Parental leave and pensions

Fiona Hanrahan  – Senior Product Insight and Technical Support Analyst

We are often asked how parental leave impacts workplace pension schemes in terms of funding in general, auto enrolment and salary exchange. This article will explain each of these.

How does parental leave impact the funding of workplace pension schemes?

A member of a defined contribution scheme can continue to pay contributions during their parental leave. During the period of paid parental leave, personal contributions are based on the actual earnings the individual is receiving. Employer contributions are based on the level of earnings immediately before parental leave.

If the member decides to stop paying contributions, then the employer can also stop contributions.

A member of a defined benefit scheme will have any period of paid parental leave counted as pensionable service. This means benefits will continue to accrue as they did before parental leave. Any personal contributions though will be based on the actual earnings the individual is receiving.

If the member decides to take a period of unpaid leave after the paid period ends, this will not count as pensionable service.

What we have discussed above are the statutory rules, an employee may have preferential terms under their contract of employment.

What about auto enrolment?

If an employee is on parental leave when an employer reaches their staging date, they will be assessed on the earnings they are actually receiving. This could be as low as £139.58 per week or zero if they are assessed during the unpaid leave period. The definition of qualifying earnings includes any statutory pay.

If a member of an auto-enrolment scheme goes on parental leave, they can continue to pay contributions during their parental leave. During the period of paid parental leave, personal contributions will be based on the actual earnings the individual is receiving. Employer contributions will be based on the level of earnings immediately before parental leave.

Examples

Lily (34) has recently gone on maternity leave and hasn’t had her baby yet. Her employer pays her statutory maternity pay during her parental leave. When her employer stages, she is receiving 90% of her average weekly earnings which is £450 per week. She is not currently a member of a workplace pension scheme. Therefore:

  • Her employer assesses her as an eligible jobholder as she is earning above the earnings trigger of £192 per week.
  • She is auto-enrolled into the employer’s scheme.
  • As Lily wasn’t a member of a scheme prior to going on maternity leave, her contributions as well as the employer contributions will be based on the actual pay she is receiving.

Of course, Lily’s employer could have used postponement to assess her after the first six weeks when her earnings are £139.58 per week, meaning she didn’t have to be auto-enrolled.

Sadie (27) has been on maternity leave for 10 weeks and is receiving statutory maternity pay of £139.58 per week at her employer’s staging date. She is not currently a member of a workplace pension scheme. Her employer assesses her as a non-eligible jobholder as she has qualifying earnings above the lower level of £112 per week but below the earnings trigger of £192 per week. This means Sadie will not be auto-enrolled but the employer must provide her with information on how to join a scheme.

What about salary exchange?

It is still possible to use salary exchange during periods of paid parental leave. But it is not possible to sacrifice earnings to a level below the statutory amounts.

An employer needs to be aware that if salary is exchanged for an employer pension contribution, that contribution has to continue if the employee subsequently goes on parental leave. The contributions only need to continue during paid leave.

It is recommended employers take advice when setting up salary exchange agreements.

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