Clause 34 of the new Pensions Bill 2013, introduced to Parliament at the end of June, contains provisions that will allow that an employer does not have to automatically enrol into pension saving certain specific groups of employees.
These proposals are part of the Government’s continuing review of automatic enrolment, as part of a consultation published on 25 March 2013, and against which a final response is awaited.
On 1 July, the Department for Work and Pensions published Pensions Bill 2013-14 Briefing Paper: Clause 34 Automatic enrolment: powers to create general exceptions.
Although the Government remains firmly committed to the policy of automatically enrolling the eleven million people who are not currently saving in a qualifying workplace pension scheme, irrespective of employer size, they have been made aware of some specific circumstances in which the benefits of being automatically enrolled are outweighed by either the practical, financial, or legal consequences. In particular, DWP have been presented with evidence about situations in which being automatically enrolled is likely to cause detriment to some jobholders.
The Briefing Paper outlines three examples of where this can occur.
- Individuals with existing pension savings that are protected from tax charges under HMRC enhanced or fixed protection provisions*.
Automatic enrolment puts this status at risk because of the automatic nature of the employer duty, with no involvement, choice, or decision from the individual worker. At the moment the only option available to those individuals who have this protection and wish to retain it is to opt out after they have been automatically enrolled. If for any reason the jobholder doesn’t do so within the time limit they could face significant tax charges.
- Where someone hands in their notice and their period of notice spans their automatic enrolment date.
It seems inappropriate that an employer should be compelled to auto-enrol such an individual.
- Where an active member of a money purchase scheme gives notice of retirement and stops making contributions before the purchase of an annuity.
It seems perverse to oblige an employer to enrol them again if the employer’s staging date falls within the notice period. There is unlikely to be any real benefit in their making further contributions to a new pension scheme. In some cases, the scheme may decide to do nothing more than hold any contributions in this scenario in a cash account, and the member may have difficulty accessing what may be a relatively small sum of money.
As I stated above, clause 34 is only an enabling provision; the exact nature of any final exceptions from a duty to auto-enrol an eligible jobholder will be down to Regulation.
Therefore, to assess the evidence so far and balance the relevant factors when considering proposed uses for the power in Clause 34, the Government propose to test all the suggested exclusions against the following core policy principles:
- Is pension saving likely to put the individuals at financial or legal risk?
- Are the individuals unlikely to benefit from pension saving?
- Are employers able to identify the individuals with minimal burden?
- Is the employer able to arrange membership of a scheme without unreasonable financial or legal risk?
A summary of the findings from the 25 March consultation will be published as part of the Government’s response in due course. It is then proposed to hold a further formal consultation on draft proposals in the autumn 2013, which means it is unlikely that any changes will be introduced before 2014.
*From 6 April 2006 (and again from 6 April 2011), special rules were introduced to limit the amount of tax relief an individual was allowed against pension savings. In the context of protected pension benefits, these new rules, for example, affected high earners with pension benefits that exceeded what was then the 2006/07 lifetime allowance of £1.5 million, or were likely to exceed that allowance in any one tax year.