Government proposals unveiled yesterday will make it easier for some employers to maintain existing defined contribution pension designs once they are subject to the automatic enrolment regime, according to Towers Watson.
Greater certainty about several regulatory requirements should also allow more employers to firm up their plans, though some announcements will be more welcome than others.
Defined contribution quality requirements
Rudi Smith, Senior Consultant at Towers Watson, said: "In 2010, the Government announced that employers who calculate pension contributions as a percentage of basic pay should not have to redesign change their schemes, provided that contribution rates were acceptable. The problem was that its definition of 'basic pay' was quite different from the one used by a lot of employers. The final version of the DC certification tests means Government's proposals better reflect its intentions."
The changes affect employers who calculate pension contributions as a percentage of basic pay and also provide non-pensionable benefits like shift premiums or car allowances. Many will now be able to certify that their existing schemes satisfy new quality requirements without broadening their pensionable pay definitions.
However, several employers can still anticipate having to change their schemes. Rudi Smith said: "It appears that area allowances like London weightings must be pensionable if an employer wants to certify their scheme and avoid having to make new calculations for each employee."
A step closer to a final set of rules
Rudi Smith said: "If you go back to when the Pensions Commission was first set up, the Government has taken almost 10 years to come up with its policy on auto-enrolment and then start implementing it. By contrast, some employers will only have around 10 months between seeing the final regulations and having to comply. The Pensions Regulator recently wrote to payroll providers encouraging them to push forward with developing software to help employers to meet the requirements. The latest announcements should make that easier."
"Today's announcements are a very important piece of the jigsaw but there are other pieces still in the box. For example, the proposed earnings thresholds are still subject to consultation and employers with contracted-in defined benefit schemes are waiting for guidance on how to certify them. The Government has also hinted today that the regulator may supply more details on how the auto-enrolment rules fit together with salary sacrifice.
Waiting periods, re-enrolment and compliance dates The Government has said that employers will have up to one month, rather than one week, to notify employees that they will be auto-enrolled after a waiting period (which can be up to three months long).
Rudi Smith said: "One-week always looked like an impractical deadline, especially during holiday periods. This looks a lot more workable. The Government also wants to make it easier for people to opt in straight away. This could mitigate the impact that deferral has on employees' retirement funds and on employers' costs.
"It has not done as much to accommodate employers' concerns over re-enrolment dates. As expected, to ensure a more even workload for the regulator, employers will only be able to choose from half of the dates in the year when deciding when employees who opted out should be re-enrolled.
"Disappointingly, there are also no proposals to adjust employers' staging dates where the PAYE arrangement overstates the number of people they employ. This can be problem if former employees receive their pensions through the employer's payroll."
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