Is your scheme family friendly?

Introduction

With the Coalition poised to put forward further extensive changes to family friendly rights,1 now is the time for pension schemes to ensure that they are up to date with the changes so far.

In this Alert:

• Key points
• Where are we now?
• Tricky points
• The future is bright for modern families?

Key points

• Pension schemes should check their current family leave provisions comply with legislation and, if necessary, reflect any changes made by the employer to its family leave policies.
• A recent consultation proposing an overhaul of family friendly rights does not deal with whether and, if so, how pension benefits would be affected.

Where are we now?

Maternity Rights

An employee has a right to take up to 52 weeks’ maternity leave, comprising 26 weeks’ ordinary maternity leave (OML) and 26 weeks’ additional maternity leave (AML).

During OML and any paid AML:

• the employee pays pension contributions on the basis of the salary she actually receives; and
• benefits accrue (DB) or the employer contributes to the scheme (DC) on the basis of salary the employee would have received were she not on maternity leave.

Cover for death in service should continue throughout the whole period of maternity leave.

Unless the contract dictates otherwise, there is no obligation on either party to contribute during unpaid AML (although some schemes allow members to pay additional contributions to bridge this gap).

Paternity rights

Fathers are entitled to take:

• a single block of one or two weeks leave after the birth of their child; and
• in respect of children born on or after 3 April 2011, additional paternity leave (APL) if their wife / partner returns to work without taking their full maternity / adoption leave entitlement.

APL may not be taken until (at least) 20 weeks after the child’s birth / adoption placement and may be between 2 and 26 weeks. The time must be taken as one continuous period and partial weeks are not permitted. The father is entitled to the same rate of statutory pay (if any) that the mother would have received had she been on leave.

In respect of pensions, the position for a man on APL essentially mirrors maternity leave requirements for women.

Tricky points

DC top-up?

It has long been debated whether an employer should supplement a DC member’s contributions to make up the difference between the amount she pays (based on actual pay received) and the amount which she would have paid had the contributions been based on her usual salary. Changes to the legislation have not resolved the issue definitively but, in our view, an employer top-up is not currently required.

Personal Pensions?

The Equality Act 20102 was intended to consolidate previous discrimination law, including the legislation on maternity leave, but was not intended to change it. Unfortunately, some of the provisions from previous legislation seem to have been lost in translation, leaving uncertainty as to how the Act applies to contract based personal pension schemes, such as GPPs and stakeholders. However, given the policy intent underlying the Act, we believe that currently contributions to such schemes should be calculated in the same way as for occupational DC schemes.

Salary Sacrifice

During maternity leave, employees generally continue to be entitled to any contractual non-cash benefits (e.g. childcare vouchers).

Some commentators argue that if an employee’s pension contributions are made via salary sacrifice (as employer contributions) they mutate into non-cash benefits, meaning that they should continue unchanged throughout maternity leave. We remain unconvinced that schemes must treat such contributions differently to those made by the employee directly (when the member’s contributions would be calculated by reference to her salary while on leave). However, we have noticed that increasing numbers of employers are taking a more cautious approach and choosing not to reduce contribution levels during maternity leave.

The future is bright for modern families?

In its “Consultation on Modern Workplaces”, the Government proposes a new system of family leave comprising:

• 18 weeks of paid maternity leave and two weeks of paid paternity leave at or around the birth of the child; and
• 34 weeks of “flexible parental leave” (with statutory pay available for a total of 21 of those weeks). Either or both parents could take this leave, concurrently if desired, and both will be entitled to a “reserved period” of four weeks.

At this stage there is no indication that the Government intends to change how such leave must be pensioned, but we will watch with interest!

1 A response to HM Government’s Consultation On Modern Workplaces (May 2011) is expected shortly
2 Which consolidated discrimination law with effect from 1 October 2010