Sponsors and trustees of pension schemes contracted out of the State Second Pension (S2P) must ensure that the new Upper Accrual Point has been taken into account in their payroll systems, scheme rules and member communications, says Mercer.

The financial consultant has urged funds to check that the new rules, effective from 6 April 2009, are allowed for, as neglecting to do so could mean that member benefits are affected.

The way in which S2P is calculated will be revised from 6 April 2009, from which date accrual will be based on earnings between the Lower Earnings Limit and the Upper Accrual Point, which is fixed at £40,040. This was previously calculated with the Upper Earnings Limit, which for 2009/10 will be £43,888.

"There are obvious payroll implications here," said Deborah Cooper, head of Mercer's retirement resource group. "Also, the calculation of some contracted-out defined benefits, and many defined contribution schemes' contributions and benefits, may be affected unless scheme rules are amended before 6 April 2009."

Mercer believes that, under current rules, benefits can default to classification as Protected Rights in schemes that are contracted out on this basis, should their scheme rules define minimum contributions with reference to the Upper Earnings Limit.

"There could be circumstances where the change in S2P accrual inadvertently affects the firm of benefits that members will be able to receive. In addition, schemes contracted out on a money purchase basis will shortly lose this status and protected rights will be removed by legislation, so the government should consider overriding legislation to avoid imposing unnecessary additional costs on this group of scheme," Cooper added.

- Pensions Age March 2009

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