UK: Back To Basics On Pensions And Settlement Agreements: What You Need To Know To Protect Your Business

The pension terms of an employment settlement agreement are often left until the last minute. Sometimes HR or employment specialists are reluctant to draft for or advise on the pensions aspects of an individual's termination package. In turn, pensions specialists may be unaware of the wider HR related sensitives and scope of any 'deal' being reached with the individual in question.

In the fourth of our Back to Basics series the Combined Human Resources Solutions (CHRS) team seek to address some of the more frequently asked questions that arise for employers in relation to pensions and settlement agreements.

This back to basics primarily deals with settlement agreements:

  • where pension issues are not the actual subject of the potential claim - given the complexities around settling pension disputes, we recommend that specialist legal advice is taken on the particular issue; and
  • that deal with pension payments under a defined contribution (or money purchase) arrangement. These are the more common arrangements that are dealt with under such agreements. If the employee is a member of a defined benefit arrangement (such as a final salary or career average arrangement) which is still open to accrual, again, you should consider taking specialist advice early on.

Why are pensions relevant to settlement agreements?

A settlement agreement is generally intended to set out the compensation and benefits that an individual will receive from their employer in exchange for waiving potential claims they have against them, often (but not always) on termination of their employment. As pensions can form a significant part of an employee's overall benefit package, what is offered in relation to that benefit on termination will usually need to be covered off in the settlement agreement.

What pension information is useful to have before you start drafting a settlement agreement?

In order to help with drafting the pension terms of any settlement agreement, there are a number of questions you can ask which will make the drafting easier from the outset.

  1. What type of pension arrangement is it? A defined benefit or a defined contribution arrangement?
  2. Is the arrangement an occupational arrangement (usually a scheme set up by the employer for its employees and governed and administered by trustees) or a personal pension plan (e.g. contract-based and run by an insurer)?
  3. What (if anything) is the individual asking for in relation to payments into, and treatment of, their pension on termination?
  4. What does the contract say about benefits payable during notice? Are pension contributions included?
  5. Does the company have a standard or usual approach to the pensions' aspect of a settlement package?
  6. Is the employee paying any pension contributions? If so how are these being paid (e.g. as standard employee contributions or via salary sacrifice)?

Do you have to pay pension contributions during an employee's notice period?

This will depend on what contractual benefits the individual is entitled to during their notice period and whether there is a 'pay in lieu of notice' clause. If the employee is only entitled to basic pay, for example, the employer may not need to continue paying pension contributions during their notice period. There may be tax implications depending on whether there is payment in lieu of notice (PILON) clause/custom and practice of paying in lieu of notice, and also depending on whether the payments are made before or after termination of employment.

Finally, you will need to consider what statutory obligations you have under workplace pension reform in respect of the employee.

Is it OK to agree to extra payments into an employee's pension under the settlement agreement?

Often this will be OK, but you may need to check such payments are allowed under the scheme documentation. Sometimes, it will not be possible to make extra payments into a pension scheme where an employee has left employment, as they will no longer be an 'Active Member' of the scheme in question. To avoid getting into a debate on this issue, make it clear in the drafting that any obligation on the employer to make payments into an arrangement will be subject to the terms or rules of that arrangement and to the Trustees or provider (as relevant) accepting the payments.

It is not unusual for employees who have personal pension arrangements to request that their employer pays a contribution into that arrangement on their behalf pre termination. This may be a more tax efficient way of the employee to receive their settlement monies. There is no issue with the employer doing this in theory, but as above, the employer should make it subject to the insurer or trustees who administer the arrangement agreeing to receive the payments. The employer should also make it clear that it has no responsibility for the tax treatment of any such payments.

Do we need to exclude accrued pension rights from claims being settled?

Usually, yes! Wording carving out 'accrued rights' from the list of things being waived or compromised by an employee is standard. This effectively guarantees to the employee that the employer is not changing or removing any rights they have already built up in their pension scheme during their employment.

Exceptions may apply where the subject or issue of the dispute is pensions itself. In that instance specialist advice should be taken.

Can an employee keep contributing to their pension scheme after their employment has terminated?

This will depend on what type of pension arrangement they are in. Sometimes employees can only contribute to occupational pension schemes if they are Active Members (i.e. still in service with their employer). However, where an employee is a member of a group personal pension plan, depending on the rules of that plan, it may be possible for them to be able to continue to make contributions towards it. Be careful about writing into a settlement agreement anything which gives the employee a right to continue to make payments into their pension scheme unless you have checked and know that this will be possible.

Are there any particular considerations I need to have around high earners?

Yes. High earners are more likely to be subject to particular tax restrictions and allowances on their pension savings. These often result in higher tax charges where an individual's pension savings in any given year, or over their lifetime, reach a particular threshold. If you are drafting pension contributions for an individual into a settlement agreement, ensure you make it clear in the drafting that any tax consequences or considerations are the individual's responsibility.

What if an employee wants particular pension benefits writing into the settlement agreement?

The answers above have all been predicated on the assumption that the employee might be entitled to, or ask for, extra employer contributions towards their pension arrangement. If an employee is asking the employer to guarantee entitlement to a particular pension benefit, caution needs to be exercised. The employer is unlikely to know the precise cost of funding a particular benefit - agreeing to this could provide an ongoing funding risk or liability for the employer, and so both actuarial and legal advice should be taken prior to making any commitments in this respect.

For more information we have provided a top tips on pensions and settlement agreements.

Read the original article on GowlingWLG.com

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 Mondaq.com.

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

Authors
Similar Articles
Relevancy Powered by MondaqAI
Gowling WLG
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Gowling WLG
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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.

Disclaimer

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.

General

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