The news that the Department for Work and Pensions is looking into the 'loophole' that could allow employers with hybrid schemes to defer auto-enrolling existing staff even when only offering the defined contribution (DC) element of the scheme has been welcomed by Capita. It has also drawn attention to the potential pitfalls for any employer tempted to exploit the opportunity.
Robin Hames, head of marketing at Capita Employee Benefits, explained: “First and foremost, employers choosing to take advantage of this loophole should consider the reputational risk. It is clearly in contravention of the spirit of the legislation - the deferral easement is designed for employers offering more generous DB or cash balance benefits to staff, it was never intended for pure DC benefits. Employers should be in no doubt that it would be viewed dimly by both the Regulator and the Government. Steve Webb has made clear that he is open to naming and shaming those who attempt to subvert the purpose of auto-enrolment and clearly the Regulator would have to view any employer acting in this way with suspicion.”
Robin continued: “Furthermore, the financial benefits may only actually be marginal. There is a question mark over whether such a hybrid scheme could phase contributions; section 29 of the Pensions Act 2008 applies the lower DC transitional rates for money purchase schemes and personal pensions only. Employers therefore might need to offer a 3 per cent contribution from day one rather than 1 per cent under phasing. They would also have to communicate to existing employees their right to opt-in on this basis. So even if we assume a take-up rate as high as 75 per cent under auto-enrolment, it would only require 25 per cent of the same workforce to opt-in for the financial argument to fall by the wayside.
“Any employer or, indeed consultancy, considering this wheeze should really stand back and ask itself whether it wishes to attract such opprobrium for potentially marginal financial gain. Auto-enrolment is here: the only opt-out that exists is for employees not employers.”
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