techtalk
This article originally appeared in January 2014 edition of techtalk. Please visit www.scottishwidows.co.uk/techtalk for the latest issue.
EDITORIAL: Jeremy Branton
Statutory payments,
pension rights and
automatic enrolment –
how do they interact?
Employers approaching their staging date, with workers in receipt of statutory payments now
have a further set of rules to consider. This article explores how these apply.
Assessing the workforce
It’s important for employers to make an initial assessment of their
workforce in advance of their staging date.
During this process, employers may find they have workers in receipt
must be automatically enrolled. Alternatively the level of earnings
may dictate that the worker has a right to opt in or to join the
employer’s pension scheme.
of statutory payments – maternity pay, adoption pay, paternity pay
We consider the different statutory payments employees may be
receiving and ask whether pension rights continue, before looking at
or sick pay and may be questioning how these individuals should be
some examples.
treated. As these statutory payments count as qualifying earnings,
then provided the workers are aged between 16 and 74 and are
Statutory maternity/adoption/paternity pay
working or ordinarily working in the UK the employer will have the
Statutory maternity pay
same automatic enrolment responsibilities towards these
individuals as other workers.
It’s possible that workers whose pay consists solely of statutory
payments may be assessed as eligible jobholders and therefore
For professional adviser use only, not to be relied upon by any other person.
Although statutory maternity leave covers a period totalling
52 weeks, statutory maternity pay is only payable for a maximum
period of 39 weeks. It ceases if the employee returns to work.
It’s available to employees who:
• Have worked for their employer continuously for at least 26
weeks up to the 15th week before the expected week of
childbirth (the qualifying week).
• Have average gross weekly earnings of at least the lower
earnings limit – £109 per week for 2013/2014.
Statutory adoption pay
This provides benefits to those employees who are matched with a
child by an adoption agency and have at least 26 weeks continuous
service before the beginning of the week they are matched with a
child. Again the employee’s average gross weekly earnings must
meet at least the lower earnings limit.
Pension rights and parental leave
These are based on paid and unpaid leave, as summarised below:
Scheme
type
Paid period of
parental leave (1)
Unpaid period of
parental leave (1)
Defined
benefit
(DB)
•Treated as pensionable
service therefore benefits
must continue to accrue
based on employee’s
normal salary.
• Any unpaid period
of leave which
follows a paid
period of leave
doesn’t have to
count towards
pensionable
service.
• Employee contributions
are based on the level
of pay actually received
with employer effectively
picking up any shortfall
arising from reduced
employee contributions.
Statutory paternity pay
This benefit comprises ordinary statutory paternity pay – the right
for qualifying employees to take up to two consecutive weeks leave
and additional paternity pay – payable if the child’s mother or primary
adopter returns to work before the end of their full entitlement
to either statutory maternity or adoption pay. Qualification is again
subject to the employee having at least 26 weeks continuous
service and average gross weekly earnings of at least the lower
earnings limit.
• Scheme rules may allow
employee to pay AVCs
if they wish.
Defined
contribution
(DC)
• If scheme is set up on a
matching basis,
employer contribution
must be based on the
level the employee
would normally pay.
Statutory sick pay
This is paid for up to 28 weeks to employees who have earnings of
at least the level of the lower earnings limit.
www.gov.uk/browse/employing-people/time-off
The current rates for statutory payments are summarised below:
Rates payable (2013/2014)
Statutory
maternity
pay
• 90% average gross weekly earnings for weeks 1-6.
• Lower of £136.78 pw or 90% average gross weekly
earnings for weeks 7-39.
• There is no statutory payment for weeks 39-52.
Statutory
adoption pay
• Lower of £136.78 pw or 90% average gross weekly
earnings for up to 39 weeks.
Statutory
paternity pay
• Lower of £136.78 pw or 90% average gross weekly
earnings for up to 2 consecutive weeks (ordinary
paternity leave)
• Lower of £136.78 pw or 90% average gross weekly
earnings for up to 39 weeks (additional paternity
leave).
Statutory
sick pay
• £86.70 pw for up to 28 weeks.
When considering employers’ duties under the workplace pensions
reform legislation for individuals receiving statutory payments,
account must also be taken of the wider rules governing pension
contributions.
•Employer
contributions
may be payable
depending on
the scheme rules
or contract of
employment.
• No requirement
for the employee
to contribute.
• Employer contributions
can be conditional on an
employee continuing to
pay contributions – the
scheme rules or contract
of employment will specify
whether this applies.
Further guidance on statutory leave is available at:
Type of
payment
• Employer is required to
continue contributions
based on the employee’s
normal salary.
•Employment
before and after
the break must
be treated as
continuous.
• Employee contributions
are based on the level of
pay actually received (2).
Death
benefits
(DB and DC
schemes)
Any death benefits provided under the scheme that
are linked to salary must be based on the employee’s
normal salary.
(1) The paid period of leave is normally weeks 1 to 39 and the
unpaid period weeks 40 to 52.
(2) This will result in a contribution shortfall because of the reduced
employee contributions. Unlike a DB scheme where the employer
makes up the shortfall, the accepted position is that there is no
requirement for an employer to do this under a DC scheme.
In summary, the result of the interaction between the rules relating to
paid parental leave and those applying to workplace pensions is that an
employer must pay the higher of two minimum contribution levels.
An employer would only have a statutory requirement to continue
pension contributions for an employee who is off sick where the
individual had been automatically enrolled into his/her employer’s
scheme, and where the definition of pensionable pay was not based
on band earnings. Otherwise any pension provision during a period
of long-term sickness will be subject to any contractual entitlement
in the contract of employment or in the case of an occupational
pension scheme, the scheme rules.
What about salary exchange?
Finally, in the context of statutory payments, it’s worth considering
what effect schemes operating on a salary exchange basis may have.
• For the employee, any salary exchange arrangement could affect
entitlement to statutory maternity, adoption, paternity or sick pay
– it would therefore be unwise for anyone to reduce their salary
below the lower earnings limit. As earnings cannot be reduced
below the national minimum wage, this is unlikely to be an issue
except for part-time workers. Employees also need to bear in mind
that maternity, adoption or paternity pay will be based on the post
exchange level of salary.
• Under a salary exchange arrangement, the terms of the employee’s
contract are altered and responsibility for paying some or all of the
pension contributions is moved from the employee to the employer.
This means that during periods of paid parental leave, the employer
must continue to contribute at the agreed level until the end of
the exchange period.
• It’s also important to note that statutory payments must be made in
full and in cash and can’t be reduced by a salary exchange arrangement.
• Finally, HMRC has relaxed its previous stance on the revocability
of salary exchange arrangements. This means that subject to the
employer agreeing, an employee could cancel the arrangement
and have their salary returned to its previous level, without having
to wait a year, or rely on a lifestyle event, as was previously the case.
Automatic enrolment – qualifying earnings
The definition of qualifying earnings includes all of the statutory
payments listed above. As such employers will need to be aware of
the level of these payments when assessing these workers at either
their staging date, deferral date (where they have opted for postponement)
or otherwise at the beginning of the relevant pay reference period.
Example 2
By contrast Hannah, who earns the same salary as Sarah has
recently gone on maternity leave and is still receiving 90% of
her average gross weekly earnings – £270 when she becomes
age 22. Her employer, which has passed its staging date, identifies
that the pay she is due to earn in the relevant pay reference
period is above the earnings trigger. Consequently, Hannah’s
employer must enrol her into its scheme. During the paid
period of maternity leave, the employer need only base its
contributions on her actual level of earnings as Hannah hadn’t
joined the scheme prior to going on maternity leave. If Hannah
is also required to contribute, due to her employer’s contributions
not satisfying the minimum required, her contributions will
be based on the earnings she actually receives – which in this
case will reduce to £136.78 pw from the seventh week of
maternity leave.
Of course, in this example, the employer may have chosen to
use postponement to defer assessing Hannah at which point
her earnings may have been below the earnings trigger to be
automatically enrolled.
Example 3
Rob who has been classed as unfit to work is receiving statutory
sick pay alone when his employer assesses him at its staging
date. Although statutory sick pay counts as qualifying earnings,
when his employer assesses his earnings for the relevant pay
reference period, it finds they fall below the minimum level of
qualifying earnings and consequently Rob is classed as an
entitled worker. As he is not already an active member of a
scheme provided by his employer, Rob has a right to join his
employer’s scheme. Rob’s employer must continue to assess
Rob at the first day of each pay reference period.
Example 1
When her employer reaches its staging date of 1st May 2013,
Sarah is in the twelfth week of maternity leave and is receiving
minimum statutory maternity pay. As her normal gross salary
is £300 pw her pay is now calculated as the lower of:
• £136.78 and
• 90% average gross weekly earnings
FURTHER INFORMATION
The Pensions Regulator – workplace pensions reform
detailed guidance:
www.thepensionsregulator.gov.uk/doc-library/
automatic-enrolment-detailed-guidance.aspx
Her employer assesses Sarah’s earnings in the relevant pay
reference period and establishes these fall between the
minimum level for qualifying earnings and the earnings trigger,
making her a non-eligible jobholder. Her employer has an ongoing
duty to continue to assess Sarah on the first day of each pay
reference period. As Sarah is not already an active member of
a qualifying scheme provided by her employer, her employer
will need to send her information about her right to opt into
the employer’s scheme.
Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change.
However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given.
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