The DWP consultation paper “Workplace Pension Reform – Completing the legislative framework for Automatic Enrolment”, published in July 2011, contains a short paragraph which could give employers more options and have a considerable impact on the design of automatic enrolment schemes.
The section says: “If an individual chooses to continue active membership but arranges to pay less than the required minimum, then the 8 per cent qualifying scheme quality test does not apply. An individual may choose to do this if, under the rules of the scheme, the scheme is ’sectionalised’ to allow for individual membership at an amount lower than an equivalent to the minimum contribution requirement”
The thinking behind this is fairly obvious. One of the primary barriers to pension saving is perceived affordability. So the paragraph quoted above is saying that if someone can’t afford the 5 per cent contribution rate, after they have been automatically enrolled, they can ask the employer to put them in a section of the scheme which has a lower contribution rate – which we’ll call the ’cheaper section’. The logic is that smaller pension contributions building up a smaller pension pot are better than no pension contributions and no pension pot at all.
But this is where it gets interesting. The section of the scheme that is being used for automatic enrolment, and which meets the minimum contribution requirements, can still be registered and run as an automatic enrolment section. The ’cheaper section’ on the other hand, need not meet the automatic enrolment scheme minimum contribution requirements, so may not have to be registered and run as an automatic enrolment section.
In other words, an automatic enrolment scheme doesn’t need to be a ’fully’ automatic enrolment scheme, so long as it has an automatic enrolment section. And the minimum contribution requirements aren’t really minimum contribution requirements, as long as there’s a section in a scheme that meets the minimum contribution requirements. That’s the easy bit. There are a number of questions that sectionalisation raises. Will the employer have to pay into the cheaper section? Or can the employee simply say they can’t afford 5 per cent and just pay, say, 3 per cent themselves? If the employer does have to pay, is there a minimum?
We have already seen the goalposts uprooted and moved a considerable distance with the delay in staging for small employers. We do not need more uncertainty
And at what point can the employer tell the workers that the cheaper section is available? If they tell them before they are automatically enrolled, is this an inducement not to join the automatic enrolment section of the scheme? If they are told after they are automatically enrolled, is this an inducement to opt out of the automatic enrolment section? There are issues for advisers around this too. Whilst it is relatively clear that workers can seek advice once they are automatically enrolled, can/must the adviser consider the cheaper section of the scheme where affordability is an issue? And would this be seen as inducement?
If a worker decides the cheaper section is for them, they will still be automatically re-enrolled into an automatic enrolment scheme on their automatic re-enrolment date. How does that process work? Presumably the worker must ask again if they want to stay in the cheaper section?
What if the cheaper section, perhaps due to its very nature, is priced more expensively? Is that fair? What does it mean for member outcomes?
Will sectionalisation appeal to all employers? The argument is that they wouldn’t want to bother with a cheaper section anyway – why should they when they can go down the easiest route? All they have to do is set up an automatic enrolment scheme, require the worker to pay 5 per cent, and if anyone can’t afford it, they opt out. The employer doesn’t have to pay anything; doesn’t have to mess about with sectionalising the scheme; and can effectively forget about the worker for 3 years. ’Sectionalisation’ is a useful concept if it gives employers more choice and widens pension provision. It could also drive innovation in scheme design. But there are many unanswered questions, and we’ll need clarity as to what can and cannot be done.
We have already seen the goalposts uprooted and moved a considerable distance with the delay in staging for small employers. We do not need more uncertainty, with employers getting the impression that automatic enrolment will never happen. This could result in them failing to plan properly and having to face a cost and administration shock that they are not prepared for.
And with the first staging dates only a few months away, we’re running out of time to get all the answers.