Technical changes to automatic enrolment

Background

The DWP is consulting on proposed technical changes which are designed to simplify the automatic enrolment process and to reduce burdens on employers.

In this response

• General comments
• Limited Liability Partnerships
• Tax protected status

General comments

We generally welcome and support the DWP’s proposed changes.

To the extent that those who are not within the Government’s target group for automatic enrolment may be unnecessarily hindered by being enrolled into pension saving, further exceptions to the employer duty will be helpful. However, as we explain below, we do not consider all the proposed exceptions to be necessary.

In our response, we have focused on those areas where we think further thought or work on the draft regulations is needed.

Limited Liability Partnerships (LLPs)

We note that, in response to suggestions from stakeholders, the DWP proposes creating an exception to the automatic enrolment duties for “genuine partners” in LLPs.

In our view, the proposed exception is unnecessary, for the reasons set out below.

In our experience, a typical LLP will be made up of different types of partner, which may include equity partners, fixed share partners and salaried partners or a combination of some or all of these. In practice, almost all of these will be “workers” for the purpose of the automatic enrolment legislation, on the basis that that they provide their services, on behalf of the LLP, under their contract with the LLP.

However, whilst most LLP partners will be workers, they may or may not be “eligible jobholders” for the purposes of the automatic enrolment legislation. This will depend on whether an individual partner has “qualifying earnings”. Unlike salaried partners, those in receipt of drawings as a true profit share will not be receiving “earnings” (as defined in section 13 of the Pensions Act 2008). This is because a profit share is not made up of “salary, wages, commission, bonuses or overtime” or the other elements which make up “earnings” for this purpose. Similarly, for fixed share partners, if their profit share genuinely depends on the financial performance of the LLP they will generally not be considered to be receiving earnings.

As such, we consider that there is currently no duty under the automatic enrolment legislation to enrol most equity and fixed share partners. As “workers”, they will simply have the opportunity to opt to join a pension scheme, which does not have to be a “qualifying scheme”, and the LLP will not be required to pay contributions.

The introduction of a discretionary power to enrol genuine LLP partners may cause confusion. There is also a risk that it could put an LLP in technical breach of its automatic enrolment obligations, if it simply operates on the basis that there is no duty (which, as we explain above, we believe is the natural interpretation of the legislation), and it does not take steps to exercise a discretion for genuine LLP partners in relation to automatic enrolment and re-enrolment.

Tax protected status

We welcomed the exception introduced from 1 April 2015 which provides that individuals with tax protection do not need to be enrolled into a pension scheme, as this helps to ensure that such protection is not lost. For the same reason, we also welcome the proposal to extend this exception to the new tax protections that will apply from 6 April 2016.

We consider that the regulations could also be further adapted to help those affected by the Annual Allowance (AA) taper from 6 April 2016.

By way of example, some employers are dealing with the impact of the AA taper by capping pension contributions at £10,000 per year. Options for dealing with such contributions include smoothing over a 12 month period or paying them up front. With the latter approach, whilst the minimum contribution threshold will be met, minimum contributions will not be paid in every pay reference period, therefore putting an employer in technical breach of their automatic enrolment duty to pay contributions. In addition, there is a risk that front loaded contributions could be considered to be an inducement to opt-out of pension saving

Given that anyone to whom the AA taper is being applied is not within the Government’s target group for automatic enrolment pension saving, it would be reasonable to introduce a further exception to the automatic enrolment requirements which applies to individuals who are affected by the taper.

Alternative solutions for those affected by the AA taper would be to:

• amend the pay reference period for affected individuals, so that contributions are instead considered on the basis of the tax year (to tie in with Pension Input Amounts);
• enable the temporary suspension of active membership (instead of the need for an individual to opt-out) where contributions have been paid up front that are equal to or greater than the minimum contributions that would be required over a 12 month period. Membership could then be reactivated on an annual basis.