UK: DB schemes given 3-yr auto-enrolment deferment

UK - The government has proposed giving defined benefit (DB) pension schemes a three-year deferment period before implementing auto-enrolment, and stated employers will have to back-date contributions if they wish to switch to a defined contribution (DC) scheme.

The latest proposals, published in a consultation by the Department for Work and Pensions (DWP), outline plans for phasing in auto-enrolment; the requirements for existing schemes to qualify for the new employer duties, and guidelines on the design of default options in workplace personal pensions (WPP).

It is suggested the staging of auto-enrolment will see employers split into 25-30 groups, based on size, and given start dates for auto-enrolment over a three-year period beginning on 1 October 2012.

In this transitional period, employers with DC schemes will be required to contribute a minimum of 1% of the worker's qualifying earnings for three years, then 2% for one year and the full 3% thereafter.

DB or hybrid schemes, however, will be allowed to defer auto-enrolment for up to three years, as the DWP argued these schemes "cannot pay reduced contributions and phase them in gradually. This is because funding and liability for these schemes needs to be maintained at an appropriate level".

But in an effort to protect members' pension savings where a DB scheme closes, the DWP warned that if an employer closes its DB scheme during this transitional period it must enrol jobholders into an alternative qualifying scheme.

The consultation document stated: "Where that alternative is a DC scheme, they will need to pay employer contributions back to the original automatic-enrolment date, which could amount to three years' worth of contributions".

It is envisaged that larger firms will be the first to enter the auto-enrolment process, to give small and micro employers time to prepare, although the regulations will allow companies to bring their staging date forward to an earlier "specified date after October 2012" if they can prove to The Pensions Regulator (TPR) they have a qualifying scheme in place or are "sufficiently advanced" in setting one up.

Further details of the certification process - allowing employers to certify their schemes meet the minimum 8% total contribution - revealed employers with DC schemes will not be required to make retrospective payments if there is a shortfall, unless it is more than 5% of the employers expected contributions in that year, and more than 10% of staff suffer a shortfall. (See earlier IPE article: UK self-certified schemes to require 7.6% contribution)

The DWP also noted the draft regulations ensure that no jobholder has a shortfall more than once in a two-year period. In addition, the qualifying test for DB schemes to qualify for auto-enrolment is that the annual rate of pension for a member from age 65 is at least 1/120th of average qualifying earnings in the last three tax years multiplied by the number of years service. 

The consultation will close to responses on 5 November 2009.


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