Breaking down the employment contract: Pensions
Author: Antonia Blackwell and Paula Rome
Applies to: England and Wales
In our sixth article in this series, we consider employment terms relating to pensions and issues that employers need to be aware of when drafting contractual pension clauses.
By way of reminder, there are two types of pension provision in the UK: private pensions and state pensions.
Private pension schemes may be occupational (set up directly by employers and administered by their trustees) or personal (set up through a contract between a pension scheme provider and an individual). Occupational pension schemes can also be categorised according to the type of benefits they provide being either defined benefit schemes or defined contribution schemes (also known as money purchase schemes) or a combination of both (known as a hybrid scheme).
Following the Pensions Act 2008, employers are required to automatically enrol eligible jobholders into a workplace pension that meets certain qualifying criteria and to make mandatory minimum employer pension contributions on behalf of those employees who join their workplace pension scheme. This auto-enrolment regime is currently being phased in, with implementation due to be complete by 1 February 2018.
The Employment Rights Act 1996 requires that employers must give employees certain basic information about any terms relating to pensions and pension schemes in a statement of employment particulars or employment contract. It is therefore essential that employers include a clause relating to pension provision in the contract of employment. Employers may include details of pension terms by reference to another document, normally the pension scheme booklet.
Prior to 6 April 2016, employers also had to include a statement regarding whether the employee's employment was contracted-out of the state second pension which often caused confusion. However, contracting out was abolished with effect from 6 April 2012 on a money purchase basis, and with effect from 6 April 2016 on a defined benefit basis, so thankfully this statement is no longer required in the contract of employment.
When including a pension's clause in the contract, employers need to take care that the wording used gives them scope to change an employee's pension terms at a future date. A failure to maintain flexibility can lead to employees claiming that they have a contractual right to receive future pension benefits at a particular level or of a specific kind which can be problematic if there is an expensive scheme to maintain. To avoid such an argument, the wording used should only give the employee a right to join whatever pension arrangements are operated by the employer from time to time.
Employers should be aware that employees cannot be compelled to join a pension scheme and any term in a contract of employment compelling an employee to join a personal or occupational pension scheme is void.
Changing pension terms
Employers wishing to make changes to pension benefits need to act with caution. In most cases, it will be advisable, or even necessary, to consult with employees (or elected employee representatives whose terms of reference include consultation on pension's issues) before implementing any changes and, if necessary, seek express agreement to the changes. Certain employers (those with 50 or more employees) making proposals, on or after 6 April 2006, for a major or significant change to future pension arrangements must consult with active and prospective pension scheme members about the proposed changes.
Employers are not advised when changing pension terms to rely on an argument that the employee has accepted the change by their conduct. Employees may not appreciate what a change to pension accrual rate means to them in practice until they reach retirement age. It is therefore always advisable to have express consent to any changes.
Employers should be aware that there are statutory restrictions on making changes to scheme members' accrued pension benefits. These are highly complex and prevent detrimental changes to members' subsisting rights, unless the members agree to them.
Top tips for employers
When drafting a pension clause in the contract, employers should:
- refer the employee to the scheme booklet that summarises the benefits provided under the scheme
- avoid giving employees a contractual right to specific benefits under the scheme by making clear that the scheme is governed by a trust deed and rules that are separate from the employment contract, and that the employee is entitled to become a member of the scheme subject to the terms of these deed and rules (as amended from time to time)
- include a specific contractual right to change the scheme or remove it entirely in the future
- include a right to deduct any pension contributions payable to the scheme from the employee's salary at the rate that applies from time to time (so that the employer has flexibility to change contribution rates) - if there is no written authority in place this will be an unauthorised deduction from the employee's salary
- if there is a payment in lieu of notice clause in the contract, make sure this should be limited to payment of basic salary only and that it excludes payment of pension benefits.
Next month we will be looking at holiday clauses within the employment contract.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.