UK: Back To Basics - Pensions And Employment Contracts

Last Updated: 10 November 2017
Article by Elaine Hiles and Ruth Ormston

An employer is required to give an employee a written statement of their 'particulars of employment' containing certain key pieces of information that are set out in statute. Usually, though not always, this is set out by the employer in an employment contract, which sets out the main terms and conditions relating to an employee's employment. But what do employers have to include in that contract about an employee's pension rights?

In the second of our back to basics series, the CHRS team set out an easy-to-follow guide to the key points you need to consider. They then provide you with the benefit of their experience with a series of top tips for applying the law in practice.

Does an employment contract have to contain information about an employee's pension rights?

Yes.

An employer must give an employee details of any terms and conditions relating to pensions and pension schemes. Often this information is put into the employment contract. The employment contract may then include these details by reference to another document, like a pension scheme booklet (this is a common approach taken by employers).

So, the employer can just add a couple of lines about pension rights and the job's done?

Not quite.

It is important that employers take care when drafting pension clauses in the employment contract (and any other document referenced in the employment contract). The employer must ensure the employees are only afforded the pension benefits the employer intends, and the employer has the flexibility and power (to the extent possible) to modify the pension benefits as desired and to deduct employee pension contributions from the employee's salary.

For example, most employers will want to ensure that:

  • employees are only provided with a right to become a member of a pension arrangement provided or chosen by the employer;
  • the employer has the flexibility to change the employee's pension rights at some point in the future; and
  • the employee does not have a claim to a contractual right to contributions or benefits of a certain level or under a specific type of scheme.

One way to do this is to make clear that the employee's pension benefits are governed by the governing documentation relating to the scheme (as amended from time to time), and to expressly reserve the employer's rights to make changes to its pension arrangements at any time.

Even without such restrictions, the law contains restrictions on the changes that an employer may make to an employee's pension rights, but more on that later...

Do we need to include information in the contract about automatic enrolment and duties under the Pensions Act 2008?

No.

The duties on employers under the Pensions Act 2008 are statutory duties. Employers do not need to include information about those statutory duties in the employment contract. Indeed it may be advisable for employers not to include this information in the contract, as there is a risk they could hard-wire statutory rights as being contractual rights.

There are separate communication obligations and duties that apply under the Pensions Act 2008 but that information can be provided outside the contractual documentation.

Are there any restrictions on making changes to an employee's pension benefits?

Yes. It can be a bit of a minefield so take advice if needed.

Broadly, unless a change affects the employee's accrued benefits (see below), an employer may change an employee's pension rights, but they should exercise caution when they seek to do so.

For certain pension scheme changes, it is mandatory that the employer consults with the active and prospective members of the pension scheme about the proposed changes for a minimum 60-day period. This is a pensions consultation requirement. This requirement is different to any consultation that may be required under employment law (such as a consultation to change terms and conditions).

The level of contractual consultation required will depend to a large extent on the pensions wording in the employee's contract, how flexible that wording is, and how many employees are affected by the change. If a change is contractual, contractual consultation will also be needed - obtaining consent to a change is the most legally watertight option here.

It is therefore possible that in relation to the one proposed change to pension benefits, an employer may need to run both a pensions and an employment consultation.

Finally, pensions legislation restricts changes to an employee's accrued pension benefits, so rights to pension benefits that employees have already built up cannot simply be taken away - legal advice should be sought in this area.

What if the employment contract includes a clause which allows the employer to amend the employee's pension benefits?

Including a specific clause permitting the employer to make changes to an employee's pension benefits can make amending future pension benefits and entitlements a little easier. However, employers should still be wary when relying on such clauses that they:

  • do not breach the employer's implied duty of trust and confidence between the employee and employer; and
  • ensure any changes are being effectively communicated.

Does an employer have to pay pension benefits during a payment in lieu of notice (or PILON) period?

This depends on how the PILON clause and referenced definitions are drafted. If the definition of salary in the PILON clause relates to all benefits (rather than just basic salary, for example) pension benefits will be payable by the employer during the PILON period.

What happens if the employer breaches its obligations in relation to pensions contained in the employment contract?

If the employer breaches a pensions term that is contractual, the employee may bring a claim for breach of contract through the employment tribunal or the courts.

Additionally, the employee may bring a claim against the trustees of a pension scheme through the Pensions Ombudsman if the complaint is that they are not getting the pension benefits they believe they are entitled to.

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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