Sackers’ Response to DWP Consultation on Technical Changes to Automatic Enrolment

Background

The present Consultation (Technical Changes to Automatic Enrolment) seeks views on proposals for a number of practical and technical improvements to the rules governing auto-enrolment, based on feedback and experience gained in the run-up to the launch of auto-enrolment in October 2012 and since implementation. We welcome the move to simplify the requirements relating to the operation of auto-enrolment in practice. As advisers to trustees and employers of occupational pension schemes, we have focused on the issues relevant to our practice and have not sought to answer every question in the Consultation.

In this response:

• Defining pay reference periods for assessing auto-enrolment duties
• Defining pay reference periods for assessing scheme quality
• Introducing consistency for contribution payment deadlines for all joiners
• Jobholders who opted out of pension saving before automatic enrolment
• Clarifying the form and content of the opt-out notice
• The joining window
• Test scheme standard
• Automatic Enrolment: Other changes
• Additional comments

Defining pay reference periods for assessing auto-enrolment duties

We agree that it is likely to be helpful, for employers who have not already passed their staging date, for the new definition of pay reference period to be brought into force as soon as possible. However, we also consider that employers should be given the option, indefinitely, of using either the old or new definition of a pay reference period.

The Consultation proposes a transitional period, during which the existing and new provisions operate alongside each other, giving employers the discretion to determine whether a worker is a jobholder or an eligible jobholder. In our view, given that larger employers have already had to make changes to their processes to implement auto-enrolment in line with the existing rules, it would be unreasonable to require them to make further changes to their processes – likely to be an unnecessary burden for those who have already adapted their systems.

Defining pay reference periods for assessing scheme quality

As the consultation notes, there are circumstances where contributions calculated and deducted from monthly or weekly pay are less than contributions when calculated on an annual basis, for example, where a bonus paid in one month causes the earnings for that month to exceed the upper limit of the qualifying earnings band.This can cause difficulties for schemes to be certain they have collected enough contributions without performing an annual reconciliation for each member.

We have experience of this being a live issue and would welcome the introduction of the revised definition of a payroll reference period as soon as possible.

Introducing consistency for contribution payment deadlines for all joiners

For jobholders enrolled into pension saving under the auto-enrolment provisions of the Pensions Act 2008 (“statutory” enrolment), the deadline for employers to pass contributions deducted from a jobholder’s pay to the pension scheme by the 19th of the month (or the 22nd of the month if the payment is made electronically) is extended to the last day of the second month after the month which includes the automatic enrolment date for contributions deducted before the end of the opt-out period. In most cases, this gives employers the option of retaining contributions until the possibility of an opt-out has passed. However, this extension does not currently apply in all circumstances, for example, where employers use “contractual” enrolment or want to enrol entitled workers and pay contributions. The Consultation therefore proposes applying the extended deadline to all new joiners.

In our view, it is administratively simpler for employers to treat all new joiners in the same way. As noted in the Consultation, the extended deadline is permissive, meaning that employers wishing to continue on the basis of existing timeframes may do so.

Jobholders who opted out of pension saving before automatic enrolment

The consultation proposes the alignment of the re-enrolment rules so that all employers will be able to take advantage of an easement allowing them to disregard individuals who have opted out of pension scheme membership within the previous12 months.

In our view, this is a practical suggestion that is likely to be of use in two key situations:

• for employers who use contractual enrolment, to allow them to take advantage of the easement that is currently only available to employers using the statutory method of enrolment; and
• in respect of individuals who have opted out of pension saving before their employer has reached its staging date.

We note the concerns raised, that the introduction of such an easement could add a new monitoring requirement. However, we agree with the DWP’s comments that employers have to monitor all jobholders anyway and that “the only difference is that they would be monitoring jobholders who cancelled membership after contract joining to make sure that they do not automatically enrol them rather than monitoring to ensure they do”. This difference is likely to be outweighed by the cost and time savings to be achieved from enrolling members who have already expressed their desire not to be a member of their employer’s pension scheme.

The proposed period of 12 months is pragmatic.

Clarifying the form and content of the opt-out notice

A minor amendment is proposed to “put beyond any doubt the intended flexibility” in terms of the content of opt-out notices for auto-enrolment, so it is clear that opt-out notices must be in substantially the same form as set out in Schedule 1 to the Regulations but do not have look exactly like the schedule. This clarification is helpful.

We consider that a more tailored approach to pension communications generally would be helpful in promoting member engagement and that the proposed approach could be usefully extended.

The joining window

The Consultation proposes extending the “joining window” – the deadline by which an employer must achieve active membership and issue enrolment information to the jobholder – from one month to six weeks.

We appreciate that the DWP is seeking to address the difficulties experienced by employers in practice, in terms of assessing earnings, particularly for workers with widely fluctuating earnings or zero hours contracts.

However, while the proposed extension will be of some assistance to employers, the use of a fixed date is likely to continue to cause difficulties for many. For example, depending on an individual’s start date and the cut-off date for payroll, an employer can still be left with a very narrow window for making the assessment, even takingthe two week extension to the joining window into account. As a result, in some cases employers are required to rely on an estimate as to whether a particular worker’s earnings are likely to be qualifying in that pay reference period.

For these reasons, and given the general complexity for employers in this area, we consider that the proposed amendment does not go far enough towards addressing the practical problems faced by employers.

An alternative approach to achieving the Government’s overall aim of getting
individuals into a quality pension arrangement within a reasonable period could be to adopt a more permissive or purposive approach. For example, allowing employers to make the relevant deduction other than in the first payroll period could give sufficient flexibility to allow accurate deductions to be made based on actual pay.

Similarly, a simple window with, for example, a long stop date of three months within which employers must make individuals members of a qualifying scheme, could also make the process significantly easier for employers whilst still substantially reflecting the policy intention. While this may mean that contributions are not deducted from pay in the first month, the advantages gained from the streamlined process and the fact that many employers are offering more than the minimum required by autoenrolment, are likely to outweigh this.

This is an issue on which we would welcome further consideration by the DWP.

Test scheme standard

The proposed changes to the test scheme standard generally appear sensible. However, we consider that the revaluation provisions for CARE schemes could besimplified. One option would be to provide for a quality benefit test that is broadly comparable to the quality requirement for money purchase schemes, rather thanrequiring a complex analysis of a particular scheme’s features.

Automatic Enrolment: Other changes

Excluding certain categories of worker from the automatic enrolment duty

We agree with the proposed categories identified in the Consultation for exclusion from the automatic enrolment duty.
Currently members with enhanced or fixed protection are faced with enrolment into a qualifying scheme and the need to opt-out to avoid losing existing tax protections.The proposals to address this issue are very helpful.

Other possible easements for employers providing good pension schemes

We support the Government’s proposal to explore the options for employers whocontractually enrol all workers into an automatic enrolment qualifying scheme. As noted in the Consultation, such employers are, in most cases, doing more than is required under statute. We therefore consider that they should not face additional hurdles to comply with the auto-enrolment duty.

Additional comments

Revaluation of CARE schemes

Regulation 36(4) prescribes the minimum rate of revaluation of accrued benefits.This provision makes reference to “an annual increase” based on the percentage increase in the index “for the year by reference to which the revaluation is made”. In our view, it remains unclear whether in these circumstances revaluation must also be applied in the final year of pensionable service in the relevant CARE scheme, where this is a part year only.

We understand that the policy intention in relation to CARE schemes (as outlined in the DWP’s response to the 2012 consultation on “Automatic enrolment: career average schemes as qualifying schemes”) is to allow such schemes to be used as qualifying schemes so long as a minimum level of revaluation of accrued benefits is provided for in service. In this way, schemes should have a degree of flexibility as to how they provide for this revaluation and timing so that they can take a reasonable and practical approach.

As noted in our response to the 2012 consultation, it would be helpful if this point could be clarified in the Regulations. We are also aware that different interpretations exist as to when the first such annual increase should apply. We understand that it is the DWP’s policy intention that there should be flexibility for schemes on this point as well. It would be therefore be helpful to have clarification from the DWP of this point.

Power for TPR to determine an employer’s staging date

We are aware that some employers have experienced confusion in relation to their staging date, for example where this has been brought forward under regulation 3 of The Employers’ Duties (Implementation) Regulations 2010. It would be very helpful, for the Pensions Regulator to have the power to determine matters of doubt in relation to staging dates, particularly in view of the fact that there is likely to be capacity crunch over the next couple of years when the auto-enrolment duty will first apply to significant numbers of employers.

Prescribed requirements for non-UK qualifying schemes

Regulation 47(5) provides that the quality requirement is satisfied where “relief from tax is given in respect of contributions made by an individual under a double taxation agreement …”. This provision does not extend to contributions made on behalf of an individual, for example where the scheme in question is non-contributory and all the contributions are paid by the employer. Our understanding is that where a double taxation agreement applies, it should not be necessary for this provision to be limited to contributions made by the individual. We would welcome clarification of this point.

Non-UK pension schemes

Under Part 13 of the Regulations, non-EEA or otherwise restricted pension schemes can be used to meet the auto-enrolment duty for existing members but otherwise not as an auto-enrolment scheme. This can cause difficulties, for example, where an individual who has been a member of such a scheme opts out, the same scheme cannot currently be used to meet the enrolment or re-enrolment duty in respect of them. In addition, for employers with mobile employees, it could be very helpful to be able use a quality scheme with its main administration outside the EEA (for example a US based 401K plan) to meet its auto-enrolment obligations.