End of the pregnant pause for pensions

Changes to the Sex Discrimination Act will affect pension contributions during maternity leave.

Changes to the Sex Discrimination Act 1975 (SDA), which came into effect on 6 April 2008, requires employers to continue paying pension benefits for employees who are absent on unpaid maternity leave. However, government guidance maintains that pension contributions do not need to be continued during unpaid leave unless the contract of employment provides otherwise, so the legal position is not clear.

All pregnant employees, regardless of length of service, are entitled to take 12 months’ maternity leave, broken down into 26 weeks’ Ordinary Maternity Leave (OML), with 26 weeks’ Additional Maternity Leave. Employees who have been continuously employed for 26 weeks by the 15th week before the week in which their baby is due receive up to 39 weeks’ statutory maternity pay (SMP).

Pre-conceived ideas

Before the 6 April 2008, employers were only required to continue pension accrual and contributions during OML and any period of paid maternity leave. For employees in receipt of SMP, when their entitlement to pay ended after 39 weeks’ absence, employers were not required to maintain pension benefits for the last 13 weeks of unpaid leave.

However, the recent changes to the SDA have extended the protection offered to women whose babies are due to be born on or after 5 October 2008, and employers will be required to continue with pension contributions for the entire 12-month period of absence.

Unintended consequence

The government maintains that the amendments made to the SDA do not affect pension rights and were introduced in the light of a High Court decision that did not even involve pensions (Equal Opportunities Commission -v- Secretary of State for Trade and Industry [2007]). However, while this may have been the intention, the effect is somewhat different, and there have been calls on the government to clarify the position.

Costly implications

In a defined benefit (or final salary) pension scheme, the entire 12 months of maternity leave will be treated as pensionable service. This means that in the unlikely event of an employee retiring while on maternity leave – for example, on ill-health grounds – the figure used to calculate her pensionable salary is the salary she would have received had she been in work. Death benefits would use the same figure.

However, there will be an immediate cost implication for employers who offer defined contribution schemes, including group personal pension plans. In those schemes, pension contributions will have to be continued as though the employee were still in work throughout the entire 12 months of maternity leave.

This is the case irrespective of whether the employee returns to work at the end of her maternity leave or receives SMP or any other contractual remuneration during her absence.

Risky guidance

In view of the literal interpretation of the legislation as currently drafted, it would be risky for employers to rely on the government’s non-legally binding guidance.

So unless further legislation is implemented before 5 October, it will, from that date, be unlawful for employers to stop pension benefits throughout unpaid maternity leave.

Employers, therefore, have two options:

  • Amend scheme rules and employment policies and procedures to make it clear that pension benefits continue for the entire 52 weeks of maternity leave.
  • Wait to see if further legislation or case-law clarifies the position – although employers taking this route could face claims of sex discrimination.

Catrin Young is associate solicitor, TLT pensions and incentives team

Key points

  • For women whose babies are due to be born on or after 5 October 2008, employers will be required to maintain pension benefits for the 12 months of maternity leave.
  • This will have an immediate cost implication for employers offering defined contribution schemes including group personal pension plans.
  • Employers should review their maternity policies and pension scheme rules with their advisers.

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