From 6 April 2016 the introduction of a single-tier state pension means that pension schemes will no longer be able to 'contract-out'. Consequently, standard employment contracts will need to be amended.
Abolition of contracting-out
The state pension was previously made up of two elements: the basic state pension and the second state pension (in the past this was known as the state earnings related pension scheme or 'SERPS').
Occupational and personal pension schemes were able to 'contract-out' of the second state pension by agreeing to provide alternative benefits within their scheme which were broadly the same as the state benefits which employees had given up.
Contracting-out was abolished for schemes which paid benefits based on defined contributions in April 2012. From April 2016 it is also be abolished for defined benefit schemes.
The Pensions Act 2014 (the Pensions Act) reforms state pensions by introducing a single-tier state pension which will pay a flat rate of £155.65 a week from 6 April 2016. As the second state pension no longer exists, it is will no longer be possible to contract-out.
Statement of initial employment particulars
Section 1 of the Employment Rights Act 1996 (the Act) requires employers to give new employees a statement of their initial employment particulars within two months of beginning employment (the Statement). There is an ongoing obligation to inform the employee of any changes to the particulars set out in this statement within one month.
Section 3 of the Act currently requires the Statement to include a note about disciplinary procedures and pensions. Section 3(5) of the Act previously required that note to 'state whether there is in force a contracting-out certificate ...'. It was therefore usual to find a standard clause in employment contracts stating whether or not there was a contracting-out certificate in place.
Advice for employers
Section 3(5) of the Act was repealed by the Pensions Act with effect from 6 April 2016. This means that employers are no longer be required to confirm in the Statement whether or not there is a contracting-out certificate in place. Standard employment contracts and statements of particulars should therefore be amended for new joiners.
For existing employees, there is technically no need to amend employment contracts. However, where employees where previously contracted-out employers may wish to explain the changes to employees as part of it wider communications programme.