Employers undecided on what to do when contracting out ends

Employers with defined benefit (DB) pension schemes facing a scramble to avoid higher national insurance (NI) bills when contracting out ends in 2016 have yet to decide how they will respond, according to research by Towers Watson.


Its Cessation of contracting-out research, which surveyed 154 organisations, found that more than two-thirds (69%) do not know how they will responded to the change in legislation.

Under the current rules, employers providing 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 NI bills for employers and employees.

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With the introduction of the single-tier state pension on 6 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 face higher NI costs and employees will see a reduction in take-home pay, offsetting potential gains from an annual pay rise.

It could also force employers to cut employee benefits spend.

However, of those that have made a decision about what they will do, half will close their DB pension scheme to future accruals, while more than 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 the scheme without closing it all together.

Only 8% of respondents have considered using the statutory override, which allows employers to change scheme design without the trustee’s agreement.

John Cockerton, senior consultant at Towers Watson, said: “A lot of organisations, 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 employers 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.”