State pension changes

With effect from 6 April 2016, the Government intends to replace the current state pension system with a flat rate single-tier pension.

A key consequence of this is that employers will cease to have the option to contract their employees out of the additional state pension on a salary-related basis.  DB contracting-out will therefore also cease to exist from the same date.

With effect from 6 April 2016 the sponsoring employer and members of open schemes which are currently contracted-out will pay NICs at the full rate.  Recognising that this additional cost will be a blow for employers, the Government has provided them with a unilateral power to amend their schemes, in relation to some or all of the members, to take account of the increase in their NICs.

Schemes may also have been designed to integrate with state benefits.  For example, state benefits may be taken into account through:

  • a deduction in pensionable salary
  • a deduction to a pension in payment or
  • a bridging pension.

Employers and trustees should consider whether rule changes will be needed so that such benefits continue to work as intended after 6 April 2016 or, alternatively, whether a change to future benefit design might be appropriate.

How we can help

  • Advising on the use of the employer’s statutory modification power
  • Advising on removal of reference scheme test underpins in DC schemes
  • Review of trust deed and rules and advice on the need for changes to take account of the introduction of the new single tier State pension
  • Drafting communications to members
  • Advising trustees on employer’s proposals for change and their role in the process
  • Advising on consultation requirements
  • Advising on disclosure requirements

Recent experience

  • Advice to large employer client in the innovation and technology sector, formulating and communicating a proposal to reduce future benefits so as to offset the anticipated increase in national insurance liabilities from 6 April 2016
  • Advice to motor industry client regarding interaction of its scheme benefit structure with state pension changes and rule amendments needed to avoid inadvertent consequences of the change to the state pension