The statutory provisions dealing with contracted-out benefits will change from 6 April 2009. This could potentially affect pension schemes “contracted-out” on a salary related or money purchase basis and those with “integrated” benefits.

Broadly, schemes that contracted-out of the State Second Pension (S2P) are required to provide an alternative form of benefit to replace the S2P.

From 6 April 2009 legislation will calculate the minimum level of benefits that must be provided in place of the S2P by referring to an employee’s earnings between the Lower Earnings Limit (LEL) and the Upper Accrual Point (UAP). Current legislation refers to earnings between the LEL and the Upper Earnings Limit (UEL). Although, both the UAP and UEL are currently the same figure, the UEL is likely to increase more than the UAP in future. Therefore if the schemes rules refer to the UEL this may impact on benefits or contributions.

Schemes that refer to the UEL should consider whether they need to change their scheme rules to reflect the change in legislation.

Examples of such schemes are:

  1. Schemes contracted-out on a money purchase basis that refer to the UEL for the purpose of satisfying the minimum statutory requirement of providing “minimum payments”; and
  2. Scheme contracted-out on a salary related basis with an “underpin” that refers to the UEL.  

Schemes that need to take action should consider doing so before 6 April 2009 (the date of the legislative change).