The Government has issued a state pension White Paper confirming the introduction of a single tier pension. As a result, employers will be given temporary powers to change scheme rules without trustee consent. The reforms, planned in order to simplify the current system, are intended to be implemented in April 2017 at the earliest and will:
- abolish contracting out;
- replace the basic state pension and state second pension; and
- introduce a flat-rate pension of around £140 per week.
Under the contracted out regime, which now only applies to defined benefit schemes and which will be abolished, employers can opt out of the state second pension and pay lower NI contributions. The reforms will result in employers bearing cost and administrative implications, including paying an additional 3.4% of relevant earnings for each contracted out employee. Many employers will wish to offset these additional costs by reducing future pension benefits or by increasing employee contribution rates.
There is however a restriction in some private sector schemes which limits the employer’s ability to modify the scheme benefit structure, whether by legislation or by the scheme rules themselves. In many cases, where the employer can modify the benefit structure, it can only be done by the trustees or with their consent. Where the changes may be detrimental to members, as is likely to be the case here, it is possible that the trustees may not consent.
As the trustees cannot be compelled to give their consent, the Government is therefore proposing to give employers powers to change scheme rules for this purpose without trustee consent. The Government believes employers should be able to change their scheme design to reflect the additional cost because it is a direct result of a Government policy change.
The modification powers will exist for a limited period and only allow changes to the extent that they offset the cost of additional employer NI contributions. Although this could result in employees’ workplace pension benefits being reduced, the Government argues that those affected would be brought back into the state pension system. The powers will also only enable changes in respect of future benefits – any benefits already accrued will not be affected.
The Government said it believes that this measure is necessary to ensure the changes do not undermine DB provision, however there is still concern in the industry that the end of contracting out could result in a wave of DB closures as employers struggle with the additional cost burden.
Whilst the reforms are four years away, employers and trustees should start planning changes to their scheme now.