In January 2013 the Department for Work and Pensions (DWP) presented its whitepaper proposing an overhaul of the state pension. The paper, “The single-tier pension: a simple foundation for saving” aims to create a flat rate pension and abolish all of the nuances and confusion surrounding the current state pension system.
The changes were expected to take effect from 2017; however, the Government recently announced that the introduction of the single-tier pension is to be brought forward a year, to April 2016.
Key modifications include setting a minimum qualifying period of 7 to 10 qualifying years of national insurance contributions (or the equivalent credit) to qualify, a requirement of 35 qualifying years of NICs for the full rate of pension (currently £144.00 in today’s earnings terms), and the end of contracting out of the State Second Pension.
For businesses that operate a final salary pension scheme, contracting out provides a welcome NIC contribution saving, both for the employer and employee. Following the changes, an employer will be expected to pay an extra 3.4% of relevant earnings for each employee currently contracted out. Similarly, the employee will pay an extra 1.4% of relevant earnings. Employers must also be aware of the indirect administrative costs in amending their scheme rules, altering NIC rates and informing their affected employees of the changes.
The DWP has suggested some ways in which this added cost may be recouped, such as reducing future pension benefits or increasing employee contribution rates.
It is currently proposed that employers will be given limited powers to change scheme rules to deal with the end of contracting out without trustee consent.
Employers looking to acquire public sector contracts, especially for local government schemes, will need to take into account the changes when pitching for government work and will need to factor these costs into their proposals.