Pensions and maternity leave can be a minefield. So we attempt to make things clearer.
A client pension query created an interesting discussion within our corporate team recently.
The original query was around a short-serving employee who was not eligible for Statutory Maternity Pay (SMP). To qualify for this, employees must earn on average at least £118 a week and to have worked for their employer continuously for at least 26 weeks into the “qualifying week” – the 15th week before the due date. *
On learning she hadn’t qualified, the employee made an application for Maternity Allowance via the Job Centre but, as this is a social allowance and does not come from the employer, she wanted to know whether there would be a requirement for her firm to pay employer’s pension contributions during the maternity period.
Even though she won’t be receiving a salary from her employer, and her maternity allowance comes directly from the government, as she had already been automatically enrolled, her employer must continue to pay employer pension contributions only, and these are based on her pre maternity allowance salary.
This discussion made the team conscious of what a minefield the whole area of maternity leave and pensions can be and left us feeling that employers could probably do with a little light shed on it.
Those away on maternity leave who are eligible to receive SMP are allowed to benefit from continued regular employer pension contributions – as long as they remain in the pension scheme and don’t stop their own contributions.
Their employer has to keep paying into their pension for at least 39 weeks and, if specifically agreed in the contract, maybe for even longer.
These payments are normally based on the pre-maternity leave salary, and if employees are having their pension contributions matched by employers, it is the pre-maternity leave contribution levels they were making that will be matched.
So, even if the employee’s earnings fall below the automatic-enrolment qualifying earnings limit during maternity leave this will not affect the employee’s entitlement to employer pension contributions.
However, the contribution levels made by the employee themselves will be based on their actual earnings level during their maternity leave, so they may become lower than previously – unless they specifically elect to increase them.
Employers, unless the contract states otherwise, don’t have to continue making contributions to an employee’s pension during periods of their maternity leave where they are not being paid – such as the final 13 weeks of a full 52-week maternity leave entitlement.
But the employees themselves might wish to consider making additional contributions to offset this shortfall when they eventually return to work.
The requirement to continue to make full pre-maternity rate employer pension contributions during paid maternity leave can be particularly costly for employers if they are using Salary Exchange.
This involves the employee electing to give up part of their salary so that their employer can pay this into their pension along with its own scheme contributions. As the employee is effectively earning a lower salary, both employer and employee pay lower National Insurance (NI) contributions.
The extra cost arises because it is illegal for the employer to exchange salary from SMP – either at the 90% of average weekly earnings rate for the first six weeks or the lower rate until week 39 (currently either £148.68 a week or 90% of average weekly earnings, whichever is lower.) *
Nevertheless, the way that Salary Exchange can affect pensions and other benefits during maternity leave should be seen in the context of the significant value that it can create for both employer and employee.
We have undertaken an analysis of recent maternity trends for a number of clients to identify their likely liabilities, and in the vast majority of cases the savings made in employer’s National Insurance (NI) have vastly outweighed the additional costs in maternity.
Some clients have also taken the viewpoint that maternity compliance is essentially a cost to the business as a whole and that the additional benefit costs incurred are not too big a deal in the grand scale of things.