Ready for auto-enrolment?

July/August 2010

With the auto-enrolment reforms due to take effect from 2012, employers and trustees of existing occupational schemes face two important questions:

• Is the current scheme eligible for auto-enrolment?
• Do we wish to use the existing scheme for auto-enrolment?

The first question is complicated as the designs of almost all occupational schemes are incompatible with the statutory requirements. Commonly, schemes define pensionable earnings on the member’s basic salary; a qualifying scheme uses gross earnings falling in a band between £5,035 and £33,540 (expressed in 2006/07 terms). Reconciling the two definitions to ensure that statutory requirements are met will be an administratively complicated process.

Defined benefit schemes must have an accrual rate of at least 120ths. However, the contribution structures of many defined contribution arrangements will have to be adapted if they are to comply. Apart from the complications arising from the definition of salary to be used, the rates of contribution must feature a minimum employer contribution of 3%, with a minimum total contribution of 8%.

Eligibility to join the scheme will have to be expanded to almost all employees, and waiting periods cannot be applied.

Ensuring that existing schemes are fully compliant with the auto-enrolment regime will be the responsibility of trustees. They will be answerable to the Pensions Regulator for any compliance failures. In view of this, many trustees and employers will take the view that they do not wish to use the existing scheme for auto-enrolment. Furthermore, redesigning the existing scheme may make it incompatible with the HR objectives of the employer as well as proving administratively impractical.

Many employers may not wish to make the scheme available to all employees. Neither will they wish to change the scheme’s design to ensure compliance with the new regime. Many schemes would find it hard to cope with the administrative burden of auto-enrolment – particularly if many new members elect to opt straight back out. All such changes would result in increased costs in terms of implementation, additional contributions and administration.

A simpler alternative would be to run the existing scheme in parallel with a new scheme designed solely for the purposes of auto-enrolment, and it is to be expected that the majority of larger employers will opt for this more practical route.

Tim Middleton is technical consultant for the Pensions Management Institute