Following a period of consultation, the Government has confirmed that legislative changes will be made to ensure that “protected persons” will not be affected by the statutory amendment power being introduced as part of the abolition of defined benefit contracting-out.

Background

As set out in our earlier article “Abolition of Contracting-out – Issues for Pension Schemes and Employers”, the Government has announced that defined benefit contracting out will be abolished from April 2016 as part of the introduction of a single-tier state pension. 

To assist employers with the resulting increased National Insurance Contributions (NICs), the Government has confirmed that it will introduce a statutory modification power to allow employers to change scheme benefits without trustee consent.  The Government consulted on whether this statutory amendment power should apply to allow employers to override the “protected persons” regulations to change scheme benefits to offset the cost of the additional NICs.  

“Protected persons” are employees of certain private sector employers in certain previously nationalised industries, such as electricity and rail, who are entitled to accrue pension benefits on the same basis as those they enjoyed at the time of privatisation.

No statutory override for “protected persons”

The Government has confirmed that employers will not be able to use the statutory override to alter their pension schemes in relation to members with protected person status.  The Government’s preference is for the issue of increased NICs to be resolved through negotiation between employers and their employees.  Accordingly, unlike other employees, protected persons’ future benefits cannot be amended, without agreement, to offset the cost of employers paying higher NICs.

This means that if an employer elects to use the overriding power to amend a Scheme for members who do not have protected person status, there could be a position where the scheme ends up with different contribution and/or accrual rates for protected and non-protected members going forward.