Can an employer's contributions to an occupational pension scheme be suspended while an employee is taking a period of statutory leave?

Equal treatment rights under Social Security legislation

The statutory "equal treatment" rules are set out in Schedule 5 of the Social Security Act 1989 (SSA). In addition to their general application to employment-related pension and benefit schemes, there are also specific provisions that apply to members of such schemes who are

taking paid maternity leave, whether payments are statutory or contractual,
taking paid paternity leave, whether payments are statutory or contractual,
taking paid adoption leave, whether payments are statutory or contractual, and
taking family leave, e.g. parental leave, and receiving contractual payments.

Schedule 5 of the SSA applies to "employment-related schemes for pensions or other benefits". Such schemes are defined as schemes

to which the employer contributes, and
that provide
- service-related benefits, usually in the form of a pension, in respect of
  - termination of service
  - retirement, old age or death
  - interruptions of service by reason of sickness or invalidity
  - accidents, injuries or diseases connected with employment
  - unemployment
  - expenses incurred in connection with children or other dependants
- any other benefit payable in consequence of the employment.

The principle of equal treatment on the basis of sex is that persons of the one sex may not be treated less favourably than persons of the other sex in any respect relating to any benefit scheme provided by an employer. The principle also extends to

benefits provided to dependants of scheme members, and
treatment that differs according to the marital or family status of scheme members of the one sex compared with the other sex.

The SSA has application, therefore, to a wide range of monetary benefits but, in the context of this discussion, the schemes that are at issue are pension schemes to which the employer makes contributions. Special provisions apply if the rules covering such schemes adversely affect scheme members during paid maternity, paternity, adoption or parental leave.

Less favourable treatment

The imposition of a requirement or condition in a benefit scheme is regarded as less favourable treatment if

the proportion of persons of the one sex that can comply is "considerably smaller" than the proportion of persons of the other sex who can comply, and
the requirement or condition cannot be justified on the basis of sex.

The Act provides a number of specific examples of requirements and conditions that may be justifiable on the basis of sex. These include

the level of employees' contributions, where the difference is justifiable on actuarial grounds
the level of employer's contributions, where the difference is intended to remove or limit the difference, as between men and women, in the amount or value of the benefits purchased
any special treatment afforded to women in connection with pregnancy or childbirth.

However, any difference that constitutes an 'unfair maternity/paternity/adoption/family leave provision' is regarded as not complying with the principle of equal treatment. This is discussed later in these notes.

Compulsory levelling up

Where an employment-related benefit scheme of any kind does not afford equal treatment on the basis of sex, the Act requires that the more favourable treatment provided to persons of the one sex must be provided to persons of the other sex. To achieve this, the Act introduces the concept of "compulsory levelling up". This states that the persons who have been treated less favourably but who are now to receive equal treatment

must pay contributions and meet any other incidental burden appropriate to the equal treatment, or
elect instead to receive the less favourable treatment and to pay contributions and meet any other incidental burden appropriate to the less favourable treatment.

Example: An employer provides permanent health insurance for employees, funded partly by the employer and partly by the employee, in order to provide protection from loss of earnings due to illness or disability. The benefit is a flat-rate payment, unrelated to hours of work. It is available to all full-time employees but not to part-time employees, on the basis that the cost of the benefit is the same irrespective of the hours worked and the costs are therefore relatively expensive for part-timers. As the majority of part-time employees are women, this is less favourable treatment. The employer must offer the benefit to part-timers on the same terms as those offered to full-timers and, as a consequence, the part-timers must be prepared to make the same contributions as are paid by the full-timers or, alternatively, elect not to receive the benefit and to continue to be treated less favourably.

Unfair maternity provision

However, if an employee is on paid maternity/paternity/adoption/family leave, the concession of electing to receive the less favourable treatment is not available. Special rules apply.

During any period of paid maternity, paternity, adoption or parental leave, employees must be treated for the purpose of benefit schemes as if they were not absent at all but working normally and receiving the remuneration that they would be likely to be paid for doing so. A 'period of paid maternity/paternity/adoption/family leave' is any period for which the employer

pays statutory maternity, paternity or adoption pay, or
pays occupational maternity, paternity or adoption pay, or
makes contractual payments during family or parental leave.

Note, however, that these special rules do not apply during any period of unpaid leave.

A maternity/paternity/adoption provision is "unfair" if it treats employees who are on paid leave in a different manner than they would be treated if they were working normally and receiving their normal pay. As a result, during a period of paid leave, employees must be treated as if

their membership of the benefit scheme continues as if they were not on leave,
the accrual of rights under the scheme continues as if they were not on leave, and
any benefits payable under the scheme that are related to their earnings are determined as if they were not on leave but working normally and receiving their normal pay.

The compulsory levelling-up rules require employees of one sex to receive the more favourable treatment afforded to employees of the other sex. To achieve this, they must be treated as if they were not on paid leave but still at work and being paid normally. As a result, the employer must continue to provide the benefits they would have received had they been at work and to meet the costs incurred in doing so.

However, where the benefit scheme rules require employees to pay contributions, they are only required to pay contributions based on the amount of statutory and/or contractual pay that they are being paid.

Example: An employer provides a money purchase occupational pension scheme, to which both the employer and the employee contribute. The employer's contribution is 10% of the pensionable salary; the employee's contribution is 5%. Throughout the period of a woman's paid maternity leave, the employer's contributions must continue to be 10% of her pensionable salary. It may not be based on 10% of her maternity pay. The pension scheme rules also require the woman to make contributions but her contributions are limited to 5% of her maternity pay during the period of paid leave.

Some employers have attempted to circumvent these rules by taking advantage of the provisions included in occupational pension scheme rules allowing both employer and employee contributions to cease while an employee is temporarily absent from work. However, a contribution holiday during paid leave appears to be in breach of the equal treatment rules because

it is an unfair maternity/paternity/adoption/family leave provision because employees are not being treated as if they were working normally and receiving their normal pay, and
the law does not permit them to elect to accept the unfair maternity/paternity/ adoption/family leave provision.

However, in the case of defined benefit (i.e. final salary) pension schemes, a contribution holiday may not affect the employee's ultimate pension if the period of absence does not reduce the employee's pensionable service. As long as the employee's final pension is not less than it would have been had the employee not taken the leave, a contribution holiday would not be an unfair maternity/paternity/adoption/family leave provision.

Contractual rights under employment legislation

From October 2008, as a result of changes made to the Maternity and Parental Leave etc. Regulations 1999 ("Maternity Regulations") and the Paternity and Adoption Leave Regulations 2002 ("Adoption Regulations"), employees taking maternity and adoption leave are entitled to continue to receive full contractual benefits (with the exception of remuneration) during both ordinary and additional leave, irrespective of whether the leave is paid or unpaid.

However, with specific reference to pension contributions, the government took the view that the maximum period for which full pension contributions need be paid is the period for which leave is paid, as required by the SSA rules. As a result, when amending the Maternity Regulations and Adoption Regulations, a clause was added which restricts the period for which full employer pension contributions are required to the maximum required by the SSA, namely, the period of paid leave.

For example, in the case of ordinary and additional maternity leave, Regulation 9(1)(a) provides that an employee taking "ordinary maternity leave or additional maternity leave" is entitled to her full contractual benefits. And Regulation 9(4), which restricts entitlement to full employer pension contributions during additional leave to that required by the SSA, states:

In the case of accrual of rights under an employment-related benefit scheme within the meaning given by Schedule 5 to the Social Security Act 1989, nothing in paragraph (1)(a) concerning the treatment of additional maternity leave shall be taken to impose a requirement which exceeds the requirements of paragraph 5 of that Schedule.

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