We cover some of the issues around drafting pension provisions for settlement agreements in our back to basics article. Here our combined human resources solutions (CHRS) team look at some top tips that private sector employers should take to ensure that both the drafting and the execution of any employer obligations under a settlement agreement go smoothly and minimise ongoing risk and exposure.
These tips address settlement agreement packages involving defined contribution/money purchase pensions only - if you have an employee with defined benefit pension entitlement we recommend you take specialist legal advice.
1. Think about the pensions provision early on
Pensions can often get left until quite late in the day when it comes to settlement agreements as they can be viewed as an "ancillary" benefit. However, thinking about this particular benefit early on will allow you to do sufficient due diligence on what pension arrangement the employee is participating in, and how any contributions made under the settlement agreement should be dealt with.
2. Establish what the tax treatment will be and don't forget high earners
Tax treatment of pension contributions under an agreement may need careful consideration, particularly depending on whether or not the payments are made pre-or post-termination. If you have high earners, ensure that they are aware any tax consequences of pension payments under the settlement agreement are their responsibility.
3. Don't commit to something you can't provide
Sounds simple. An employee may make a perfectly reasonable request to have extra employer contributions paid into a pension arrangement as part of the settlement agreement. However, unless the employer knows that the arrangement will accept the payment, it cannot commit to this without risk. Ensure that you make it clear in the agreement that any payments made to an arrangement are subject to its terms, and to the provider or trustees (as appropriate) agreeing to receive such payments.
4. If the agreement seems to waive accrued rights, seek advice
Accrued pension rights are usually not included in the list of claims that employees are agreeing to waive or settle. These are often expressly carved out and excluded from what the employee is waiving. These rights have various protections, because they are entitlements that the employee has already built up during their employment with the company. Whilst it may be possible to settle accrued rights in certain circumstances, we recommend you take legal (and potentially actuarial) advice if this is something you are seeking to achieve under a settlement agreement.
5. Don't promise pension 'benefits' without taking further advice
Wording around pensions in settlement agreements usually cover standard or extra contributions into a pension arrangement in respect of any employee. Be cautious if an employee asks for wording entitling them to extra pension benefits, and take legal advice. Funding such benefits could be an ongoing (and unknown) obligation that you are taking on as an employer.