The Occupational Pension Schemes (Power to Amend Schemes to Reflect Abolition of Contracting-out) Regulations 2015 (SI 2015/118) (2015 Regulations) came into force on 6 April 2015 and are supplementary to the Pensions Act 2014 (2014 Act).
Currently, all occupational pension schemes have the option of contracting out of the state second pension on a salary-related basis.
As a consequence of a scheme being contracted-out on this basis the employers and members pay a lower level of National Insurance contributions (NICs).
However, contracting-out on a salary-related basis will be abolished with effect from 6 April 2016, resulting in an increase in NICs for both employers and members.
Many employers will be able to amend their schemes' rules to enable them to recoup the increased employer NICs costs by using the scheme's own amendment power, although trustees’ consent is often a requirement.
However, the 2014 Act gives employers the power to make amendments to their scheme rules to recoup the increased employer NICs cost without having to gain the consent of trustees. This is known as the statutory override.
The 2015 Regulations:
- Provide that the statutory override cannot be exercised in relation to certain employees from formerly nationalised industries (known as protected persons).
- Set out the requirements with which the actuary must comply in connection with a proposed exercise of the statutory override when calculating any increase in member contributions or any reduction in scheme liabilities, and when placing a value on the increase in an employer's NICs.
- Set out the requirements for the appointment of the actuary, who must be appointed by the employer. The Department for Work and Pensions has warned against using the scheme's actuary.
- Set out the requirements with which the actuary's certificate must comply.
- Impose an obligation on trustees to provide any information reasonably requested by the employer in connection with the use of the statutory override.
- Set out how the statutory override will operate in relation to multi-employer schemes. In these schemes, the statutory override is to be exercised by the person nominated to act on behalf of the other employers in relation to funding matters under the Pensions Act 2004 or, if no nomination has been made, the person nominated by the employers to act on their behalf in relation to exercise of the statutory override.
The statutory override can be used to increase member contributions and/or reduce scheme liabilities, on the condition that the aggregate member contribution increase and/or scheme liability reduction does not exceed the increase in employer NICs.
In situations where trustees’ consent is required under the scheme's own amendment power, employers may find it easier to get their consent as a result of the fact that trustees will know the statutory override exists as a fallback.
Although the abolition of contracting-out on a salary related basis will not take effect until next year, employers of contracted-out schemes will need to give careful consideration to what changes, if any, they wish to make to their schemes and whether they will need to use the statutory override to do so.
To take advantage of the statutory override an actuary must certify that the proposed scheme amendments comply with the relevant statutory requirements.
Changes can be made using the statutory override before 6 April 2016, but may not take effect before that date.
To the extent that changes made using the statutory override are listed changes for the purposes of the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendments) Regulations 2006 (SI 2006/349), members will have to be consulted in good time before the changes take effect.