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The End Of An Era – RIP Contracting-Out

Are you one of the 2,500 private sector employers operating a contracted-out pension plan? Or are you a trustee or an adviser to one of those pension plans? There is work to do if the sponsoring employer wishes to mitigate the effects of the increase to its National Insurance contributions from April 2016 when the State Second Pension is abolished.

A new statutory power, which came into force on 6 April 2015, allows employers to make limited adjustments to their defined benefit pension plans from 6 April 2016. Using this power, employers can increase member contributions or decrease future member benefits (or a combination of both). Employers who wish to use the statutory power need to appoint an actuary to certify that the proposed amendments will not result in cost savings beyond the amount required to offset the increase in employer NI contributions. This statutory amendment power is a unilateral employer power, it does not require the consent of the trustees and it can be exercised regardless of any restrictions in the pension plan rules. This is the first time that we have seen such an overriding power in the hands of the sponsoring employer – therefore pension plans will not have an existing process to follow.

We highlight in our recent communication the process that employers should go through, and we include a project plan. In the meantime here are a few words of advice.

1. Employers should add this issue to their corporate agenda sooner rather than later if the amendment is to be effective from April 2016. Some elements of the process have the potential to be protracted and employee consultation requirements need to be observed. We certainly recommend that work starts this summer.

2. There are many advantages to employers adopting a collaborative approach with the pension plan trustees. In addition to this being general ‘good governance’, trustees will be required to implement the rule amendment which will include member communications and ensuring correct administration of the pension plan. Trustees can only carry out their duties properly if the amendment is clear. It is better for all parties if trustees have the opportunity to raise any questions or concerns at an early stage, and before the rule amendment is finalised.

To finish on a trip down memory lane… if you are old enough to remember contracting out (of SERPS) being born on 6 April 1978 you may also remember the number one hit single at that time – ‘Matchstalk Men and Matchstalk Cats and Dogs’, by Brian and Michael – a tribute to the artist LS Lowry. What a classic!

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About this Author

Catherine McKenna, Pension Attorney, Squire Patton Boggs Law Firm

Catherine McKenna leads our Pensions practice group . Her particular expertise is in providing advice to companies and trustees on all aspects of pensions law, including advice on managing pension risk and developing creative solutions to assist with funding shortfalls. She deals with pension plan restructuring, governance, and the pensions issues arising on corporate activity. Catherine also specialises in Pension Regulator applications and intervention, pension disputes and negotiating all types of pension fund investment management, custody and other third party...

+44 113 284 7045
Helen Miles, Pension Attorney, Lawyer, Sqiure Patton Boggs Law FIrm

Helen Miles is a partner in Squire Patton Boggs’ Pensions Practice Group and has been practicing as a pensions lawyer since qualifying in 1994. Prior to joining the firm, Helen was a partner in the Birmingham office of another global law firm for more than 11 years and was responsible for the establishment and management of the pensions practice.

44 121 222 3138