Pensions - Articles - DWP delivers cost of accruals easement


The Department for Work and Pensions laid regulations before Parliament that amongst other things will make it much easier for actuaries to apply the cost of accruals test to check that a currently contracted out DB scheme remains of sufficient quality that it can continue to be used as an auto-enrolment vehicle after 5 April 2016.

 All DB schemes currently contracted out will need to be assessed prior to 6 April 2016 under either the cost of accruals test (under which the ongoing cost of accrual is compared to a percentage of pensionable earnings, with the percentage depending on the scheme’s definition of pensionable earnings), or the potentially more complex test scheme standard if from this date the scheme is to remain a valid auto-enrolment vehicle.
  
 The Occupational and Personal Pension Schemes (Automatic Enrolment) (Miscellaneous Amendments) Regulations 2016 (SI 2016/311) come into force on 6 April 2016. They amend, amongst other things, Regulation 32M of the Automatic Enrolment Regulations that sets out the details of the cost of accruals test.
  
 The final version of the amendments to Regulation 32M followed close working with the Association of Consulting Actuaries (ACA), amongst others, and states:
     
  1.   For a transitional period, the cost of accruals test can be applied at scheme level even where there is a material difference in the cost of providing benefits between different groups. This period ends at the earlier of the date that the actuary signs the first report after 5 April 2016 that breaks the cost of accruals down to benefit scale level and 5 April 2019.

 The transitional easement is also available where the scheme rules are amended on or after 6 April 2016, but in a way in which the reference scheme test would still have been satisfied had the scheme been able to continue to contract out.

     
  1.   If a scheme’s definition of pensionable earnings doesn’t fit precisely with any of the five set out in Regulation 32M(9), then it is acceptable to undertake the cost of accruals test by reference to any of the five for which the scheme’s definition will always be at least as good as that in the regulations.
 The DWP is expected to publish non-statutory guidance on the cost of accruals shortly. This has also been produced following close working with the ACA, amongst others.
  
 This guidance is expected to explain in more detail the operation of Regulation 32M, along with some practical assistance as to its interpretation.
  
 With the publication of the regulations actuaries who have held back from undertaking cost of accruals tests should now be able to complete the necessary work and report the results to their clients.
  

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