Technical changes to automatic enrolment – Sackers’ response to consultation

Background

On 1 December 2014, the DWP published a consultation on draft regulations aimed at further simplifying the automatic enrolment process and reducing the burdens on employers.

The measures are designed to:

• introduce an alternative quality requirement for DB schemes
• simplify the information requirements on employers
• create exceptions to the employer duties in certain circumstances.

In this response

• General comments
• Alternative quality requirements for DB schemes
• Information requirements
• Exceptions to the employer duty

General comments

We welcome the DWP’s proposals to simplify various aspects of automatic enrolment in the light of experience to date.

As legal advisers to trustees and employers of occupational pension schemes principally, we have restricted our comments to the parts of the consultation that are most relevant to our practice.  As such, we have not sought to answer every question in the consultation.

Alternative quality requirements for DB schemes

The level of the cost of accruals test

The consultation asks whether the level of the alternative test delivers broad equivalence with the Test Scheme (Q1).

It will be for those with actuarial expertise to comment on the appropriateness of the proposed level of this test.  However, given the reasons for introducing alternative quality requirements for DB schemes (to simplify the requirements for employers and to compensate for the loss of the reference scheme test as a measure), we ask whether the existing alternative DC test might be a more appropriate measure of comparison.  This also has the merit of simplicity.

Discretion to choose own methods and assumptions

Whilst we are not in a position to comment on the detailed actuarial aspects of the proposals (Q5), we agree that allowing scheme actuaries the flexibility to determine appropriate methods and assumptions for each scheme, in line with methods and assumptions already used, is a sensible approach.

Other alternative quality requirements

It is difficult to comment on the extent to which shared risk schemes can meet the proposed requirements until the proposals in this area are fully developed (Q8).

Information requirements

The proposals on information requirements are generally sensible and we support the move to streamline both the quality and content of the communications that employers are required to provide.

We agree that the amendments will enable employers to combine the information to employees within a single communication and remove the need to assess on a continuous basis (Q11).  We also agree that employees will receive the information that they need at the right time (Q12/14), as well as reducing the practical burden of information requirements for employers (Q13).

However, whilst we envisage that many employers will wish to take advantage of the new measures, for those that have robust systems and processes in place, which they wish to continue using, it will be important to ensure that such existing arrangements can continue unaffected.

We note that the DWP is to work with TPR to review the existing template letters on TPR’s website, and that it will consider the need to develop other communication channels that could be of benefit to an employer.  We support this approach.

Exceptions to the employer duty

We welcome the proposals to exclude certain categories of member from the automatic enrolment duty and consider the selected categories to be appropriate.

It cannot be assumed that all employers will be well advised on automatic enrolment.  It will therefore be important to ensure that TPR and HMRC’s updated guidance is clear and practical.

Jobholders leaving employment

We consider it likely that most, if not all, employers who can take advantage of this exception will do so.  Employers who may not wish to do so are likely to be those with established automatic enrolment practices, for whom it may be more complicated to unravel their existing set-up (Q31).

Cancelling membership of a scheme prior to automatic enrolment

We agree that the proposed exception (Q36), and its application to all those who leave a qualifying scheme (as opposed to just contract joiners), will help simplify the automatic enrolment process for employers (Q37).

Individuals with tax protected status

We agree that the exception for dealing with individuals with tax protected status should be widely drafted (Q43), in line with the policy intention of simplifying processes and procedures for employers.  In any event, individuals whose tax protected status would not be jeopardised retain the right to opt-in and benefit from automatic enrolment, should they wish to do so.  We also agree that the proposed exception will be a welcome easement for employees in this category (Q47).

However, it is worth noting that turning the requirement to enrol eligible jobholders into a power to enrol, or to exclude an individual from automatic enrolment, introduces a certain level of complexity for employers, particularly in relation to individuals with tax protected status.  Employers will be required to analyse individual workers’ circumstances and to take a decision on whether or not to enrol them.  This is in contrast to the current position, where the onus is on the individual to opt-out.  We therefore agree that, as the main benefit of this easement if for the employee, the onus should remain on individuals to provide their employer, promptly, with evidence of their protected tax status (Q49).

Winding-up lump sums (WULSs)

We agree that this exception provides a useful easement for employers as well as a sensible protection from unwanted tax charges for the employee (Q50).  An alternative, potentially simpler, approach would be to amend the WULS legislation to accommodate the automatic enrolment legislation.