UK: Pensions On The Move Again

Last Updated: 23 April 2013
Article by Christopher Murray

An update on the changing landscape and what you, as an employer, could be doing.

By the time you read this, there will have been countless articles in the press about how much ‘better off’ or ‘worse off’ various sections of society will be as a result of the proposed move to a flat rate state pension from the present two-tier system of basic (‘old age’) pension and the state second pension (still known to many people as the state earnings related pension scheme (SERPS) which it replaced). It is not therefore the purpose of this article to consider the financial impact on individuals but instead to identify issues that employers will face during the transitional period.

The technical information is included in the Department for Work and Pensions (DWP) white paper The single-tier pension: a simple foundation for saving, which was issued on 15 January. Naturally, there are some areas that would benefit from clarification and there is always the possibility that things could change in the various committee stages when a Bill is considered. However, the Government has consulted widely with employers and those in the pensions industry, so significant changes would now seem unlikely.

Those of us who remember the introduction of the SERPS in 1978 (which – as is usual for pensions – followed enabling legislation two years previously) may recall that the initial national insurance (NI) rebate of 8.5% for contracting-out was always going to be reviewed at 5-year intervals and that this rebate would reduce over time. Today’s contracted-out rebate (only available to defined benefit schemes) has fallen to 4.8% of earnings between the lower earnings limit (£5,564 in 2012/13) and the upper accrual point (£40,040 in 2012/13) made up as 3.4% (employer) and 1.4% (member).

The great majority of employers who established defined benefit (usually ‘final salary’) pension schemes for their staff took advantage of the NI rebate available to schemes of a certain ‘quality’, by contracting their members out of SERPS and subsequently the state second pension. The ‘quality’ test did not apply at outset but let’s not confuse the issue!

“Double Whammy”

In the General Election of 1992, the Conservative party coined the phrase “double whammy” as an attack on the Labour party. It referred to a perceived outcome, if the latter won, as being (1) more taxes and (2) higher prices. The loss of contracted-out status for a defined benefit scheme is indeed a double whammy. The employer is faced with a 3.4% increase in NI contributions (tax, by another name) and may well have previously agreed adverse scheme or contribution changes with members. Any proposal to further reduce future benefits or to increase contributions will do little to motivate the workforce. Members will also see a 1.4% increase in their own NI contributions.

The Government has said that it does not intend to introduce a single-tier state pension (resulting in the demise of contracting-out) until at least 2017 by which time all employers will be caught up in ‘auto-enrolment’ - the interim (5% total contribution) phase, effective from October 2017.

Most employers today have limited financial resources and will find it difficult to afford such a dramatic increase in pension contributions. So what are the options?

  • Pass on the whole 3.4% increase (applied to the relevant earnings) to members.

  • Reduce future benefits – adopt a lesser benefit structure or defined contribution plan?

  • A combination of these.

The Government intends to allow employers to impose an increase in member contributions regardless of any powers that trustees might otherwise have. This is relevant to all schemes other than public-sector or ‘protected’ schemes. Bearing in mind that employees will have their own increase in NI contributions (1.4%) to worry about, is it realistic to pass on a further 3.4%? Probably not; members have often shared funding rate increases in recent years and to pass on a further 4.8% of a band of earnings (a combination of direct NI contributions and increased pension contributions) could well be ‘the straw that breaks the camel’s back’.

If an employer cannot afford the additional 3.4% and if passing on the entire cost of the increased NI contributions to the member (as higher pension contributions) would be unacceptable, the most practical options would be to reduce future accrual, possibly in its entirety. There are very few schemes today that accept new entrants but to close a scheme to this group without also reducing or ceasing future accrual will not address the problem of higher NI contributions.

Auto-enrolment will be in its interim phase (5% total contribution) by October 2017, so assuming some kind of defined contribution arrangement will be established if future accrual ceases, it will be important to take into account how (or if) it is to be part of your auto-enrolment solution.

Further complications

Once a scheme ceases to be contracted-out, each member’s NI record will need to be validated. Experience gained from winding-up pension schemes shows that this can be a tortuous process, with discussion needing to be held between sponsoring employers and the relevant section of HMRC. At present, HMRC has no experience of gathering this kind of information on such a grand scale. The DWP has indicated that HMRC is looking into how ‘Real Time Information’ might be used to facilitate this process but we remain sceptical as to how it could be used to reliably collect such long-term historical information.

What could you be doing?

Working on the premise that a reduction in benefits is more likely to be imposed than a further increase in member contributions (beyond the 1.4% increase in NI contributions that members will pick up in any event) there are a few actions that employers might wish to take or issues to consider, as follows.

  • Explain your anticipated new predicament, preparing members for a future solution.

  • If members agreed to pay higher contributions following your last actuarial valuation, they might not be too keen to continue with this if a cut in future benefits is planned, even though it will probably not be implemented before 2017.

  • Consider a lesser defined structure (including career average revalued earnings) or a defined contribution option.

  • Prepare a paper for your board, explaining the impending changes and possible solutions, taking into account auto-enrolment requirements.

  • Present your paper to the board, having a realistic implementation timetable in mind.

  • Initiate consultation with staff, once a viable solution has been identified.

All of the above will need to be tempered with the caveat that this is only a white paper and there is for amendment, although significant changes are not expected.

Smith & Williamson has considerable experience in helping employers to address pension issues, communicating with boards of directors and members, designing consultation material, staff presentations and 1:1 meetings.

Rather like pensions simplification in 2006, the proposed single-tier pension is supposed to be ‘a simple foundation for saving’ … we shall see!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions