Pensions and maternity leave

Pension contributions during family leave – Child’s play?

Introduction

How to calculate pension contributions during the period of an employee’s maternity or other family leave is a question that seems to arise more frequently since the introduction of auto enrolment. All employers must now enrol eligible employees into a suitable workplace pension scheme and, mostly, the rules around who needs to be enrolled and what to pay are pretty clear.

But what about when the employee is on leave for an extended period of time, part of which they are paid for and part is unpaid? And what if your policy on pensions is more generous than the statutory minimum for auto enrolment, or if you use salary sacrifice to generate savings in national insurance for the employer and employee?

We asked Vikki Massarano, partner with Arc Pensions Law, for some thoughts on the basic principles employers need to be aware of and, to avoid overcomplicating the matter, we have focused on defined contribution (DC) pension schemes only. Defined benefit (DB) schemes are beyond the scope or this article, but Vikki would be pleased to discuss any specific issues that may be relevant to you.

Family leave – paid and unpaid

Parenting can be hard; working out what pension contributions to pay to a DC pension arrangement during a period of family leave can be almost as difficult, especially if there’s a salary sacrifice scheme in place.

There are many different types of family leave – ordinary maternity leave, additional maternity leave, shared parental leave, adoption leave – all of which have different rules for minimum levels of pay and other requirements. From a pensions viewpoint the main distinction is between paid leave and unpaid leave.

Where there’s no salary sacrifice in place, unpaid leave is the most straightforward because there is no obligation on either employer or employee to make any pension contributions during the period when the employee is not receiving any pay at all. That’s subject of course to any specific or unusual requirements in the rules of your particular pension scheme.

During paid leave, the employer has to continue contributions calculated as if the employee were not on leave. That means if the employee is on a reduced level of pay, employer DC contributions must be based on pre leave salary. So for any period where the employee is on less than full pay, there will need to be a top up to the normal employer contribution amount, which may require changes to payroll.

The employee only has to make contributions based on the pay they actually receive. The result of this is that there will be a lower amount paid into a member’s DC account overall than if they had not been on leave.

The general consensus is that there is no obligation on the employer to top up the account to reflect the reduction in member contributions, but it is important to make sure the wording in member booklets and any letters issued to members on leave is clear about this to avoid misunderstanding and future complaints.

So far, so good…

With some changes to payroll and additional checks to make sure the contributions have been calculated correctly, this should be reasonably straightforward. But it’s not always so easy and some scenarios can cause more problems. First, salary sacrifice arrangements, where the employee agrees contractually to reduce their salary by the amount of employee contributions they would otherwise pay to the pension scheme. The employer in return agrees to make additional pension contributions equal to the sacrificed amount. All the contributions are technically employer contributions while the salary sacrifice scheme is operating. Salary sacrifice is very popular because there is a national insurance saving for both parties.

If a member on family leave remains in the salary sacrifice scheme during their paid leave and they receive a reduced level of take home pay, however, the employer will have to make employer contributions as if they were not on leave – i.e. the full amount of employer contributions as normal and also the amount representing employee contributions based on full pay. That is different to the position set out above if the employee is not in the salary sacrifice scheme and can be expensive.

Many salary sacrifice schemes provide for employees on family leave to come out of the salary sacrifice scheme at the start of their leave to avoid this scenario. If that is what your salary sacrifice scheme says, it’s important to make sure it happens, and if there is an automatic re-enrolment into salary sacrifice once a year, to make sure that people on family leave aren’t caught by that.

Can the rules be changed?

It’s worth checking the terms of your salary sacrifice scheme to see what it requires and consider making changes if you’re not happy with the amount of employer contributions that would be required. Any changes would need to be communicated to staff, and if what you are proposing would result in a lower amount of contributions being made, careful consideration of employment and HR issues will be needed including whether changes will apply to anyone currently on leave, or about to go on leave. Obviously the rules of any occupational pension scheme would also need to be checked in case they need amendment to bring them into alignment.

Anything else to be aware of?

Another tricky situation can arise where pay during a period of leave goes down to statutory minimum levels of maternity pay if the employer pension contributions are limited to the statutory minimum. Even though this might take someone below the threshold for auto enrolment membership or contributions, remember you have to treat them as if they are not on leave.

Death benefits also need to be considered. Typically any lump sum death in service cover would be based on pre leave salary rather than actual pay during family leave; problems can arise if an employee is on family leave receiving reduced or no pay at the insurance renewal date and the data provided to the insurer doesn’t capture the pre leave salary.

Much like planning for the arrival of a baby, there is potential for problems and perhaps some difficult calculations to be done, but with careful checking of documents and systems, it should be child’s play to make the right DC pension scheme contributions for employees on family leave.

For further information, please contact us:

Vikki Massarano, Arc Pensions Law, T: 0113 467 8792 E: vikki.massarano@arcpensionslaw.com

David Hodgson, MHM Pension Services, T: 01423 229029 E: david.hodgson@sandccarsalesharrogate.co.uk