Employers in the dark over automatic enrolment risks
13 June 2016
The problem is that it is not always understood what the qualifying criteria for an automatic enrolment scheme is, particularly in relation to jobholder agreements and default funds.
It must make sense for all employers that have not yet been given written conformation from their pension provider that the scheme they have in place for automatic enrolment qualifies, to seek such a written assurance ASAP. It is of course far better to resolve any issues upfront than to hope for a sympathetic response from The Pensions Regulator in the future.
The Jobholder Agreement issue:
In order to make a contract based pension, such as one provided by an insurance company, a ‘qualifying scheme’, a contractually binding agreement needs to exist between the pension provider and:
- The employer – committing them to pay at least the legal minimum employer contributions; and
- Each member of the scheme – specifying that the jobholder will pay the difference between the employer’s contribution and the legal minimum total contribution
The Default Funds issue:
A qualifying scheme, which is not being used to automatically enrol new members, does not need a default fund. However, if it has a default fund then the fund’s fees for members must not exceed the charge cap (0.75% per annum) It is possible that the pension provider may not consider the scheme to be qualifying and may not be aware the employer is treating it as a qualifying scheme.
Neil Esslemont at TPR kindly provided these notes for those that may not be aware of the difference between an ‘automatic enrolment scheme’ and a ‘qualifying scheme’
A pension scheme which is a ‘qualifying scheme’:
- Must be tax registered,
- Must meet a number of criteria including, for DC schemes, meeting or exceeding the legal minimum contribution levels,
- But it does not need to have a default fund, unless it is also an ‘automatic enrolment scheme’.
An ‘automatic enrolment scheme’:
- Has to be a ‘qualifying scheme’,
- Has to be administered in the UK (or in a European Economic Area state), and
- Must not have any barrier to automatic enrolment, so must have a default fund.
So, it is possible that a pension scheme may be a qualifying scheme, but not be an automatic enrolment scheme, in which case it must not be used to automatically enrol anyone. However, existing active members of a qualifying scheme do not need to be assessed or automatically enrolled.
We urge pension providers to pro actively make their employer clients aware if any pension scheme being used for automatic enrolment does not satisfy all relevant criteria. We also invite friends of automatic enrolment to collaborate in any way they can to help fix these problems – use our LinkedIn group to share your thoughts on this matter. At best the market as a whole has another reputational risk on it’s hands, at worst there may be extensive employer and consumer detriment and leaving the problem to fester would be a governance failure and none of us want that.