Less than a year remains until change which will add a combined £1,400 in National Insurance contributions for an employee earning £35,000.

With less than twelve months to go until the end of contracting out, a large proportion of companies and the defined benefit schemes they run still appear to be under-prepared for the change. Findings from a webinar by Hymans Robertson and Sackers revealed that 27 percent of attendees are yet to take action on contracting-out, despite the complexity of the change, impact on company bottom lines and employee benefits it will cause. Of the remainder, around half confirmed they are at the planning and assessment stage of their work.  From 6 April 2016, the Government intends to replace the current State pension system with a flat rate single-tier pension. At the same time, the system of contracting out of the State Second Pension will end. This will necessitate a series of decisions for companies running defined benefit schemes, in part because of the extra cost they will accrue.

The change will add around £1,000 to an employer’s National Insurance bill for an employee earning £35,000. Employers may choose to pass on these costs to employees, absorb the costs themselves or simply close their defined benefit scheme as a result. Research among in-house pension and HR professionals last year by Hymans Robertson showed that 10 percent will opt for the latter, closing their scheme to future accrual as a result of contracting out ending. Commenting, Susan Waites, Partner at Hymans Robertson said:“There’s less than a year to go now but still a lot to do to prepare for the end of contracting out. Employers will see company costs go up with the knock-on result affecting their bottom line, their employees or their defined benefit scheme.

“If they haven’t started planning yet, then it is vital companies and trustees seek external advice to ensure they have a concerted plan of action in place to make the right change, at the right time and in the right way. Communication with employees will really matter too. This is a complex decision which has the potential to significantly impact their pay packet or their pension plan depending on their employers decision. Communicating effectively and explaining the impact of the route companies choose to go down will be important, especially if employees are being moved  to a DC pension.”

Fuat Sami, Partner, Sackers said: “The end of contracting out is fast approaching and the time for employers to start acting is now. It’s not just about choosing between benefit reductions or increasing member contribution to offset increased NI costs. It’s also about taking the most effective legal route to get to where you want to be, whether it is use of the statutory modification power or a more conventional route. Legally, there is a lot in the mix – statutory consultation, IBM and past communications, interaction between schemes rules and the state pension system – so employers will need to do their homework to avoid tripping up and trustees should be talking to their sponsors to ensure they understand their plans.” Below is a five step process for companies to prepare for the end of contracting out, ensuring they make the right decisions and manage the costs effectively. The five steps are:

Assess the options and impacts; Plan and identify priorities and stakeholders; Get stakeholder buy-in; Communicate with key audiences and Manage the implementation of the changes.