Automatic enrolment: Consultation on the effect of differences between occupational and workplace pension schemesThursday, February 3rd, 2011
The review Making automatic enrolment work, commissioned by the Department for Work and Pensions (DWP) and published in October 2010, warned that some regulatory differences between occupational and personal pensions could create “regulatory arbitrage”. The review team recommended that “Government should review as a matter of urgency the scope for regulatory arbitrage between the trust and contract based regulatory environment.”
A new DWP “call for evidence” document explains what “regulatory arbitrage” means. Arbitrage is “the exploitation of market imperfections to make a profit”. Regulatory arbitrage, therefore, in the context of automatic enrolment pension schemes, refers to the potential for pension providers and employers to take advantage of the differences in the statutory rules relating to occupational pension schemes and personal pension schemes, thereby counteracting the Government’s objective of broadening pension saving.Although some regulatory provisions are common to both types of scheme, including the handling of late payments, disclosure of information, and registration for tax purposes with HMRC, there are a number of significant differences.
Occupational pension schemes
- provide pension benefits under a contract between employee and employer
- are set up as trusts in order to keep them at arm’s length from the employer, with a body of trustees responsible in law to care for the interests of employees and ensure adequate pension funding
- make provision for short service refunds, where a member leaving the employment after three months and before two years of service may take a refund of contributions if no pension benefits have accrued
- make provision for trivial commutation payments, where members aged 60 or over with total pensions saving of less than £18,000 can withdraw the total fund as a lump sum
- do not allow employer contributions to be refunded to the employer but allow them to be offset against future employer contributions.
Workplace personal pension schemes
- provide pension benefits under a contract between employee and pension provider
- limit employer involvement to the collection and payment of contributions
- are contract-based , with pension providers required by law to guarantee payments and hold a solvency margin
- have a 30-day cancellation period but, otherwise, no refund provision, allow only for members to transfer their fund to another scheme or keep it within the pension plan.
The concern, therefore, is that, in particular, short service refunds may be seen by employers, especially those with high labour turnover, as a way of managing costs and reducing the administrative burdens of managing small pension rights. That could prompt employers to put employees into schemes offering short service refunds as a way of reducing their future pension contributions costs. Employees who leave employment frequently may not, as a result, build up entitlements to pension benefits – contrary to the policy behind automatic enrolment.
Comments on these and other related issues are invited by 18 April 2011.