Members of the Royal Bank of Scotland’s defined benefit pension scheme will foot the bill for the £18m rise in the bank’s national insurance contributions at the end of contracting-out, raising the question of whether this practice could become the norm.
April 6 2014 is enshrined in the psyche of many in the pensions industry as the date that ushered in new freedoms, but the ‘A-day’ of the modern era is set to bring more joy in 2016.
Contracting-out of the state pension will end on April 6, in line with the introduction of the single-tier state pension. This regulatory shift will increase national insurance contributions for both sponsors and members of DB schemes still open to accrual.
I don’t think we should be too surprised by an employer, who was given the opportunity by legislation to make this pension scheme a bit cheaper to run or to share the cost with the employees, choosing to do it
Anne-Marie Winton, ARC Pensions Law
Cessation will generate an additional £18m of employer national insurance contributions for RBS, a cost the bank has confirmed it plans to pass on to 27,000 of its DB members.
The cost handed down to employees will equate to an extra 2 per cent of pensionable salary, according to union Unite.
From October 2016, employees will pay an extra 1 per cent in pension contributions, rising by an additional percentage point in October 2017; this will come alongside increases in employees’ own national insurance costs, also set to rise in April.
Rob MacGregor, national officer at Unite, said RBS had written to DB members over the weekend and issued a general statement to the workforce yesterday advising them of the changes.
“Today is the starting gun for general understanding and people being aware of what’s going on,” he said.
“From the reaction we have already had this morning they have woken up to the impact of the move to a single-tier state pension.”
MacGregor said Unite is taking issue with the scale of national insurance cost increases relative to funds already provisioned by RBS for writedowns, impairments and litigation costs for 2016.
“The national insurance costs which they’re choosing to pass on to their employees… [are] a drop in the ocean if you look at what they just announced in provisions,” he said.
“The increases they’re passing on are less than 1 per cent of what they have set aside this year alone.”
RBS will also consult employees on the changes, which fall in line with the bank’s broader strategy to meet an £800m target for cost reductions in 2016.
An RBS spokesperson said: “Reforms made to DB pensions mean that the costs of our own scheme have risen.
“As a result RBS is proposing to increase the cost of being a member of the scheme. The bank will be consulting on this proposal with affected staff and employee representatives.”
Communicating change
Anne-Marie Winton, partner at law firm ARC Pensions Law, said the bank’s actions were unsurprising given the recent changes to legislation.
“I don’t think we should be too surprised by an employer, who was given the opportunity by legislation to make this pension scheme a bit cheaper to run or to share the cost with the employees, choosing to do it,” she said.
Winton said that “cosmetically” the decision is likely to prompt member reaction, but taking a decision permissible under legislation did not warrant “outrage”.
Other employers may follow suit, Winton said, although a complex terrain of communicating the changes lies ahead for employers opting to pass on costs.
“The challenge is going to be explanation to scheme members,” she said.
“You have to explain a bit about what contracting-out was in the first place."
