Under the current rules, companies providing defined benefit (DB) pensions have typically chosen to replace part of the State Pension as well as topping it up. ‘Contracting out’ of the State Second Pension in this way reduces National Insurance (NI) bills for employers and employees. With the introduction of the single-tier state pension on 6th April 2016, this will no longer be possible and the increase in employer NI cost can add up to 2.9% of pay, depending on the employee’s earnings. If no action is taken, employers will face higher NI costs and employees will see a reduction in take-home pay, offsetting potential gains from an annual pay rise.
John Cockerton, senior consultant at Tower Watson, said:
“A lot of companies, faced with this additional NI cost, will embark on a wider review of their schemes. Irrespective of the action they take, it is likely that employee consultation will be required. After taking into account planning, consultation and implementation time, April 2016 is already a challenging target to hit.
“This summer will be a crucial time for companies to get their plans in place. Changes can be made after April 2016 but that means paying more National Insurance in the meantime – why would an employer want to do that? It may also be harder to communicate that State Pension reform is responsible for cuts to employee benefits if these things do not happen at the same time.”
According to the research, half of the companies that have made a decision say they will close their DB scheme to future accruals, while just over a third (37%) suggest they will not change their pension plan design, leaving the employer to pay higher NI contributions. The remainder say they will make changes to their scheme without closing it altogether.
Only a handful of employers (8%) have considered using the Statutory Override, which allows employers to change scheme design without the trustees’ agreement. In Towers Watson’s experience, many employers consider this unnecessary because trustees will anyway agree to reasonable proposals; others will want to make more sweeping changes than the override permits.
John Cockerton said: “Even those companies that are not planning on changing their schemes need to act: employees will pay higher NI and will need to understand the impact on their take home pay and more importantly the change in their expected State Pension.”
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