The ability for occupational and personal pension schemes which provide defined contribution or money purchase type benefits to contract out of the state second pension was abolished on 6 April 2012. The state second pension serves to top up the state pension and is based on an employee's national insurance contributions.
The legislation which effects the abolition requires the trustees or scheme provider of the applicable pension scheme to provide members with certain information by some key dates. The main onus on communication is not with the employer. However, employers may be aware that section 1 of the Employment Rights Act 1996 requires employers to provide a written statement setting out the basic terms of employment to the employee. The section 1 statement must set out any terms relating to pensions and pension schemes and in particular the statement should specify if a contracting-out certificate, for the purpose of the state second pension, is in force in relation to the employment.
The Employment Rights Act (section 4) also requires employers to provide employees with a statement of any changes to the section 1 document. A change to the contracted out status is likely to amount to a change. Therefore, if an employer fails to provide the employee with the required information relating to the pension scheme’s status, an employee could bring a claim for failure to provide the required information under either section 1 or section 4 and a tribunal can award two to four weeks pay. However, an employee can only bring such a claim if they have a successful substantive claim, i.e. the employee could not bring a stand alone claim, but would be able to add in a claim of this sort if for example they brought a successful unfair dismissal claim.
In addition to the requirement above, and to foster good employee relations, many employers may want to join in with their pension scheme providers or communicate the change to contracting out provisions to its employees independently.
Jean Boyle, pensions expert at Stone King said, “the risk is that any well advised employee engaged in an employment claim with their employer will join in a claim in relation to their employer’s failure to provide details of the change to the pension scheme’s contracted out status. In these circumstances it is likely that a tribunal will award up to four weeks pay to the employee”.
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