UK: Employee Benefits: Pension Rights on Maternity Leave

By John Papadakis, Partner, Martin Scott, Associate and Rosalind Connor, Associate

For some time there has been a degree of confusion as to women’s rights to pension benefits accrual whilst on maternity leave. However, the Employment Act 2002 has now clarified the position. This commentary summarises the employer’s and employee’s duties in relation to the pension scheme whilst the employee is on maternity leave. The position varies between ordinary and additional maternity leave.

Ordinary maternity leave is the 26 week period of maternity leave during which the employee is entitled to statutory maternity pay. Under the Employment Rights Act 1996, an employee’s benefits continue whilst on ordinary maternity leave as if she were still working, except in relation to remuneration.

Following the Employment Act 2002, it is now explicit that "remuneration" includes only wages and salary paid to the employee and that all other benefits (such as pension contributions paid to a pension scheme) are to continue as if the employee were still working.

In relation to a defined contribution scheme, this means that the employer must continue making contributions at the same rate based on the employee’s full salary as if she were not on maternity leave. In relation to a defined benefits scheme, the employer must continue to provide for accruing benefits, again at the full salary, effectively treating the period as ordinary employment.

The employee is obliged to continue to make contributions to the pension scheme herself if the scheme is a contributory one. However her contributions should be based on the appropriate proportion of the actual pay received, whether simply statutory maternity pay or a higher contractual rate, rather than on the salary she would have received were she not on maternity leave. This results in a disparity between the obligations of the employer and the employee.

The effect of the employer continuing to make the same contributions to a contributory defined contribution scheme is that the employee on maternity leave will accrue smaller benefits than she would have done if she had not taken maternity leave. This is because her own actual contributions fall during this period. This has led some commentators to suggest that the legislation requires that the employer makes additional contributions to cover the reduction in employee contributions. This viewpoint does not have wide credence at the moment and the Department of Work and Pensions, which had earlier endorsed this view, presently does not do so. However, there has not been a court decision on this issue and, therefore, there is some risk that an employer may have an additional liability in these circumstances.

The Inland Revenue limits have been amended to allow pension benefits to be accrued at the usual remuneration rate whilst on maternity leave, to the extent that this is required by the legislation, i.e. to allow for the fact that accrual will be based in part at least on normal as opposed to actual earnings.

During additional maternity leave (an additional 26 week period of leave after ordinary maternity leave available subject to certain qualifying criteria), the employee only has a right to continuance of limited terms and conditions of employment. These do not include the pension scheme and therefore, subject to any greater rights contained in the pension scheme documentation or the contract of employment, the employee has no right to continued employer contributions to a defined contribution scheme or to accrual of benefit in a defined benefit scheme. However, the employee cannot be treated as having left the scheme and on returning from additional maternity leave, contributions or accrual must re-commence, as if the period of employment after additional maternity leave had been continuous with the period before it.

Most modern scheme deeds and rules are drafted with enough flexibility to provide these extra benefits if the law requires it. If the deed and rules do not do so, the employer may be able to use the augmentation provisions to provide them. However, if there is no such provision or its use is at the discretion of the trustees, it may be necessary to amend the deed and rules to ensure that the employer is not obliged to provide a pension benefit that may not be provided through the pension scheme.

This article is a publication of Jones Day Gouldens. The contents are intended for general informational purposes only and are to raise your awareness of certain issues (as at September 2003) under the laws of England and Wales. This commentary is not comprehensive or a substitute for proper advice, which should always be taken for particular queries. It may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at its discretion. The mailing of this publication is not intended to create, and receipt of it does not constitute, a solicitor-client relationship.