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Holiday pay ruling could add £100m to cost of pensions

Firms could be forced to pay up to £100m a year in extra pension contributions after a controversial ruling on holiday pay.

PwC pensions partner Peter McDonald says businesses may need to fork out additional pension payments after the Employment Appeal Tribunal ruled overtime pay should be used to calculate holiday pay. The £100m figure does not include backdated contributions.

McDonald says firms that take into account total pay – as opposed to basic salaries – when calculating pension contributions could decide to pay staff compensation rather than attempt to incorporate the changes.

He says: “Potentially this is just far too complicated for firms to contemplate. I imagine in reality lots of firms would seek to come to another agreement with the workforce.”

Law firm Pinsent Masons says the ruling should sound “alarm bells in boardrooms” and could impact pension schemes where variable pay is included in pension contributions.

Head of pensions Carolyn Saunders says: “The decision could affect those pension schemes that include variable elements, such as bonus and commission, in the pay that is used to calculate benefits and contributions. 

“There will be no impact on schemes that use only basic pay to do this. Both defined benefit and defined contribution schemes could be affected.  The administrative costs of sorting out the past underpayments could be significant.”

Saunders adds she expects the tribunal’s ruling to be appealed.


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. I know there are a lot of if’s, but’s and maybe’s in the above article but it seems £100 million (assuming no back dating) is a huge additional burden on businesses as an unintended consequence of the EU working-time directive. It WILL cost jobs AND put everyone’s costs up in the supply chain which means that the end users will eventually pay the additional costs – Thats the consumer.

    It is just one more reason that we need to get out of Europe.

  2. Imagine the joys for a company whose workforce are mostly on zero hours contracts of running an AE scheme.

  3. As I said on the last thread, if I am doing 35 hours a week in a 9-5 and my mate is doing 35 hours a week shift work every week including 2 shifts of overtime – and if this is overtime which is required by the job, not an extra shift now and again to buy the kids something nice for Christmas – I don’t see why I should get more holiday pay for the same hours.

    Anecdotally I have heard that many companies explicitly define what is meant by “basic pay” in the contracts of employment so shouldn’t be affected. For those who didn’t bother and have been stiffing their workers I have little sympathy. If anything the three month limit on backdated claims is generous.

    I would be interested to see the methodology for the £100m figure and expect it amounts to little more than “pull out a big round number that will make a good headline”.

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