With 6 April 2016 fast approaching, the countdown to the abolition of contracting out pensions has begun. Employers with contracted-out schemes need to act now to deal with the impact.

Since 6 April 1978, members of certain pension schemes have, in exchange for lower National Insurance Contributions (NIC), had the option to contract-out of the state second pension and instead receive retirement benefits from their employer’s scheme.

However, this will automatically cease with the abolition of state second pension and introduction of the single tier state pension on 6 April 2016. Employers and members of schemes that are contracted-out will then automatically revert to paying the full rate of NIC on this date.

With 6 April 2016 fast approaching, the countdown has begun. It is imperative that employers with contracted-out schemes act now to mitigate the impact of the abolition of contracting-out.

Key tasks are:

Consider amendment

  • Employers should assess the cost implications of the changes and the impact on funding and ascertain the amendments required.
  • Schemes incorporating elements of the state pension scheme into their benefit structure (such as offsets, bridging pensions, underpins etc.) may also require amendment.
  • GMP revaluation is changing from 6 April 2016 in relation to members who cease contracted-out employment. Employers should review the scheme rules to establish whether this will impact the scheme rules as currently drafted and make amendments as required. 
  • Employers that are currently using a contracted-out scheme as a basis for auto-enrolment compliance will need to consider whether the scheme will continue to meet the quality requirement under legislation after 6 April 2016, and make any changes necessary to ensure continued compliance by this time.

Employers will need to establish whether the proposed amendments constitute a “listed change” on which there is a requirement to carry out a 60 day consultation with affected members.

Reconcile data

To avoid future disputes, employers should liaise with scheme trustees to ensure that steps are being taken to reconcile data relating to contracted-out benefits.. HMRC have confirmed that requests for reconciliation data have to be made by 5 April 2016. Scheme trustees will have until April 2018 to complete the reconciliation after which time HMRC will withdraw their support for contracting-out reconciliation queries and assume that its records are correct.

Communicate with members

From a member’s perspective, the immediate concern will be the cost of increased NIC and the reduction of take home pay. Employers should communicate with affected members as early as possible, taking into account disclosure and consultation requirements.