The effect of strikes on pensions accrual, life cover and AVCs

5 July 2011

Many public sector unions are planning or undertaking strike action. This article addresses some of the concerns that defined benefit and public sector employers may have concerning the impact on pension accrual and related issues during the days that their members are on strike.

Breach of employment contract
Since strikes are usually a breach of the employee's contract, the employer can avoid paying all or part of the employee’s salary, which can include their contribution to the striker’s pension, for the days the employee is absent from work on strike. Not all employers will choose to deduct salary, cease paying their pensions contribution and premium for life cover for workers on strike. It is up to the employer to choose if they wish to maintain their contributions during any period of strike action. It is also important to remember that not all industrial action involves a breach of contract, for example, a “work to rule”, for which deductions from pay and contributions to pensions can be justified.

Deduction of pension contributions
If an employer decides to make deductions from pay, the calculation of the deduction will depend on a number of factors. If the contract specifies normal working hours and pay is calculated by the hour, then the deduction will be determined by reference to the hours lost. On the other hand, if the employees are paid a salary, then this is deemed to accrue from day to day, and this means calendar day, not working day under the provisions of the Apportionment Act 1870. The employer may only be able to deduct 1/365 of the annual salary for every strike day, leaving a potential shortfall.

However, if the contract indicates a contrary intention, the Apportionment Act may not be applied and you can argue for a more realistic deduction based on the number of working (not calendar) days in a year. Whichever formula is used to calculate the deduction from pay, the proportion of the pensions’ contribution deducted for the day(s) or period lost will be in the same proportion to that of the deduction made by the employer concerning the worker’s pay.

Continuity of employment and other pension considerations
If contributions are not paid in full for each day of industrial action, a number of significant problems arise in relation to continued membership of many defined benefit (“DB”) schemes. This is because without payment of contributions such days can be treated by some schemes as days of “suspended membership” with loss of service and any loss of life cover. Other schemes have the option to treat strike days as “suspended membership”.

For instance, under the Local Government Pension Scheme, where an employee takes part in strike action which is not paid, those days are not counted as service towards the calculation of pension benefits. The reckonable service for part-time workers will also be reduced because it will be multiplied by the fraction of the pay they forgo by striking represents of what it would have been if they had been in the same employment on a full-time contract.

Example of suspension of membership
Over the past few years, a number of schemes have decided to not treat strike days as a suspension of a pension scheme membership for members on strike, if they have the discretion to do so under their rules. This has partly been due to the administrative burden that suspending pension scheme membership can cause to the employer and scheme administrator when “one day” strikes are held. The following example of what happens when there is a suspension of membership is based on the Teachers Pensions Scheme (“TPS”):

“The amount of almost all TPS benefits depends on two elements:

• the member’s pensionable service; and
• his or her pensionable salary.

For every £29,200 of pensionable salary a day’s suspension can be expected to reduce the initial annual pension of a full-time employee who takes the standard lump sum by £1 (1/80 x 1/365 x 29200) and that lump sum by £3: the fraction of 1/365 would apply even if the employer were entitled to deduct a higher fraction of salary from your pay.”

Additional contributions by employee to make up for shortfalls and Additional Voluntary Contributions (“AVC”)
There would also be an impact on members who are currently paying monthly added years additional voluntary contributions. Many scheme administrators are likely to recognise continuity of current contracts and it will not be their intention to terminate any existing contract in these circumstances but each day's loss of additional contributions will be reflected in final benefits unless the full AVC is made.

Some, but by no means all schemes, will allow (with the employer’s agreement) the employee to pay a sum equal to both the employee and employer contribution in order to receive full credit for the day's absence on strike and continue to have full life cover. However, the employer is not forced to agree to this request and some employers will only agree if the member has put such a request in writing before the employee goes on strike on the day concerned. This can cause problems since the employee may not know this rule or how to make the request. If employers are going to rely on such a rule, they may wish to consider publicising it prior to the industrial action commencing so that they are not criticised for failing to communicate with their members on an important condition.

Comment
Within the private sector, the continued closure of DB schemes and the move to replacing them with less costly DC schemes is leading some employees to take strike action. Many pensions professionals have welcomed Lord Hutton’s’ report into public service pensions as fair and balanced but the implementation of the recommendations of his commission are clearly causing serious concerns amongst affected public servants. Unison's 1.3 million members, who work for local authorities, the NHS, colleges and the police, have not yet been balloted on industrial action but TUC sources are claiming that strikes over pension reforms will be the biggest since the General Strike and likely to involve many public and private sector services.

We suggest that many employers will want to consider, before a strike occurs what action if any they will take in deducting pay, pension and life cover contributions during the current industrial unrest.