DWP announces changes to pension personal accounts in order to “make automatic enrolment work”Thursday, November 4th, 2010
On 27 October, the Department for Work and Pensions (DWP) published the detailed results of an independent review of the procedures needed to ensure that automatic enrolment into the new pension personal accounts from October 2012 will work and be effective.
Automatic enrolment will be introduced in monthly stages between 2012 and 2016, with the largest UK employers going first. All employers are required to designate a suitable pension scheme into which qualifying employees between age 22 and State Pension age will be automatically be enrolled if their earnings are above an annual earnings threshold. That threshold is currently set at £5,035 in the Pensions Act 2008, although the defined annual review of the threshold indicates that would be £5,732 in today’s prices.
The review considered whether:
- the lower earnings threshold should be increased and the upper age threshold reduced, thereby reducing the number of workers brought into the scheme
- certain groups of employees should be excluded from the scheme, in particular the smallest employers
- any changes to the scheme rules and procedures would improve the success of the scheme
- any changes should be made to the rules relating to the National Employment Savings Trust (NEST).
This is a complex and detailed Report, running to over 200 pages. The key recommendations are set out below, although it is not clear whether they have all been accepted by the Government. In addition to a full analysis of the reasons behind the recommendations, the Report also reviews in considerable detail:
- the types of individuals who do and do not need pension savings, and the effect of pension personal accounts on the State Pension system
- the existing pension provision across employers of all sizes
- the administrative and contribution costs for employers
- the compliance issues facing employers
- the role that NEST will play in the pensions market.
Scope of enrolment
No changes are to be made to the requirement for all employers to provide pension personal accounts, irrespective of their size. This can only be achieved by offering NEST and the Government has confirmed that this optional pension scheme will go ahead. The Report recommends that the Pensions Regulator should reinforce the message that NEST is designed to meet the needs of small employers and that employers must be reassured that they will not be held accountable for their scheme choice should something go wrong.
No changes to the age thresholds are recommended.
Large employers with October and November 2012 staging dates should be allowed to start automatic enrolment as early as July 2012 if they wish.
To prevent minimal contributions where earnings just exceed the annual earnings threshold,
- the earnings threshold for automatic enrolment will be set at the income tax threshold (£7,475 pa for 2011/12, or £144 pw), and
- employer and employee contributions will be a percentage of earnings between
- the NICs primary earnings threshold (currently £5,715), and
- an upper threshold, defined as £33,540, but equivalent to £38,185 at 2010/11 levels.
Employees with earnings between the primary threshold and the tax threshold will be able to opt-in voluntarily and be entitled to employer contributions.
However, there is no mention in the Report of the Government’s apparent intention, as announced in the June 2010 Budget, to increase the primary threshold in line with the Labour Government’s plans, which could see it increasing to over £140 per week, almost the same as the 2011/12 tax threshold.
An optional waiting period of up to three months will be allowed before employees have to be automatically enrolled, although they may choose to be enrolled during the three months in order to start receiving employer contributions if they wish. This will
- help with the problem of short-term seasonal workers,
- allow employers to align their enrolment dates with their payroll schedules,
- give new employees longer to decide whether to opt out,
- limit the problem of having to make refunds when employees opt out after automatic enrolment, and
- help pension schemes that already have a waiting period.
At the time for automatic re-enrolment every three years, a similar flexible three-month period will be allowed, but either side of the scheduled re-enrolment date.
The Pensions Act 2008 makes provision for Regulations to allow an employer to effectively self-certify that an existing money purchase pension scheme meets the relevant quality requirements. A certification scheme was included in early draft Regulations but was removed following consultation, basically on the basis that it did not meet the policy intent.
The Report proposes a much simplified certification process. Employers with good schemes, which usually define contributions as a percentage of all basic pay, need certainty as to whether their scheme’s contribution rules are good enough to meet the legislated amounts, which are based on a percentage above a threshold. The proposal, which has been confirmed by the Government, is that a scheme would be certified as meeting the quality requirements if it provides:
- a minimum 9% contribution of pensionable pay, including a 4% employer contribution, or
- a minimum 8% contribution of pensionable pay, including a 3% employer contribution, provided pensionable pay constitutes at least 85% of the total pay bill, or
- a minimum 7% contribution of pensionable pay, including a 3% employer contribution, provided that the total pay bill is pensionable.
An annual contribution limit for NEST is set in legislation – £3,600 in 2005/06 terms, equivalent to £4,300 in 2010/11. In view of the complexity involved in managing the limit and, in the long term, the negative message that it will give about pensions saving, the Report recommends that NEST’s ‘contribution cap’ should be removed in 2017.
Current legislation does not permit NEST to receive transfers from other schemes. As the current average number of jobs that employees have during their working lives is eleven, they could end up with that number of pension pots by retirement. The Report recommends that, on a broader level, Government and regulators should review how to ensure that it is more straightforward for people to move their pension pot with them as they move employer.
The requirement for employers to designate a pension scheme is likely to drive employers to choose trust-based schemes, which allow contributions to be refunded if employees leave within two years or for favourable commutation terms for those who stay longer but have a fund that is less than £2,000, over contract-based schemes which require the pension rights to be preserved. As this would be detrimental to the Government’s policy intentions, the Report recommends that Government should review the scope for regulatory arbitrage between the trust and contract based regulatory environments.
The Report questions whether the existing regulatory regime for the provision of defined contribution workplace pensions remains appropriate once automatic enrolment becomes the norm and suggests that this should be reviewed by Government.
The Report recommends that Government should ensure there are effective communications to individuals, employers (and especially smaller employers) and the pension industry in the lead up to and during the implementation of the reforms, and that Government puts in place a comprehensive programme of monitoring and evaluation.