UK Employment Alert No. 154: Pension Scheme Contributions During Additional Maternity Leave
August 20, 2008
Background
Maternity rights are changing for employees who are due to give birth on or after 5 October 2008. An employer will be obliged to provide all terms and conditions of employment, except remuneration, during additional maternity leave (“AML”) as well as ordinary maternity leave (“OML”). See Employment Alert No. 153 for more detail. The question is how will this affect employer pension contributions.
The pre-October position
OML lasts for 26 weeks and AML for a further 26 weeks. Statutory maternity pay (“SMP”) is payable for 39 weeks which covers the full period of OML and half of AML. During the final 13 weeks of AML SMP is not payable. In most cases the employee will not receive contractual pay from her employer.
Where an employee is in receipt of SMP, contractual pay or a combination of both she is on ‘paid maternity leave’.
Under current pensions legislation an employee on paid maternity leave is entitled to the continued accrual of benefits under a pension scheme of which she is a member. Under both defined benefit (final salary) (“DB”) and defined contribution (money purchase) (“DC”) schemes employer contributions are based on the employee’s pre-maternity leave pay (taking into account subsequent increases). However the employee’s contributions are based on the amount of pay she actually receives.
What is changing?
From 5 October 2008 employment legislation is changing so that the obligation on employers to provide all benefits, except remuneration, during OML is extended to the full period of AML.
For the first 13 weeks of AML an employee will at least receive SMP. Therefore the pensions position is clear. Employer contributions continue based on pre-maternity leave pay and employee contributions are based on the level of pay actually received.
But what about the second, unpaid, 13 weeks of AML (assuming no contractual pay is received)?
The pensions legislation requires pension contributions to be continued only during ‘paid maternity leave’. The new employment legislation requires all non-pay benefits to continue during unpaid AML. Therefore, there is a conflict.
One view is that employer pension contributions must be maintained during unpaid AML. We do not agree with that for two reasons:
-
the new employment legislation contains a provision which states that it does not impose a greater requirement in relation to pension schemes than already exists under the current pensions legislation. Unfortunately the technical drafting is clumsy;
-
HM Revenue and Customs has published guidance that “Employers need not continue during unpaid AML to make employers’ occupational pension contributions, or to count unpaid AML as reckonable service for the purposes of occupational pension contributions”. This is suggested by guidance issued by the Department of Business Enterprise and Regulatory Reforms.
Our view is that employers are exempted from making pension contributions during any period of unpaid AML and the legislation permits the suspension of the accrual of pensionable service for this time. Employee contributions would also not need to be made.
What will this mean for employers?
The two sets of guidance (while not being law) provide support for employers who take the decision not to continue pension contributions or permit continued accrual of pensionable service through unpaid maternity leave.
Clarification has been sought from the government as to the precise meaning of the ‘saving provision’. Unfortunately it is thought that the government will merely restate the guidance already issued.
Employers should also note that, in relation to DC schemes it will remain best practice to remind employees that they have the option of making up employee contributions once they resume work. It should also be noted that, provided the employee returns, the employee’s pensionable service under both a DB and DC scheme should be treated as continuous service during unpaid AML (i.e. the employee must not be treated as having left and then rejoined the scheme).
The position is summarised as follows:
|
Maternity leave |
||||
|
|
Paid |
Unpaid |
||
|
|
DB |
DC |
DB |
DC |
|
ER contributions (based on pre-maternity leave/pay) |
ü (plus pension-able service continues) |
ü |
X |
X |
|
EE contributions (based on actual pay received) |
ü |
ü |
X |
X |
