Synopsis: The government has published a consultation on the abolition of defined benefit contracting-out. Defined benefit contracting out of the additional State Pension will end when the current 2-tiered system of basic and additional State Pension is replaced by a single-tier pension in April 2016.

Date posted: Tuesday, May 27, 2014

As a consequence of the Government’s State Pension reforms, contracting-out of the additional State Pension will cease as there will be no additional state pension from which to contract-out. This will have a range of implications for employers, employees and schemes. For employers, one of the most significant implications of abolition will be the need to start paying the standard rate of NICs. This will mean an increase in respect of each contracted-out employee of 3.4 per cent of relevant earnings. The minimum standards for being a contracted-out scheme will no longer apply when contracting-out ends, helping some employers to agree with trustee’s changes to scheme rules to reduce scheme costs to offset this increase in National Insurance (NI), either by reducing future pension benefits or by increasing employee contribution rates. However, some private sector employers are limited in their ability to modify the scheme benefit structure by legislation or by the scheme rules themselves. In many cases, scheme rules can only be changed by the trustees or with the trustees’ consent.

The Government will provide private sector employers limited powers, in the form of a statutory override, to change scheme rules to adjust for the additional NI cost without trustees’ consent.

The consultation asks for views on proposed legislative changes. Draft Regulations are attached within the consultation as Annexes:

Annex A contains the draft Occupational Pension Schemes (Power to amend Schemes to Reflect Abolition of Contracting-out) Regulations 2014 – referred to in this consultation as the ‘statutory override regulations’.

Annex B contains the Occupational Pension Schemes (Schemes that were Contracted-out) Regulations 2014. The draft regulations contain provisions which will replace the Occupational Pension Schemes (Contracting-out) Regulations 1996.

The consultation period began on 8 May 2014 and runs until 2 July 2014.

A library document will be issued shortly with further detail on the consultation.


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