Maternity leave pension contributions: a hidden compliance risk for employers?

According to data gathered by Nugget Savings, more than 239 of 379 women surveyed had discovered discrepancies in their contributions during maternity leave, with one woman reportedly owed £20,000.

A possible explanation for such discrepancies concerns the way employer pension contributions should be calculated during maternity leave. During this period, an employee’s pay commonly reduces as they move from full pay to enhanced maternity pay, statutory maternity pay (SMP), or eventually, unpaid leave. In certain circumstances, employer pension contributions should continue to be calculated by reference to a higher level of pay than that actually being received by the employee. Where employer contributions are reduced when they should not have been, a shortfall will arise.

Whilst the immediate financial impact of such treatment might not seem significant, pension savings benefit from long-term investment growth. Missing contributions can therefore have a disproportionately large effect on an individual’s retirement savings due to the loss of compound investment returns over what could be several years.

One reason why errors might arise is that employee and employer pension contributions are treated differently during maternity leave.

Broadly speaking:

• during ordinary maternity leave, and during any paid period of additional maternity leave, employer pension contributions under an occupational money purchase scheme will generally continue to be based on the pay the employee would have received had they not been on maternity leave;
• by contrast, the employee’s own pension contributions will usually be based on the maternity pay being paid at the time, rather than on normal pay; and
• during unpaid additional maternity leave, there is generally no requirement for employer pension contributions to continue. However, the position may be different if the scheme, employment contract or other contractual arrangements require contributions to continue during that period.

This means that where an employee’s pay reduces during maternity leave, the employer’s pension contributions should not necessarily reduce in the same way. Payroll settings that calculate contributions solely by reference to actual pay may therefore produce incorrect results. In most cases, employer contributions will be required throughout ordinary maternity leave and any paid period of additional maternity leave, including periods when the employee receives only SMP. The obligation will generally cease during unpaid additional maternity leave, unless the scheme, employment contract or other contractual arrangements provide otherwise.

A combination of legal, administrative and systems-related factors may help explain why these errors occur, and The Pensions Regulator (TPR) has itself highlighted that miscalculating pension contributions for staff receiving maternity pay is a common area of employer error.

Firstly, many employers understandably rely on payroll software to perform pension calculations. It is easy to see how errors can arise, particularly where payroll systems are configured to calculate contributions automatically by reference to actual employee earnings.

Secondly, the position is complex. Employers who seek guidance online may encounter conflicting information or simplified explanations that do not fully address the nuances of legislation. This can make it difficult to determine the correct position.

Finally, maternity pay, pension contributions and pension obligations sit at the intersection of employment law, pensions law and payroll administration. Even organisations with sophisticated HR and payroll functions can encounter difficulties where, for example, processes have not been reviewed for a number of years.

At present, it is difficult to determine the scale of the issue. Available data is limited and there is no clear indication of how many employers and employees may be affected.

However, if employer pension contributions have not been paid properly due to payroll processes or system settings operating incorrectly, any resulting underpayments could have accumulated over an extended period and impact multiple employees.

Financial liability

Where underpayments are identified, employers may need to make corrective payments to restore members to the position they would otherwise have been in. This may involve not just paying arrears of pension contributions but also considering whether any adjustment is required to reflect lost investment growth. Depending on the circumstances, the resulting costs could be significant, particularly where multiple employees are affected.

Employee relations

Employees are likely to expect their employer to have administered maternity benefits correctly and may react negatively if they later discover underpayments. Any reputational impact can also be amplified where employees feel they must repeatedly challenge an employer before corrective action is taken.

Regulatory scrutiny

Incorrect pension contributions can attract regulatory scrutiny, particularly where errors are widespread or have persisted over an extended period. Employers should also consider whether any underpayments amount to a breach of law that may need to be reported to TPR under the statutory reporting regime.

Discrimination considerations

Employers should also be mindful that maternity-related benefits receive special protection under employment and equality legislation. Whilst every case will turn on its facts, systemic errors affecting women on maternity leave have the potential to generate allegations of discrimination and/ or unfavourable treatment connected with pregnancy or maternity, particularly where an employer fails to correct identified issues.

Blowing the whistle

Employees who raise concerns about underpaid pension contributions may argue that they have made a protected disclosure because they reasonably believe there has been a breach of legal obligations relating to maternity leave and pension contributions. An employee who is subsequently subjected to any detriment because they raised those concerns, such as not being chosen for promotion, excluded from opportunities or treated unfavourably in some other way, may be entitled to bring a whistleblowing detriment claim against the employer. 

Employers may wish to review their maternity leave and pension contribution arrangements to ensure they are operating properly and consider whether payment errors have implications for their wider pensions compliance obligations, including auto-enrolment requirements where relevant. Practical steps may include the following.

1. Review payroll processes

Employers could review how pension contributions are calculated during periods of maternity leave, including periods when employees move from enhanced maternity pay to SMP only. Where calculations are automated, payroll settings could be reviewed and tested to ensure reduced pay does not result in incorrect employer pension contributions.

Employers might also wish to check whether pension contributions are made through salary sacrifice which can raise additional issues during maternity leave.

2. Check contracts and pension scheme provisions

The minimum legal position may be supplemented by contractual arrangements or pension scheme rules that provide more generous benefits. Any review should therefore consider both statutory obligations and scheme-specific or contractual requirements.

3. Conduct historical audits

Where concerns arise, employers may wish to undertake a retrospective audit of maternity leave cases. The scope of any audit will depend on workforce size, available records and identified risk factors.

4. Rectify problems promptly

Employers may need to obtain advice regarding the most appropriate rectification strategy in the case of identified errors. Prompt correction can often reduce the risk of disputes escalating and demonstrate a commitment to compliance. Employers will need to consider whether any identified errors constitute a breach of law that should be reported to TPR.

5. Train HR and payroll teams

Given the complexity of the position, refresher training might be useful. It could help ensure that HR, payroll and finance teams understand how maternity leave affects pension contributions.

6. Seek legal advice where necessary

Pension and maternity rights can be complex. Obtaining legal advice can help employers understand and comply with their obligations. Legal advice can also help employers investigate potential historic underpayments.