Provisions under the Pensions Act have come into force which allow employers to amend the rules of contracted-out defined benefit (“DB”) schemes in light of the imminent cessation of contracting-out on 6 April 2016. The provisions give a statutory override power to employers which means that scheme amendment rules do not have to be complied with when implementing the changes.

With effect from 23 February 2014, an employer sponsoring a DB occupational pension scheme may amend the provisions of the scheme to take account of increased employer National Insurance costs following the abolition of contracting-out.  Whilst any amendments made under the new legislation must not take effect prior to the abolition date of 6 April 2016, changes to employee contributions and future accrual rates may be consulted on, and implemented, now subject to the 6 April 2016 date.

In 2014 the Government announced its plans to reform the State pension regime such that the Basic Sate Pension and the State Second Pension will be replaced by a new single tier scheme from which contracting-out will not be allowed (see “The Abolition of Contracting-out" – September 2014). The Pensions Act 2014 (the “Act”) repealed section 41 of the Pension Schemes Act 1993 (which provides for reduced rate National Insurance contributions) and introduced the right for employers to amend DB schemes to take account of the increased amount of National Insurance contributions they will have to pay once the National Insurance rebate is no longer available.

The power to amend schemes to reflect the abolition of contracting-out is set out in Schedule 14 to the Act, with the Occupational Pension Schemes (Power to Amend Schemes to Reflect Abolition of Contracting-out) Regulations 2014 (the “Regulations”) setting out details on how the power may be exercised. The power, which may be used more than once, allows employers to increase future member contribution rates, or alter the future accrual of benefits, or both in order to provide a cost saving to the employer of an amount up to, but not greater that, the increase in the employer’s National Insurance payments. No changes to subsisting members’ rights will be permissible and the proposed amendments will require certification by an actuary to the effect that the requirements of the Act and the Regulations have been complied with.

Unlike in the past, an employer will not be required to consult with its affected employees where it terminates its DB scheme’s contracting-out status following the new legislation. However, the requirement to consult affected members on listed changes under sections 259 to 261 of the Pensions Act 2004 will still apply if an employer proposes to amend a scheme to increase members’ contributions and/or reduce the accrual rate. The requirement for a 60 day consultation period will apply whether or not the proposed listed changes would be made using the statutory amendment power.