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Bye Bye COMP schemes

Bye Bye COMP schemes

Although there is some significant noise being raised about Pension Reform which impacts a few larger employers as early as October 2012, most employers have forgotten or ignored a much earlier pension impact – the Abolition of Contracting Out on Defined Contributions basis.

From 6 April 2012 (Good Friday), contracting-out of the State 2nd Pension on a defined contributions (DC) basis is abolished. HMRC records will show these contracted-out schemes as closing on Thursday 5 April 2012.

Currently Contracted-Out pension schemes are entitled to rebates from National Insurance Contributions (NICs) – for COMP schemes these now end. So employees who currently receive a 1.6% point reduction in NIC contributions using contribution letter F, will be hit by an over 15% increase in their new NIC liabilities as their contributions increase from 10.4% to 12% (a 15.38% rise in liability). Equally the employer rebate of 1.4% point will consequently be hit with an over 11% increase as rates increase from 12.4% to 13.8% (an 11.29% rise).

Amounts equivalent to the rebates have to be paid into the occupational pension scheme as COMP minimum payments. These minimums can be met entirely by the employer or shared appropriately between the employer and employee.

The rules governing protected right are also removed. It will only be possible to contract out of State 2nd Pension on a defined benefit basis via a Contract Out Salary Related (COSR) scheme for which the employer must hold a valid Contracting Out certificate (NIC letter D, E and L).

HMRC state that:

following the abolition the NICs category letter to use will depend wholly on the individual employee’s circumstance and as such will be the responsibility for the employer to decide

- NIC letters F, G and S will no longer exist.

Pensions impacted by this abolition of Contracting Out fall into three categories:

• Contracted Out Money Purchase (COMP) schemes including Stakeholder COMP schemes (SHCOMP)
• Sections of Contracted Out Mixed Benefit (COMB) schemes which are contracted out on a DC basis
• Appropriate Personal Pension (APP) schemes and APP Stakeholder Schemes where the individual has elected to individually contract out of State 2nd Pension.

Employers must urgently undertake action to:

• Plan for the changes
• Discuss with the scheme trustee and/or their advisors on how the scheme is to operate
• Consider any revision to the scheme to take account of that fact that there is no longer any primary (employee) or secondary (employer) NIC rebates – contribution rates may need to change
• Communicate changes to the pension scheme to their employee members
• Be aware that NIC will now be accounted using standard rate NICs
• Be aware that NIC letters F, G and S cannot be used for the 2012-2013 tax year and cannot form part of the P14 submission in 2013
• Ensure that revised NIC category letter is applied to all earnings paid from 6 April 2012 (including payment made on 5 April 2012 which would normally have fallen to be paid on 6 April 2012)
• The Scheme Contracted Out Number (SCON) is no longer used.

Contracted Out pension rights accrued up to the abolition date will continue to be used to provide benefits for the period that the individual was contracted out. From the abolition point the affected employees will again be entitled to build up State 2nd Pension entitlement.

So as an urgent activity, employers will need to consider the basis on which their COMP pension scheme continues – whether on a Not Contracted Out basis or introduce a new form of pension savings.

Where a minimum contribution COMP scheme is in place, then the scheme in effect comes to an end as the rates would both be 0%. Where employee and employer rates exceed these rebates, then a reduction in the contributions should be considered to either maintain the status quo or some other reflection that the scheme is no longer contracted out.

So where an employee contributes 2% of relevant pay and the employer 5% of relevant pay, then this may now want to be reviewed and amended to reflect a 0.4% employee contributions and a 3.6% employer contribution – else both the employee and employer will face increased costs for their pension provision.