How to manage pension contributions and parental leave

It is not uncommon for employers to face situations when employees embark on a period of parental leave, whether that is maternity, paternity or adoption leave or other stints of time off. From a pensions perspective, it is important both employers and employees understand the legal situation and the potential implications for retirement savings.  

When it comes to maternity, paternity or adoption leave, the general principle is that employers are required to continue to pay employer pension contributions based on the employee’s normal, pre-family leave salary rather than the reduced salary during family leave, says Eleanor Hart, pensions partner at Dentons. 

“However, the employee’s own pension contributions are based on the reduced salary that they actually receive,” she says. “It is important for the employer to also check the pension scheme rules and employment contracts, which may include additional requirements in relation to pensions and family leave.”

Clarify contribution responsibilities   

There is a particular lack of awareness when it comes to payments made through a pensions salary sacrifice scheme. “In this very common arrangement, what would ordinarily be ‘employee’ contributions are, in fact, employer contributions,” she says. “The employer is required to continue to pay both the ‘employee’ and the employer contributions based on the employee’s normal pre-family leave salary rather than their reduced family leave salary. This means the employer effectively topping up the employee’s contributions that are based on reduced pay.”

Employers, though, are not required to pay contributions during periods of unpaid leave, she adds. 

There are other periods of leave too, including unpaid parental leave, where employees can take up to 18 weeks for each child under the age of 18 years. Here, employers must continue to make contributions in salary-related or defined benefit (DB) schemes. Karen Morovic, employment partner at Knights, says: “Such schemes are more prevalent in the public sector and do not tend to feature in the private sector. In contrast, there is no obligation to continue any contributions to a money purchase or defined contribution (DC) scheme when the leave is unpaid. Such schemes are more common in the private sector.”

If employers choose to provide periods of paid parental leave, they must provide continuity of pensionable service under a DB scheme and fund the cost, and make contributions based on pay received for DC schemes, she adds. 

Shared parental leave is another scenario, and follows a similar process to that of maternity leave and standard parental leave. Andy Dickinson, employee benefits team director at Mattioli Woods, says: ”There are different conditions to be met depending on whether partners want to split shared parental leave and statutory shared parental pay, or whether only one of them applies. Employers are often unaware of these shared rights and how their pension contribution policy applies if leave is taken in blocks or by different partners.”

Gender pensions gap 

If pension contributions stop or reduce during periods of leave, including employees choosing to opt out of auto-enrolment, the impact can be significant, and can even contribute to the gender pensions gap. Clare Moffat, head of technical and marketing compliance at Royal London, says: “Many employees don’t realise they could see a negative long-term impact on their retirement savings if they pause their pension contributions during a period of leave, and employers aren’t always confident about how their obligations apply across different types of leave and pay structures.”

This means it is essential that employers communicate the options and potential impacts to staff ahead of any period of leave. Kirsty Ross, proposition director at People’s Pension, says: “Employers should ensure that pre-leave materials include straightforward information on how pension contributions will be affected by changes in pay, how employer contributions are calculated, what happens during unpaid leave, and what options employees have if they wish to make additional contributions later.”

This also needs to be actively promoted, says Hannah Strawbridge, an employment solicitor and director at Inspire Legal Group. “Too often, this is buried in a policy that nobody reads,” she explains. “Employers should explain clearly, before leave starts, what will happen to both employer and employee contributions. Worked examples are particularly helpful, as this is not intuitive. This should form part of a structured pre-leave conversation, not an afterthought.”