04/04/2014

Pension negotiations ahead

The pension safeguards put in place when utilities were privatised are to survive the introduction of the single tier pension in 2016, but companies still have decisions to make, says Terry Saeedi.

The Pensions Bill continues its progress through Parliament.  One of its central pillars is the introduction of the single-tier state pension from 6 April 2016 which is designed to provide a simpler, fairer state pension system.  However, the introduction of this new state pension is now going to be less than straight-forward for utilities companies.

State pension changes

From 6 April 2016 the current state pension provision (the basic state pension and the state second pension) will be replaced by the single-tier state pension of £144 per week – the exact figure will be finalised shortly before implementation.

The state second pension is an earnings related pension and is based on an employee’s earnings between the lower and the upper earnings limits.  Many occupational pension schemes (including those of utilities companies) are “contracted-out” of the state second pension.  This means that, where the statutory conditions are satisfied, the state second pension benefits are provided from the scheme instead of by the Government.  In return for providing those benefits from the scheme, both the employee and employer pay reduced National Insurance Contributions.  The National Insurance Contribution rebate is 3.4% for employers and 1.4% for employees.

What the changes mean for contracted-out pension schemes in general

The Government’s January 2013 White Paper confirmed that the abolition of contracting-out for occupational pension schemes was integral to the introduction of the single-tier pension.  However, contracted-out benefits accrued up to 6 April 2016 will be protected and must be paid.

One of the main consequences of the abolition of contracting-out is the withdrawal of the National Insurance Contribution rebate.  This means that from April 2016 employee National Insurance Contributions will increase by 1.4% and employer National Insurance Contributions by 3.4%.

The Government has accepted that employers may wish to change the design of their pension scheme in order to offset this increased cost.  The Pensions Bill 2013 contains a modification power which will allow an employer, for a limited period of time and without trustee consent, to amend future service pension benefits or to increase member contributions in such a way as to offset the loss of the National Insurance Contribution rebate.

What the changes mean for utilities companies

On privatisation, protections in respect of pensions for utilities company employees were put in place.  The exact level of protection differs across the different utilities sectors.  However, a common feature across all these protections is that changes to pension benefits or member contributions are subject to certain constraints.

The protections for the coal, electricity and nuclear decommissioning industries are set out in the relevant Protected Persons Regulations.  These Regulations broadly require pension benefits for employees who were employed at the time of privatisation to be at least as good as those they received before privatisation.  The Regulations also restrict amendments which reduce future accrual or increase contributions for those employees.  The exact restrictions differ between the different sectors, for example, the Electricity Supply Pension Scheme requires two thirds of members to agree to an adverse change.

The utilities companies have been concerned to ensure that the Pensions Bill modification power will allow them to treat all employees (particularly those covered by the Regulations) in the same way for pensions purposes when contracting-out ends.

In January 2013 the Government issued a consultation paper looking at whether or not utilities companies with employees subject to the Regulations should be able to use the modification power in the Pensions Bill.  As an overriding principle the paper makes it clear that the Government wants to balance the rights and expectations of both affected employers and employees.  The consultation closed on 14 March 2013.  The Government published its response on 12 February 2014.

The consultation response comments that there were strongly polarised views on the questions of whether or not the Protected Persons Regulations should be overridden by the Pensions Bill power.  Trade unions said that the power should not apply to protected persons on the basis that the Government should not renege on promises made to employees at the time of privatisation.  They argued that any changes to pension benefits should be the subject of negotiation between the employer and the protected persons.

Employers, however, said that the power should apply to protected persons on the basis that protected persons and non-protected persons should be treated equally, any difference in treatment could lead to employee relations difficulties.  In addition, they said that employers should be given as much flexibility as possible to deal with the abolition of contracting-out and that the proposed introduction of the single-tier pension would not have been envisaged when the protected persons regime was put in place in the early 1990s.

In its response document the Government acknowledged that the arguments were finely balanced.  On the one hand, the Government accepted it is important that all scheme members be treated in the same way and that if protected persons are excluded from the statutory override employers will look for other ways to offset the loss of the National Insurance Contribution rebate.  The Government also commented that the changing pensions landscape has meant that protected persons have ended up with more generous pension terms than public sector employees.

The Government concluded that the Pensions Bill modification power should not be extended to protected persons.  In coming to this decision the Government stated that the small number of workers involved (estimated at 22,750 in utilities companies) means that the matter can and should be resolved by negotiation.  In addition, the Government considered that it was important that it stands by the promises made at the time of privatisation.

In conclusion

Utilities companies will need to decide whether or not they wish to achieve a cost neutral response to the introduction of the single-tier state pension and the end of contracting-out.  However, they may need to adopt different approaches with protected and non-protected persons.  Non-protected persons may see their pension benefits or pension contributions adjusted.  Employers of protected persons will probably seek to negotiate an appropriate salary adjustment.  It remains to be seen whether or not this happens in practice.