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Adviser  >  Technical Central  >  OPS Matters  >  Auto-enrolment and NPSS - The exemptions

Auto-enrolment and NPSS - The exemptions

You’ll no doubt be aware due to recent press coverage that as part of the Government’s concerns about pensioner poverty, they’re considering whether to introduce a savings scheme in 2012 into which employees will be auto-enrolled. The individual pension ‘pots’ built up will be known as ‘personal accounts’.

However the Government recognises that lots of employers already offer pension schemes so they’ve proposed exemptions from the requirement to auto-enrol employees into personal accounts. But only if the scheme already being offered by the employer is of a certain calibre.

The proposed exemptions

The general idea is that if the existing occupational scheme offers the same, or better value than the national one, and employees are auto-enrolled into it, then the employer won’t have to auto-enrol employees into personal accounts.

As you’d probably expect however, there are different criteria for passing this ‘equivalent or better’ test depending on whether the scheme is defined benefit (DB) or defined contribution (DC).

DB schemes

It’s proposed that the test will be based on the ‘reference scheme test’. The ‘reference scheme test’, if you remember, is the one that DB schemes had to pass in order to remain contracted-out after 5 April 1997. In very basic terms, if a scheme provided 80ths accrual for each year of service and 50% survivor pensions both before and after retirement, then they would pass the test.

DC schemes

This looks straightforward enough. The proposed contribution rates for personal accounts are 3% employer, 4% employee and 1% via tax relief. So 8% in total.

The proposal is that if an employer offers a scheme with the same, or a higher contribution rate, then they will be exempt.

But it’s not quite that easy. The 8% contribution rate is to be based on band earnings between £5,000 and £33,500, not full earnings. So a scheme which has a lower percentage contribution rate than 8% but based on full earnings could still be making higher contributions on a pound and pence basis.

Secondly, for various reasons, at the moment it’s not normally possible to auto-enrol employees into a group personal pension scheme. So such a scheme would potentially not be exempt, even if the contribution rate was higher than the proposed 8%.

Levelling down

The Government also recognise that employers who offer quality schemes with higher contribution rates may be tempted to ‘level down’ to 8% to save cost. There are proposals to combat this however so that employees are not put at a disadvantage.

What’s next?

As you can see, there are a few issues to sort out. So consultation, and lots of it, is likely to be the story all the way up to the proposed start date in 2012. And things may change drastically between now and then. So other than keeping up to date with developments, there’s really nothing much more to do just now.