10 new proposals set to change the auto enrolment rules

21 August 2013
Various technical changes to the automatic enrolment rules are being proposed by the Department for Work and Pensions (DWP).

We look at what they are and what they will mean for employers.

DWP published a consultation document in March 2013 detailing how it proposes to change the rules around automatic enrolment.

The consultation came about as a result of information gathered from employers, advisers, payroll providers and The Pensions Regulator about their experiences of automatic enrolment so far.

The proposed changes are designed "...to improve the operation of automatic enrolment for employers and pension providers". 1

The consultation period is now complete. Once DWP publish the outcome to the feedback they are keen to make the changes in time for April 2014.

The DWP will also consider bringing other changes in sooner, if there is a demand to do so in the responses to the consultation.

As these proposals are subject to consultation, they may change before they become law and some may not be taken forward at all.

The proposals

The problem

It can be difficult to assess workers using the current definition of pay reference periods as they do not align with tax weeks or months.

The proposal

Employers can choose a new definition of the pay reference period for assessing a worker that begins with the start of the tax week or month in which the worker is actually paid.

What it means

  • This should make it easier to assess workers as this information should be readily available from payroll.
  • Workers should see little change other than with their automatic enrolment date.
  • Employers can choose either the current definition or the new proposed definition.
  • We would expect employers to use the new proposed definition. 

The problem

  • Employers must make sure that the total contributions being paid meet the quality requirement.
  • Under the current definition, this is measured over the period of one year.
  • Where workers have spikes in earnings (e.g. a bonus), employers may find that they fail this test, even although the contributions have been paid at the correct level on a monthly or weekly basis.

The proposal

The pay reference period for assessing scheme quality will change to tax weekly or monthly or weekly.

What it means

  • This change will make it easier for employers to meet the scheme quality requirements, regardless of any earnings spikes for individual workers.
  • Workers should see little or no change.
  • Pension providers will probably update their reporting and governance processes to account for this change. 

The problem

The deadline for passing over pension contributions deducted from new joiners' pay was extended to cater for automatic enrolment. However this extension does not cover all workers, e.g. entitled workers and those enrolled under the contract of employment. This means employers and providers have to operate two sets of rules.

The proposal

To have a single set of rules on the deadlines for passing over pension contributions deducted from new joiners' pay during the first two months of membership.

What it means

  • It will be easier for employers and providers to operate a single set of rules to check that contributions have been paid on time for new joiners.
  • Note that this extension only applies to new joiners – subsequent months' contributions are still subject to the existing deadlines.
  • Workers will see no change.
  • Pension providers will need to update their processes to take these changes into account. 

The problem

Some workers will be automatically enrolled even if they have voluntarily stopped pension saving as little as a day before their automatic enrolment date, e.g. those who opted out of contractual enrolment, or those who stopped paying for financial reasons.

The proposal

To introduce legislation that allows employers to exclude certain workers from automatic enrolment. In particular those:

  • with fixed or enhanced protection;
  • who have given notice of retirement;
  • serving a period of notice after resigning.

The DWP will consult formally on these proposals to establish:

  • if there are any other exclusions that should be made;
  • to make sure that the proposed exclusions do not result in additional administration for employers.

What it means

  • Employers are likely to receive fewer inquiries from workers who have previously ceased active membership and are then put back in a pension scheme that they have to opt out of again.
  • There will be less confusion amongst workers as they will not be automatically enrolled where they recently ceased active membership voluntarily.
  • Employers will need to develop processes to monitor and manage these workers. 

The problem

The Regulations around what must be in the opt-out notice are seen as too restrictive.

The proposal

To make a small change to the regulations to make it clear that the wording of the opt-out notice does not have to be exactly the same as the regulations.

What it means

This has little impact other than to provide comfort to providers and employers that they have some scope to 'customise' the opt-out notice, as long as it contains substantially the same information set out in the regulations.

The problem

  • Where a worker is assessed as an eligible jobholder, or where a non-eligible jobholder wants to opt in, employers have one month to achieve active membership.
  • For people with variable or unknown earnings, e.g. 'zero hour' workers, the employer may have to wait until the worker's pay day to assess them.
  • This could mean that employers do not complete the assessment on time, are non-compliant, and subject to action from The Pensions Regulator (TPR).

The proposal

To extend the joining window from one month to six weeks.

What it means

  • This will be welcomed by employers with workers whose earnings won’t be known until they are actually paid.
  • Workers will see little or no change. 

The problem

  • Employers with defined benefit or hybrid pension schemes must ensure that their scheme passes a test scheme standard so that they can be treated as an automatic enrolment scheme.
  • The test scheme standard set out in the regulations can make it difficult for employers and actuaries to comply.

The proposal

To change certain technical aspects of the regulations that details the test scheme standard.

What it means

These changes should make it easier for employers and actuaries to calculate if a defined benefit or hybrid pension scheme meets the test scheme standard.

The problem

It is clear that certain workers could suffer a tax charge because they are automatically enrolled. In addition, there are workers for whom automatic enrolment is likely to be unsuitable.

The proposal

Employers can choose a new definition of the pay reference period for assessing a worker that begins with the start of the tax week or month in which the worker is actually paid.

What it means

  • This will mean that certain workers who arguably should not be automatically enrolled will be exempt.
  • However it’s unclear:
    • exactly how an employer will be able to identify certain workers e.g. those with enhanced or fixed protection
    • what processes will be required to monitor excluded workers.  

The problem

  • Some employers already enrol workers into a pension scheme under the workers' contracts of employment, regardless of their age and earnings.
  • Employers who operate contractual enrolment will still have certain automatic enrolment duties, even although they may be providing a scheme that exceeds the minimum requirements and into which all workers are enrolled.

The proposal

The DWP would like to explore whether employers who contractually enrol all workers into a pension scheme that exceeds the minimum requirements should be exempt from all, or some of their automatic enrolment duties.

What it means

  • This will be good news for the many employers that already provide a high quality pension scheme for their staff.
  • Workers will see no or little change. 

The problem

Defined benefit schemes can meet the automatic enrolment scheme quality requirement in two ways:

  • if the scheme is contracted-out
  • if the scheme meets the test scheme standard.

Contracting-out in defined benefit schemes comes to an end in April 2016 and so all defined benefit schemes will need to meet the test scheme standard from that date.

The proposal

Employers can choose a new definition of the pay reference period for assessing a worker that begins with the start of the tax week or month in which the worker is actually paid.

What it means

  • This should make it easier to assess workers as this information should be readily available from payroll.
  • Workers should see little change other than with their automatic enrolment date.
  • Employers can choose either the current definition or the new proposed definition.
  • We would expect employers to use the new proposed definition. 

Find out more

If you'd like to discuss these proposed changes in more detail, get in touch with your financial adviser.

View the consultation documents and the outcome to the feedback, when it's available.

Notes

1 'Technical Changes to Automatic Enrolment Public consultation on draft regulations and other proposed changes', DWP, March 2013.

About the author

Jamie Clark

Business Development Manager

A self-confessed 'Pensions Geek', Jamie reads Pensions Acts for breakfast. He's spent the last two years working on auto enrolment and has talked to hundreds of advisers and employers about how they can best prepare.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London EC3V 0RL.