Changes to the State Pension – Impact on Businesses

22.03.2013

Nigel Bolton, Partner in Irwin Mitchell’s Commercial & Transactions team, provides an overview of important changes to the State Pension and what these will mean for businesses.

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 are expected to take force from 2017. Key modifications include setting a minimum qualifying period of seven to 10 years of national insurance contributions (NICs) (or the equivalent credit) to qualify, a requirement of 35 years NICs for the full rate of pension (currently £144.00 in today’s money), and the end of contracting out of the State Second Pension.

For businesses that operate a final salary pension scheme, contracting out provides a welcomed 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. However, there will be no blanket power as a result of the alterations that will allow employers and trustees to circumvent the consultation requirements. Any change will have to comply with scheme rules and current legislation.
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.

For further information, contact Nigel on 0113 220 6213 or nigel.bolton@irwinmitchell.com