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Limiting Cost of End of Contracting-Out In the UK – It Isn’t Too Late!

The UK State Second Pension, and contracting-out, will be abolished from 6 April 2016. As a result, employer and member national insurance contributions will increase for schemes currently contracted-out on a salary related basis.

Employers who sponsor such schemes have the power to amend the scheme rules to offset the loss of the NIC rebate. This is known as the “statutory override”, because it can be used even though a scheme’s rules would otherwise prevent the amendment. The cost saving achieved by the amendment must be no more than the amount of the increase in employer NICs.

Although 6 April 2016 is less than two months away, employers should note that:

  • Amendments can be made at any time from now until 5 April 2021.

  • The amendment power can be exercised more than once in relation to the same members. So, if an employer does not recoup the full cost of its NICs increase when it first amends the scheme, it can make further amendments at any point before 6 April 2021.

Therefore, there is still time for employers to assess the financial impact of contracting-out abolition and consider amendments to offset the increase in NICs.

However, note that amendments cannot be retrospective, so the earlier the employer acts, the greater the cost saving.

© Copyright 2020 Squire Patton Boggs (US) LLP


About this Author

Gareth Davies, Financial attorney, Squire PB

Gareth joined the Pensions Practice Group as an Associate in 2015. 

He has advised trustees and sponsoring employers on a broad range of issues, such as scheme funding, interpretation of scheme documentation, buy-ins and buy-outs. 

44 121 222 3595