UK: What To Include In Employment Contracts Regarding Pensions (Video)

Last Updated: 7 April 2017
Article by Ruth Ormston

Jane fielding, Head of Employment, Labour & Equalities talks to Ruth Ormston, Associate about pensions issues for employment & HR professionals in settlement agreements and employment contracts, plus Ruth gives a refresher on auto-enrolment.


Jane Fielding: So Ruth, you are going to talk to us about pensions law for employment lawyers and HR people who are not pension managers.  What are the top three things that you want to tell us about?

Ruth Ormston: Well I thought I would tell you about pensions clauses in employment contracts because that is a thing that employment lawyers and HR lawyers need to think about.  Also looking at the other end of the spectrum at pensions when you are dealing with termination and how to deal with that in your settlement agreement and thirdly we have automatic enrolment, part of workplace pension reform, which is something that applies to all UK employers.

Jane: So, employment contracts that's being clear at the start about what the pension entitlement is, and drafting carefully for that?

Ruth: Yes exactly.  So making sure that your provisions on pensions are really clear but also that they do not go further than they need to in terms of saying what the pension provision is for an employee.

Jane: So less is more can be the case sometimes?

Ruth: Often yes. I think sometimes with pensions the temptation is to put a lot into the contractual clause and if you are putting in things like fixed contribution rates for the employer or the employee or you are writing in automatic enrolment into your contractual provision it may then be quite tricky to change that going forwards which can sometimes be an issue for employers. 

Jane: And there is always that bit in precedents that talks about contracting out which I think most people don't really understand and leave it in. Is that relevant?

Ruth: Yes, that is no longer relevant because contracting out has actually been abolished in UK pension schemes but the good news is that if you still have those provisions in there because of legacy clauses they just will not apply anymore because the statutory repeal of contracting out is overriding.  So, essentially, now you don't need to include anything on contracting out if you are drafting from scratch although if you have got something in there already do not worry about it, it just will not apply. 

Jane: So looking at the other end of the employment cycle, if you are moving somebody on or they have resigned or you are exiting somebody, what are the kind of key things, key flags if you like, to have in your mind as an HR person or an employment lawyer dealing with that?

Ruth: I guess it would be think about pensions early on because I think sometimes that can get left until the final draft of the settlement agreement and it actually can be quite complex.  Defined benefit pensions, which is where the employee has a guaranteed amount of pension when they come to draw their benefits, are fairly complicated so I would suggest taking advice if you are thinking of drafting anything in a settlement agreement that is dealing with defined benefit pensions.  Defined contribution, which is where both the employee and the employer usually have put in a certain amount of money into a pot that will then be used to buy a pension or benefits at the end, is dealt with more commonly in settlement agreements because, particularly with workplace pension reform, that tends to be the more common pension that employees have.  There are a number of things to think about when you are looking at dealing with settling defined contribution pensions in a settlement agreement.  A few things would be tax, so make sure the tax treatment of any pension sums that you are paying is dealt with correctly.  Also make sure that you are setting out clearly in the agreement what pension contributions you are making and how they are being dealt with and check that the scheme that you're paying across to will actually accept the contributions because the trustees, or in the case of a personal pension plan, the provider, need to be able to accept those contributions if that is something you are promising the employee you will do under the settlement agreement.

Jane: So we often have the bit in the claims clause in the settlement agreement that talks about excluding from the waiver of claims accrued pension rights. Does that mean you can never settle a pensions accrued right or how does that work?

Ruth: So again settling pensions disputes in particular can be complicated and generally the principle is that the pension benefits that an employee has already built up, so they are already kind of banked, cannot be waived so you can't just expect an employee to give up those rights. But when it comes to settling pension rights more broadly, I think there is a bit of a misperception that you cannot settle those at all.  You can, but you need to be very careful with your wording and take advice on it because there have been cases that have shown that even where the wording looks quite robust, it does not necessarily settle all the claims that might be envisaged. 

Jane: And auto enrolment.  So that's been with us for a while now.  What has changed? What do we need to know about at the moment?

Ruth: So it has been around for a while but employers are still finding their feet with it I think and a lot of smaller UK employers are now obviously coming on board with auto enrolment and the employer duties under the Pensions Act are applying to them.  Just as a refresher, this is the duty on all UK employers to enrol eligible job holders into a workplace pension scheme and start paying contributions towards that scheme for them.  A few updates on this really.  One is that the staging dates for increases in contributions have been put back slightly by the Government, I think partly in recognition to how complicated this is and also economic concerns, so the dates for the contribution levels going up have been put back so worth checking if you're a UK employer.  There have been a few changes to NEST, which is the National Employment Savings Trust, a few relaxations really around some restrictions that NEST had on transfers in and out and on the maximum amount that could be saved into NEST if you were using that to satisfy your employer duties.

Jane: And if you have been auto enrolled for a while or if you have been caught by your staging date for a while is there a point at which you kind of review your arrangements? Is there sort of a refresher period if you like?

Ruth: You need to be re-enrolling eligible job holders every three years.  So this is something that employers will still need to keep under review.  They might also want to keep their providers under review particularly because there is going to be increased regulation on master trusts and so if you are using a provider, maybe reviewing that provider early on before you get to re-enrolment so that you can keep your options open.

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.

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