Last week the Department for Work and Pensions (DWP) issued a consultation paper on technical changes to automatic enrolment (the Consultation). The Government has been gathering information about early experiences of workplace pension reform by employers and pension schemes and identified areas which could benefit from practical or technical improvements. The Consultation envisages that the changes will be introduced by April 2014 but is also considering whether they can and should be brought in earlier. 

What changes are being proposed?

The Consultation's 30 pages include a number of proposed changes to the current legislation that governs workplace pension reform. There are three key proposals which could, if properly implemented, provide employers with useful flexibility and help with their compliance:

Joining window

Employers currently have a maximum of one month from a jobholder's 'automatic enrolment date' to ensure that the jobholder becomes an active member of an automatic enrolment scheme. In the Consultation, the DWP has acknowledged that employers may not be able to assess earnings for certain workers (for example, zero hours workers and those with widely fluctuating earnings) until payroll is run.

In practice, this means that such employers would not have enough time to complete the jobholder's joining process within the current one month statutory deadline and would therefore be in breach of their employer duties.

To deal with this, the Consultation proposes extending the deadline from one month to six weeks. This will provide some comfort to those employers who were struggling with fulfilling their employer duties within the statutory one month joining window.

If this proposal is implemented, however, employers would still have to be wary of running to the full six-week period - not least because the one month opt out period will only be triggered when the steps to achieve active membership have been completed. 

Pay reference periods

Under current legislation, a jobholder's earnings over a 'pay reference period' are used to decide whether they have earnings above the 'earnings trigger' and are therefore eligible for automatic enrolment (assuming they fulfil the other eligibility criteria). The Government proposes to make it easier for employers to use periods already recognised by existing payroll processes by introducing a new option to align pay reference periods to tax and national insurance periods.

This new option will be introduced as soon as possible so that employers can take advantage of it before April 2014. The existing requirements will continue to apply so employers will have a choice over which route they wish to take.

In order for a defined contribution (DC) pension scheme to satisfy the quality requirements, minimum contributions must be paid on the jobholder's qualifying earnings in the relevant pay reference period. Some schemes currently have to carry out annual reconciliations where a member's pay fluctuates throughout the year in order to ensure that they meet the minimum requirements. The Government proposes to address this issue by applying the new pay reference period to minimum contributions.

Contribution deadlines

Employers must pay over any contributions that have been deducted to the pension scheme by a statutory deadline. Under the current regime, the statutory deadline is extended where contributions are deducted before the end of the opt out period as part of the automatic enrolment, re-enrolment or opt in process.

This gives employers the option to retain contributions for jobholders who have been automatically enrolled (or have opted in) until the possibility of an opt out has passed. This extended deadline does not, however, apply to contributions deducted from pay for entitled workers or those joining a scheme under contractual enrolment.

In order to simplify scheme administration and employer processes, the Consultation proposes to apply an extended deadline for all contributions deducted from all new joiners. This change will be welcomed, as it will ease administration for employers using the same systems (and potentially the same schemes) for all of their workforce. 

In addition, the Consultation considered a number of other easements which could be helpful for employers in certain situations:

Jobholders who opt out before automatic enrolment

Employers are currently exempted from having to automatically re-enrol a jobholder who has opted out within the previous 12 months. This exemption does not, however, apply to a member who was contractually enrolled, has opted out and is due to be automatically enrolled for the first time.

In the Consultation, the Government details plans to provide a new exemption in respect of any jobholder who voluntarily ceased active membership in the 12 months before the employer duty would have otherwise arisen.

Opt out notice

The Government is proposing a minor change to make it clear that opt out notices must be in substantially the same form (but not the exact same form) as that set out in the regulations. This change is intended to make it clear that opt out notices can be branded, additional information added and adapted for on-line completion and submission without falling foul of the legislation.

Quality requirement for defined benefit schemes

Defined benefit (DB) schemes satisfy the quality requirement if they are either contracted out of the state second pension or they satisfy the test scheme standard. The test scheme is a hypothetical DB scheme. The benefits of the test scheme are compared to the benefits of the DB scheme. The Government is planning to make some technical changes to the test scheme standard so that it works as intended (in particular to take account of state pension age increases).

From April 2016 DB contracting out will be abolished. DB schemes which are no longer contracted out will have to satisfy the test scheme standard to be used as qualifying schemes. Are there simpler measures of quality which could be used for automatic enrolment purposes? Could the quality requirement for DB schemes be removed altogether? These are matters that the Government is considering and consulting on. 

Excluding certain categories of worker from automatic enrolment duty

The Government is consulting over the insertion of a regulation making power to exclude workers of a prescribed class or description from the scope of automatic enrolment. It will consult formally on the draft regulations. The following examples are given of the types of worker who might be excluded:

  • those with enhanced/fixed protection;
  • those who hand in their notice during a deferral period; and
  • those who are active members of money purchase schemes who have given notice of retirement.

Contractual enrolment

The Government is consulting over whether employers who contractually enrol workers into a scheme which meets minimum standards for automatic enrolment could be allowed to certify or self certify that they are meeting the policy objectives. They would then be exempt from the explicit employer duties.

When will the changes come into force?

The DWP is planning to bring the regulations into force in time for April 2014, and expects to lay secondary legislation before Parliament before the summer recess (July 2013). It will consider bringing specific changes into force earlier if consultation responses show there is demand and it can be achieved without unwelcome consequences.

Importantly, the Government expects employers to carry on complying with the law as it currently stands until any changes are brought into force. 

Are any other changes expected?

The Government says it will also be making technical changes to primary legislation (including making sure transitional arrangements operate as intended where a scheme offers both DC and DB benefits and making changes to exceptions where automatic enrolment is deferred). These changes will be included in the forthcoming Pensions Bill.

Is this simplification? What practical difficulties still remain?

The Government's proposals would represent a welcome simplification for employers who are preparing their systems in readiness for the onset of employer duties. However, unless and until the changes are brought into force employers are left in a state of limbo - aware that changes are likely to be made, but unsure exactly what those changes will be and when they will come into force. They still have to comply with the law as it currently stands. 

Some of the flexibility being introduced is also coming too late for employers who have already 'staged' and had to grapple with some of the difficulties surrounding the incompatibility of the requirements with existing payroll processes. 

The consultation paper deals with a number of the practical issues in relation to workplace pension reform which were causing headaches for employers. However, some areas which are not addressed include the following:

  • the distinction between 'joining' (for entitled workers) and 'opting in' (for non-eligible jobholders) is in many ways artificial and creates difficulties for employers seeking to relay a simple message to their workers; and 
  • some of the potential administrative and communication issues which can be created by a worker changing status.

The Consultation is open until 7 May 2013.