Pensions Legal Update June 2008

Updated June 2008

This article has been adapted from an opinion piece published in Personnel Today.

Changes to pensions during maternity leave

Changes to the Sex Discrimination Act 1975 that came into effect on 6 April 2008 have the effect of requiring employers to continue pension accrual and contributions whilst an employee is absent on unpaid maternity leave. The Government's position is that "the employer need not continue pension contributions during unpaid leave unless the contract of employment provides otherwise". However, the legal position is not quite that straightforward and employers and trustees are advised to review their pension arrangements and scheme rules with their advisers.

UK Maternity Law
All pregnant employees, regardless of length of service, are entitled to take 12 months' maternity leave. Employees who have been continuously employed for 26 weeks by the 15th week before the week in which their baby is due are also entitled to receive up to 39 weeks’ statutory maternity pay (SMP). Therefore, the last 13 weeks of any period of maternity leave is unpaid unless an employer agrees to pay it as part of the contract of employment.

What do we do about pension accrual and contributions during maternity leave?
Before the 6 April 2008 changes, employers were generally only required to continue pension accrual and contributions during any period of paid maternity leave. For those employees in receipt of SMP, this meant that when their entitlement to pay ended after 39 weeks' absence, an employer was not required to make contributions into their pension or continue accrual in the pension scheme for the last 13 weeks of unpaid maternity leave.

Our view is that the recent changes to the Sex Discrimination Act 1975 have extended the protection offered to women whose babies are due to be born on or after 5 October 2008. Employers will be required to continue pension accrual and contributions for all employees throughout the entire 12 months of absence.

The Government maintain that the amendments made to the Sex Discrimination Act 1975 do not affect pension rights and were introduced in light of a decision of the High Court that did not even involve pensions. However, whilst this may have been the intention, the effect of the legislation as drafted is somewhat different. There have been calls on the Government to clarify the position but to date no statement has been made.
What does that mean for employers with defined benefit ("DB") schemes?
In a DB scheme, the entire 12 months of maternity leave will be treated as pensionable service. This means that in the unlikely event of an employee retiring whilst on maternity leave (for example, on ill-health grounds) the figure used to calculate her pensionable salary would be the salary she would have received had she been in work. In addition, where life assurance is provided under the scheme, if the employee were to die whilst on maternity leave, the figure used to calculate her death benefits will be the salary she would have received had she been in work.

What does that mean for employers with defined contribution ("DC") schemes?
There will be an immediate cost implication for employers who offer DC schemes, including Group Personal Pension Plans. In those schemes, pension contributions will have to be continued throughout the entire 12 months of maternity leave. This is the case irrespective of whether the employee returns to work at the end of her maternity leave or whether she receives SMP or any other contractual remuneration during her absence. Employer contributions will be based on the salary the employee would have received had she been in work. If the employee would have received a pay rise during her absence, contributions will be based on that increased salary.

Previously, employers were only required to continue pension contributions during the last 13 weeks of unpaid maternity leave if the employee returned to work and backdated any employee contributions into the scheme on her return. This, therefore, is a costly change.

What do you need to do?
In view of the literal interpretation of the legislation as currently drafted, it would be extremely risky for employers to simply rely on the Government's non-legally binding guidance. Unless further legislation is implemented before 5 October, it will, from that date, be unlawful for employers to stop pension benefits throughout unpaid maternity leave. Employers, therefore, have two options:

• They can amend their scheme rules and employment policies and procedures to make it clear that pension benefits continue throughout the entire 52 weeks of maternity leave; or
• They can wait to see if the Government introduce further legislation or case-law emerges that clarifies the position. However, employers following this route face potential claims of sex discrimination which, if successful, will result in a backdated liability to 5 October.

Corporate Trustees: Disclosure of Indemnity Provisions

There have been a number of articles in the press regarding the introduction of the Companies Act 2006 on 1 October 2007 and its effect on indemnities given to the directors of pension trustee companies. The changes allow pension trust companies (and their associated companies, usually the principal employer) to indemnify a director of a pension trustee company against liability incurred in connection with the company's activities as trustee of the scheme. Many corporate pension trust companies have taken the opportunity of reviewing the personal protection and indemnity provisions contained in their Trust Deed and Rules and/or Articles of Association to ensure that they offer the maximum protection permissible under legislation.

However, one point that has not been so widely reported is that where such a qualifying pension scheme indemnity provision (QPSIP) exists, the fact of its existence must be disclosed in the pension trust company's director's report. Where the QPSIP is provided by an associated company such as the principal employer, it must be disclosed in the directors' reports of both companies. In addition, a copy of the QPSIP must be made available at the company's registered office for at least one year after it has expired and shareholders have the right to inspect and request a copy without charge.

Failure to comply with these requirements is a criminal offence and is punishable by a fine of up to £1,000. Given that it is the officers of the company and not the company itself who are potentially liable to be convicted, directors and company secretaries of pension trustee companies are advised to ensure that they comply with these requirements.

If you have any other queries or would like any further information about matters covered in this briefing please contact Catrin Young.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2008. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.