Technical changes to automatic enrolment
The DWP is consulting on technical changes to automatic enrolment with a view to further simplifying the automatic enrolment process and reducing the administrative burden on employers. In particular, the DWP wants to ensure that those with the most to gain from pension saving continue to be automatically enrolled, without giving rise to unintended consequences for individual savers.
In this Alert
- Key points
- The alternative quality requirement for DB schemes
- The prescribed percentage under the new test
- Exceptions to the employer duty
- Simplifying the information requirements for employers
- Next steps
- The DWP has put forward an alternative quality requirement for DB schemes used for automatic enrolment, based on the cost to the scheme of the future accrual of active members’ benefits (“the scheme-level cost of accruals test”).
- Individuals with tax protections, who are in a notice period or who have cancelled contractual scheme membership look set to be exempt from the automatic enrolment duty.
- The number of automatic enrolment communications that an employer needs to provide, and the level of detail they contain, are to be reduced and simplified.
- Schemes will be able to choose to take advantage of the simplified procedures or to continue using their existing processes.
- The consultation, to which we will be responding, closes on 9 January 2015. It is intended that the new provisions will come into force in April 2015.
Automatic enrolment went live for the UK’s largest employers on 1 October 2012 and, over the period to 1 February 2018, is being rolled out to all employers. Employers who have passed their staging date must enrol all workers who satisfy age and earnings criteria into a qualifying workplace pension arrangement.
Since the legislation was introduced in 2008, there have been a number of changes aimed at streamlining processes and procedures in the light of employers’ practical experience. The Pensions Act 2014 also sets out power to introduce:
- alternative quality requirements for DB schemes
- regulations to allow employers to exclude certain types of individual from automatic enrolment.
The DWP is now consulting on regulations which will set out the detail of these measures, as well as simplified information requirements for employers.
Employers using a DB scheme to meet their automatic enrolment duty have to ensure that their scheme meets minimum quality requirements. This currently means that a DB scheme must be contracted-out on the reference scheme test basis¹ or satisfy the statutory “Test Scheme Standard” (TSS)².
With a view to simplifying the DB quality requirement, the DWP is proposing the “level cost of accruals test”. If adopted, a DB scheme can be a qualifying scheme if “the cost of providing the benefits accruing for, or in respect of, the relevant members over a relevant period would require contributions to be made of a total amount equal to at least a prescribed percentage of the members’ total relevant earnings over that period”. The prescribed percentage of this test will not be lower than the 8% total contribution required for qualifying DC schemes.
It is intended that the new test should run in parallel with the scheme funding requirements, to allow existing actuarial work to be relied upon.
Under the proposed level of the cost of accruals test, the cost of providing scheme benefits will need to equate to a contribution of 10% of qualifying earnings, or 9% if the scheme does not provide dependants’ benefits. Using a similar approach to the DC alternative requirements (see our Alert On your marks: Will your scheme qualify for auto-enrolment?), a scheme would satisfy the test if:
- the pensionable earnings of the relevant members are at least equal to their basic pay and the cost of future accruals would require total contributions of at least 11% of the members’ pensionable earnings, or
- the pensionable earnings of the relevant members are at least equal to their basic pay and the cost of future accruals would require total contributions of at least 10% of the members’ pensionable earnings and, taking all of the relevant members together, the pensionable earnings of those members constitute at least 85% of the earnings of those members, or
- where all earnings are pensionable, the cost of future accruals would require total contributions of at least 9% of the members’ total earnings.
It is proposed that earnings should be assessed either over a period of 12 months, or by reference to the most recent actuarial report or valuation, and that the scheme actuary will have discretion to determine the methods and assumptions to be used.
There is currently no scope to exclude any eligible workers from automatic enrolment. This can be problematic for individuals at various stages of their employment, for whom the only alternative is to opt out. Agreeing that automatic enrolment is not appropriate for everyone, the DWP is now looking to exempt three categories of worker.
Jobholders leaving employment
For anyone in a notice period (whether the notice relates to resignation, dismissal or retirement), or where a notice is given at any time up to six weeks after the automatic enrolment duty has arisen, it is proposed that the employer’s duty will become a power to enrol, leaving the employer free to choose whether or not to enrol someone in this position. Employers will also be able to stop the automatic enrolment process where notice is given after the duty has arisen but before the arrangements are complete.
Affected individuals would not be able to opt in to a qualifying scheme or join a pension scheme. But if the notice were withdrawn, the automatic enrolment duty would start to apply again from the date of the withdrawal.
Individuals who cancel membership of a scheme prior to automatic enrolment
Some employers enrol their workers into a pension scheme when they start work under their contract of employment. If a contractually enrolled employee then cancels their pension scheme membership, they currently need to be automatically enrolled under the statutory process on becoming an eligible jobholder (ie when they reach age 22 and have appropriate earnings, or when their employer reaches its staging date), even if they have only recently left the scheme.
The DWP proposes to give employers a choice as to whether to enrol an employee who has left a qualifying scheme within the previous 12 months.
Individuals with tax protected status
Individuals with pension savings above the current LTA may be protected from tax charges under enhanced or fixed protection. Such protections can be lost if an individual is automatically enrolled into pension saving. To avoid losing their tax protection, affected individuals currently need to opt out within the statutory timeframe to prevent adverse tax consequences.
The DWP proposes to give employers the option to enrol employees who have certified tax protection, leaving affected individuals who are eligible to do so the option of opting in to pension saving should they wish to do so. To make use of this exemption, an employer would need reasonable grounds to believe their employee had tax protected status, for example, because they had a copy of the individual’s HMRC certificate. The onus would be on the employee to keep their employer informed.
With an eye on the small and micro employers who will be staging from 2015 onwards, the DWP is looking to reduce the administrative burden for employers by streamlining the automatic enrolment information requirements. It proposes that this can be achieved by reducing communications to three pieces of information to be given:
- to all employees at the employer’s staging date or individually when new employees join
- to all employees if the employer chooses to postpone their staging date
- to each employee when they are automatically enrolled, re-enrolled or enrolled following opting-in or joining.
In conjunction with this, it is proposed that, as a minimum, employees should know:
- whether they are being enrolled into a qualifying scheme, what the employer contributions are and what deductions will be made from their salary. They should also know that they can opt-out, how to do so and what that entails
- if they meet the necessary age and earnings requirements, the fact that they can opt-in to the employer’s qualifying pension scheme or, where they do not meet the earnings threshold, the fact that they have a right to ask to join a pension scheme
- if their employer has postponed its staging date, what their actual enrolment date will be and the fact that they can opt-in or ask to join before then.
For employees who are already members of a qualifying pension scheme, all information requirements are set to be removed.
The DWP will be working with TPR to review the current template letters and to develop other communication tools.
If you have any questions, please speak to your usual Sackers’ contact.
¹ Broadly under the reference scheme test basis, at least 90% of members must have benefits equal to or better than a “reference scheme” – a notional scheme providing a pension of 1/80 of qualifying earnings for each year of service and a 50% dependants’ pension on death.
² The TSS is based on a pension payable from age 65 equal to 1/120 of average qualifying earnings in the last three tax years before the end of pensionable service for each year of pensionable service (subject to a maximum of 40)