Yes, ‘exempt’ schemes can be offered in place of personal accounts. To be exempt, occupational schemes must meet certain criteria.
Remember, though, that if your exempt scheme is not available to all eligible workers, you will also have to offer personal accounts to the class of eligible workers who cannot join your own scheme (see Who is an eligible worker?).
An exempt scheme can be a money purchase scheme, a defined benefit scheme, a hybrid scheme or a workplace personal pension.
Is our scheme exempt: what are the main criteria
- The scheme must have prescribed minimum contribution rates, which are roughly the equivalent to those provided by personal accounts. So, for defined benefit schemes, the accrual rate must be at least 1/120th. For money purchase or personal pension schemes, the minimum employer contributions on the band of qualifying earnings (currently set at between £5035 and £33,540) are 3% with a top up to 8% by the employer, the jobholder, or both (including tax relief). Crucially, there is still some debate about whether earnings will be based on basic pay or total pay.
- We expect these contribution rates to be phased in (see How we expect contribution rates to be phased in).
- With the following exceptions, eligible workers must be auto-enrolled into the scheme from day 1.
- Regulations are expected to allow deferral of aut-enrolment for three or six months for defined benefit schemes which have high employer contribution rates of least 6%.
- For deferred benefit and hybrid schemes, we expect employers will have a 3 year period within which they will have to auto-enrol all existing employees. All new employees will have to be auto-enrolled at the start of the phasing in period.
- There are particular problems with workplace private pensions (see What about workplace private pension schemes?)
- All eligible workers who have opted out must be allowed to opt back in, but not more than once every 12 months – unless you agree.
- The scheme must not require eligible workers to make any choices (such as an investment choice) or to give any information before enrolment.
- The scheme must meet certain quality requirements. Some of these are contained in the Pensions Bill, but they will be fleshed out by Regulations.
- The scheme must registered as exempt with The Pensions Regulator and be registered under Chapter 2 of Part 4 of the Finance Act 2004.
|
There is an unresolved issue relating to workplace private pension schemes. The EU Distance Marketing Directive prohibits auto-enrolment for these schemes. The government has said that it will try to resolve this issue at European level. However, this will take time.
In the meantime, employers will not be able to auto-enrol their workers into these schemes. Instead we expect that workers will have to sign a form before they are enrolled. For new workers, this would probably have to be before or on day 1 of employment, so that the system mirrors auto-enrolment as closely as possible.
How this will work in practice has not been finalised. EEF has lobbied hard to avoid any requirement on employers to include enrolment in contracts of employment. We are against this as it could impose a new requirement on employers to issue contracts of employment before day 1 of employment.
What if our current pension provision does not meet these criteria?
You may well find that the best option is to change it so that it does (see What changes might we have to make to our existing provision?).
Otherwise you may find yourself in a tricky position. It is likely that you have a contractual agreement with employees who belong to your current scheme to continue with that scheme. If so, unless or until you are able to change relevant contracts of employment, you will be obliged to continue with your current scheme. On top of this, you will also have to offer individuals personal accounts.
If you would like to continue with your existing occupational pension, then you will have to look at the scheme itself, as well as who you currently allow to join the scheme and the mechanisms in place for doing so. We expect most employers will have to make some changes.
- First, you will need to investigate whether the scheme meets the quality requirements.
- Once the Pensions Bill and relevant Regulations are on the statute books, we would recommend that you get your pensions advisers to tell you whether or not your scheme meets the necessary quality requirements and advise you on any changes.
- You may need to review the scheme’s minimum contribution levels if they fall below the new statutory minimum levels for exemption.
- For example, it may be that whilst your scheme has quite high maximum contribution levels for employees, they can contribute at a very low level if they choose.
- Your scheme may not be compatible with the criteria for exemption in other ways. For example, it will probably not provide for automatic enrolment and re-enrolment of individuals and may well require individuals to provide information to the trustees or to make choices before joining. If so, the scheme rules will need to be changed accordingly. The Pensions Bill allows trustees to modify their scheme to comply with requirements such as these.
- You will also need to check who you allow to join the scheme – historically, you have probably not allowed all workers (over 22 who earn over the lower earnings threshold) to join. If so, you will have to decide whether to extend our existing scheme to all eligible workers, or to offer those excluded from it personal accounts instead.
- You will therefore need to consider the implications of opening up the scheme to more workers, possibly earlier on in their employment in terms of cost, administration and employee relations. You will have to weigh this against the costs and benefits of offering personal accounts to some workers instead.