Regulations have come into force setting out the detail of an employer's statutory power to amend a scheme to take account of the increase in the employer's National Insurance contributions as a result of the end of contracting-out in April 2016.


Although the power itself is exercisable by the employer, trustees need to understand their duties and responsibilities in relation to the exercise of the power.

Background

For contracted-out schemes open to future accrual, the end of contracting-out from 6 April 2016 will mean an increase in National Insurance contributions for both employers and active members of the scheme. This will increase employer NICs by 3.4% of relevant earnings and employee NICs by 1.4% of relevant earnings. The end of contracting-out will not normally affect the benefits which accrue under the scheme. These will continue in accordance with the scheme rules.

In recognition of this extra cost to employers, the Government introduced a statutory power for employers to increase employee contributions or alter future benefit accrual. However, the power may not be used in a way that would:

  • Increase total annual member contributions by more than the annual increase in the employer's National Insurance contributions in respect of those members;
  • Reduce annual benefit accrual liabilities in respect of those members by more than the annual increase in the employer's National Insurance contributions in respect of those members;
  • Result in the total of the two elements above being more than the annual increase in the employer's National Insurance contributions in respect of the relevant members.

In a non-segregated multi-employer scheme, the principal employer will normally be able to exercise the statutory power on behalf of all the employers.

The Regulations

The regulations set out the detail around how liabilities and contribution changes are to be calculated for the purposes of the tests set out above. They provide that an actuary appointed by the employer must certify whether the relevant test is met and stipulate the information which the actuary's certificate must contain. The Government consultation response accompanying the regulations envisages that the actuary will not normally be the scheme actuary due to conflict of interest issues.

The scheme trustees must provide any information reasonably requested by the employer in connection with the use of its statutory power. Such information must be provided within such reasonable period as is agreed between the employer and trustees. The Pensions Regulator can impose financial penalties on trustees who fail to take all reasonable steps to comply with their obligations in this respect. The Government's consultation response indicates that where the calculation date is the same as the date of a completed actuarial valuation, the Government would expect trustees to be able to provide all relevant information within 8 weeks. The trustees' obligations to provide information have been watered down compared to the draft regulations as originally published, following respondents' concerns that the requirements as originally drafted were too onerous.

Some respondents to the consultation on the original draft regulations expressed concern about the risk of "double dipping", i.e. that trustees might agree to rule amendments on the understanding that these are to offset the employer's increased National Insurance contributions, only to find that the employer then makes additional benefit reductions using its statutory power. The consultation response states that trustees should, where appropriate, make it a condition of any amendments made under the normal power of amendment that the employer does not subsequently use the statutory override power.

The consultation response states that the normal statutory requirements to consult with members will apply to amendments made pursuant to the statutory power.

Comment

Where a scheme has ongoing accrual on a contracted-out basis, there is a high probability that the scheme's employer will seek to make changes to offset the cost of the higher National Insurance contributions that it will have to make from April 2016. It is important that trustees of affected schemes understand their obligation to respond to information requests. Trustees who agree to rule amendments intended to offset the cost of higher National Insurance contributions should be alert to the "double dipping" risk and should consider what steps to take to guard against this.

In practice we expect many schemes to make amendments using the scheme amendment power, with the consent of the trustees where appropriate.

Key contacts

Rachel Rawnsley

Rachel Rawnsley

Partner, Head of Pensions
United Kingdom

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Jade Murray

Jade Murray

Partner, Pensions
United Kingdom

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Catherine McAllister

Catherine McAllister

Partner, Pensions
United Kingdom

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Rachel Uttley

Rachel Uttley

Partner, Pensions
United Kingdom

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