Employers will be exempt from auto-enrolling staff into the national pensions saving scheme if already provide access to pension schemes which are equivalent to or more generous than the proposals set out for personal accounts, says the DWP.
However, the government says it still needs further guidance as to how it can extend this exemption to stakeholder and group personal pension schemes as European law prohibits automatic enrolment into these types of schemes.
Chapter 6 the latest Pensions White Paper - Personal accounts: a new way to save – reveals a ‘light-touch’ regulatory and self-certifying scheme is being introduced which exempts employers from the need to auto-enrol its members into the NPSS as long as they automatically enrol their staff into the company scheme.
A key element of the process which requires further consultation, however, is the government’s aim to educate employers and employees about personal accounts and the pension reforms so is seeking guidance on the type of “information and support” which would encourage compliance.
The DWP says research it commissioned this summer as part of the National Pensions Debate reveals company schemes which match or are better than personal accounts are offered by 15% of employers and cover 23% of all UK employees so they will be allowed to auto-enrol employees into their existing schemes.
However, the government has decided it will not take death-in-service benefits will not be taken into account as part of the exemption test.
The defined benefit scheme (DB) exemption test will be based on the rate of benefit accrual, which the government acknowledges is typically 1/80th of pensionable earnings each year for contracted-out DB schemes so the existing Reference Scheme Test will be sufficient as an exemption test while a new test will need to be created for contracted-in DB schemes which, based on figures from the Government Actuary’s Department, has auto-enrolment and ensures offering at least 1/120th of pensionable earnings for every year.
Employers offering access to a money purchase (defined contribution) scheme will be exempt providing the contribution is at least equivalent to personal accounts and there is a default investment option with access to additional fund choices if wanted by the member.
The DWP notes such DC schemes tend to have an annual management charge of 0.6% and is broadly happy with this but will review the exemption at a later date if DC scheme charges are not comparable with personal accounts.
In contrast, however, the concept of auto-enrolment is a barrier to GPP and stakeholder exemptions as European law stipulates contract-based schemes require the written consent of an employee to be enrolled in – the opposite of the government’s intentions – so specific consultation is being sought on how best to tackle the employer exemption for these schemes.
To reassure employers there will be no increase in the amount they are required to contribute, legislation will state they must pay 3% of every enrolled member’s salary into an occupational pension or personal account.
The requirement to pay it will also be phased in over three years, as previously stated by the DWP.
There will also be no waiting period for the auto-enrolment of new employees, says the DWP, as it estimates the impact of a six-month waiting period would reduce a person’s pension fund by 9% if they have eight jobs over their working lifetime.
To try and assess the impact of implementation or auto-enrolment on employer schemes, the government is now setting up a cross-governmental group to look at the administrative impact of reforms and support employers.
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