Correct drafting of the pensions clause in an employment contract sets out clearly what is being provided in terms of pensions in a clear and unambiguous way to the benefit of both the employer and the employee. Incorrect or poorly drafted pension clauses create confusion and frustration for an employee and could prove very costly for the employer at a later stage in the employment relationship.
Pensions information in employment contracts
An employer is obliged to provide an employee with a written statement of the terms of their employment within two months of their start date. This information can be incorporated into the contract of employment and should include any terms and conditions relating to pensions or the pension schemes that they must join as a result of their employment.
It is important to ensure that these terms and conditions:
- Are drafted in a clear and concise manner
- Provide a degree of flexibility for the employer
- Clearly define the pension rights of the employee
- Allow for the future proofing of the pension arrangements
Drafting pensions clauses
Pension terms and all pensions documents referred to in the employment contract should be drafted with great care. It is important to provide the employer with the flexibility and scope to change pension benefits in the future. It is equally important to ensure that employees’ pension rights are precisely defined and do not extend beyond what the employer intended. Employees should not be afforded contractual rights to contributions or benefits outside what is intended by the employer or allowed for by the scheme. The contract should refer to the pension arrangement chosen by the employer and the identity of the person(s) from whom further information on the arrangement can be obtained. The contract should also give the employer authority to deduct pension contributions directly from the employee’s salary and the power to change pension benefits or contributions in the future. This power will typically be set out in the pensions documentation itself but should be reiterated at every opportunity.
Employers may wonder whether provision needs to be made in employment documentation, now or in the near future, for auto-enrolment in pension schemes. A new auto-enrolment system for private sector workers is scheduled to come into operation in 2021. At the moment, there is no need for employers to make any provision for this in their employment contracts. As it is a statutory duty placed on employers there is no requirement for it to be included in contracts of employment.
This may change depending upon the nature of the auto-enrolment scheme that is introduced and the effect it will have on existing pension arrangements. It may be that an employer will not have to participate in the auto-enrolment system if they have an existing pension scheme in place. We will learn more as we approach the 2021 start date and draft legislation is released.
Amending employees’ pension benefits
An employer may want to vary pension terms for different reasons, such as a re-organisation of the company or changes in economic circumstances. Technically, any such changes to the contract of employment cannot be made unilaterally without the employee’s consent.
Ideally, an employer should include a specific clause in the employment contract to enable changes to be made to pension benefits in the future. Such a clause is typically permissible so long as it does not breach the employer’s implied duty of trust and confidence to the employee. The inclusion of such a clause could avoid the need to obtain the employee’s express consent to the change to pension benefits.
Paying benefits during notice periods
Employees placed on garden leave or receiving payment in lieu of notice, or PILON, are entitled to all benefits that they would normally accrue during this period of service, provided they adhere to the terms of the contract of employment. Pension entitlements will accrue during this time unless the contract specifically states otherwise. This should be considered by employers when drafting pension clauses.
Precise drafting of pension clauses in employment contracts is crucial in order to avoid legal action from employees. If an employer breaches a pension term of the employment contract, the employee can bring a claim for breach of contract to the civil courts. The employee can also submit a complaint to the Pensions Ombudsman.
When it comes to drafting the pension clause in an employment contract, it is clear that the correct and appropriate use of language is of paramount importance. A poorly drafted clause could potentially jeopardise restructuring project or reduce the attractiveness of a company to an investor.
We have seen poorly and incorrectly drafted pensions clauses delay and jeopardise multi-million euro transactions. What seems like a simple task at the commencement of the employment relationship can have disastrous consequences if the required attention is not paid to the pension arrangements in place and how best to communicate these arrangements to an employee.