The review on behalf of the Department for Work and Pensions (DWP) has been completed. The recommended changes are few and sensible, and reflect what many in the pensions industry were calling for. The review does not suggest tampering with key features of the regime, such as the introduction of NEST (the investment vehicle available to all employers), the universal application of automaticenrolment for all employers no matter what size and the age thresholds for qualifying employees.
The recommendations do not go as far as some employers had hoped – there are no recommendations to exclude small employers from the new regime, allow for a six-month waiting period, extend the requirement to re-enrol relevant employees to five years from three years and relax the rigidity of the opt out process.
The DWP has already announced that it is supportive of the changes recommended. However, the changes will require further legislation, and a new Pensions Act can be expected early next year with further regulations.
The highlights of the review are as follows:
1. increase the earnings threshold for automatic enrolment so that it is aligned with the income tax personal allowance (£7,336 in 2010/2011 terms). However, the lower limit for contributions will continue to be based on earnings above the National Insurance primary threshold. Workers can opt in and receive an employer contribution if they earn between these two thresholds;
2. introduce an optional waiting period of up to three months. Workers can, however, opt in during the waiting period;
3. allow for a more straightforward self-certification process for defined contribution schemes. An employer will need to satisfy any one of three tests based on a past years’ scheme data:
(a) minimum contributions of 9% (with 4% minimum employer contributions). Contributions must be based on basic pay.
(b) minimum contributions of 8% (with 3% minimum employer contributions). Contributions must be based on at least 85% of total pay - which can be calculated on an aggregated basis rather than member by member.
(c) minimum contributions of 7% (with 3% minimum employer contributions). Contributions must be based on total pay.
4. allow some helpful measures to increase flexibility. For example, larger employers will be able to autoenrol earlier than October 2012, and employers will have more flexibility as to the timing for reenrolment;
5. encourage smaller employers to opt for NEST;
6. suggest the DWP provides comfort to employers that they should not be held liable for scheme choices – particularly if employers opt for NEST or a stakeholder scheme. The suggestion is that a “safe harbour” approach is adopted by the DWP which protects employers from the legal risk of claims for poor investment performance. The concern is that where employers try and be helpful they may find themselves subject to a higher degree of risk; and
7. implement further recommendations in 2017, including the removal of the contribution cap for NEST and allowing transfers.
Finally, there are also wider recommendations for the Government to consider other structural changes to the regulatory regime governing defined contribution provision. The review notes some disparity between trust-based and contract-based schemes in terms of opt out periods and the terms on which members can commute small pots. There is also a suggestion that consideration is given to allowing employees to switch between defined contribution arrangements more easily on changing employment.