A reminder about the abolition of salary related contracted-out. Is your scheme prepared?
From 6 April next year, contracting-out will be abolished for defined benefit pension schemes. This follows on from the abolition of contracting-out for defined contribution pension schemes on 6 April 2012. It will bring to an end what has been a key (and hugely complex) feature of pension schemes for many years.
For any defined benefit pension scheme in which members are still accruing benefits, employers (and members) will pay higher national insurance contributions from 6 April 2016. Employers are likely, therefore, to want to at least consider an amendment to the rules of their defined benefit pension schemes to take account of this increase. For example, an amendment could increase employee contributions by an amount which is equivalent to the increase in the employer's national insurance contributions. The Pensions Act 2014 provides employers with a specific power to amend scheme rules for this purpose. The power is, though, subject to a significant number of conditions which add up to an employer only being able to use it to recoup the cost of higher national insurance contributions and nothing else.
Another major consequence of abolition is that trustees and employers of defined benefit pension schemes should carefully consider if the rules of their scheme contain contracting-out requirements that are entrenched in the rules. As this is often the case, it may well be desirable to amend scheme rules to reflect abolition.
Employers will also need to notify any employees who are in contracted-out employment of the changes.