrual point (UAP).  The UAP replaces the upper earnings limit (UEL) for the purposes of the calculation of National Insurance contribution rebates for employees contracted-out of S2P (the UEL Change).  Without this measure, there would have been a small increase in the S2P payable to those earning above the UEL and in the rebates received by those same earners and their employers who are contracted-out.

What does this mean for schemes?

Any schemes which make specific reference in their rules to earnings between the “lower earnings limit” (LEL) and the UEL (or to benefits calculated by reference to the UEL) could be unintentionally affected by these amendments.  Such schemes should consider making an amendment.

Ideally, such a change would have been made before 6 April 2009.