Since October 2012, employers have had to assess their workforce and enrol eligible jobholders into a qualifying workplace pension as part of the automatic enrolment (AE) duties.
The experience of large and medium-sized employers, who have completed this process so far and who are now entering the re-enrolment phase, has highlighted areas that would benefit from simplification or revision before the AE duties affect employers in ever greater numbers. The changes outlined in the Department of Work and Pensions’ (DWP’s) consultation paper aim to do just that, as well as reflect developments elsewhere in the pensions system.
Although we must wait for DWP’s consultation response and the final regulations for confirmation of the details, because the changes take effect from 6 April 2016, employers who may be affected by the changes and their agents need to understand them.
The following proposals simplify some automatic enrolment processes.
1. Currently, when employers bring forward their staging date (the implementation date for the AE duties) to a more convenient date, they must meet several conditions. This includes gaining prior agreement from a pension scheme but, for employers who have no workers to enrol, this creates the unnecessary step of setting up a pension scheme that will not be used.
Therefore, for employers with no workers to enrol, the process will be simplified:
a. There is no requirement to gain agreement from a pension scheme beforehand (and therefore no need to set up a ‘shell’ pension scheme).
b. The employer can choose any date as its staging date; it does not have to be the 1st of the month.
c. The employer can choose to submit its declaration of compliance when it brings its staging date forward.
In addition, the minimum notice of one month that must be given to The Pension Regulator (tPR) is removed for all employers, regardless of whether there are workers to enrol. Instead, tPR must be informed no later than the day before the new staging date.
2. At present, employers with defined benefits schemes can use a valid contracting-out certificate to demonstrate the quality of the scheme. From 6 April 2016, contracting-out no longer exists so the certificate becomes obsolete. Instead, employers must use either the Test Scheme Standard or the alternative quality requirement.
Employers who use the alternative quality requirement may test the cost of future accrued benefits under the scheme but current rules require this test to be applied on a benefit-by-benefit basis. This causes complexity for schemes with more than one benefit scale.
To help reduce the administrative burden, the consultation proposes a transitional period during which the cost of future accrued benefits need only be tested at the scheme level. The easement runs until 5 April 2019 or the effective date of the first actuarial report due on or after 6 April 2016, whichever is earlier. It is available where schemes meet the contracting-out conditions on 5 April 2016 and where the benefits in their schemes have not changed.
3. At present, the deadline for submitting a re-declaration of compliance depends on whether the employer has any workers to re-enrol. One deadline is based on the chosen re-enrolment date and the other uses the anniversary of the original declaration of compliance, which has led to some confusion.
To address this, the proposal establishes a single re-declaration deadline for all employers that will be five months after the third anniversary of the staging date (or last re-enrolment date).
Additional and revised exceptions to the employer duty
Various exceptions to the general employer duty exist in recognition that automatic enrolment into a pension scheme is not appropriate for all individuals. It can lead to unintended consequences as well as an unnecessary administrative burden for employers. Building on exceptions introduced last year, the consultation proposes additional circumstances where the ‘duty’ (obligation) to enrol is replaced by the ‘power’ (option) to choose whether to enrol. The definition of ‘worker’ for AE purposes is also clarified following a recent legal case.
1. At present, company directors are exempt from the definition of ‘worker’ for AE purposes unless they have a contract of employment and at least one other person also has a contract of employment.
The first proposal replaces the duty to enrol with the power to choose whether to enrol (and to re-enrol) for director-only companies where two or more directors have contracts of employment. By choosing not to implement AE at all, the employer avoids the previous requirement to set up a ‘shell’ pension scheme, only to have everyone opt out.
The second proposal extends this to companies with contracted directors who also employ workers (although the AE duties remain in relation to the workers). The DWP made a point of encouraging views on this particular proposal while pointing out that it is, nevertheless, included in the draft regulations. This apparent ambivalence suggests that, of the numerous changes in the document, this proposal is perhaps the most likely not to appear in the final regulations.
Note that both proposals preserve the right of directors to opt-in. This could leave very little time to make the necessary arrangements where the employer had originally decided not to embark on the AE process.
2. A recent Supreme Court decision, Clyde & Co LLP v Bates van Winklehof, established that self-employed members of a Limited Liability Partnership (LLP) can be ‘workers’ as defined in employment law, and therefore subject to the AE duties. This has led to suggestions that partners in LLPs should be specifically exempted from the AE duties.
While agreeing to this, which echoes the revised treatment of directors, the DWP is nevertheless concerned to ensure that only genuine partners are exempt. It therefore proposes following HMRC’s Salaried Members Rules that distinguish between genuine partners and individuals who are, in reality, employees (see box). This approach has the advantage of consistency between tax and AE purposes.
The change from ‘duty’ to ‘power’ applies to enrolment and re-enrolment but also preserves the right of affected individuals to opt-in.
The DWP proposes to use HMRC’s Salaried Member Rules to identify when LLP members are genuine partners who are entitled to the new exemption from AE duties. What are these rules?
HMRC’s Salaried Members Rules
The Salaried Members Rules are three conditions that, if all are met, mean the individual is classed as an employee for tax purposes.
Condition A: Disguised salary
This condition is met if 80% or more of the total amount payable to the individual can be defined as ‘disguised salary’. The payments must be either fixed, or variable but not with reference to the overall amount of the LLP’s profits or losses, or not affected by the LLP’S overall profits or losses in practice.
Condition B: Significant influence
If the rights and duties of the individual do not give rise to a significant influence over the running of the LLP, then this condition is met.
Condition C: Capital contribution
This condition is met if the capital introduced by the individual is less than 25% of the ‘disguised salary’ for the tax year.
3. From April 2015, the employer’s duty to enrol automatically was replaced by the power to choose for individuals that were paid a Winding Up Lump Sum (WULS) and were then re-employed in the 12 months before the duty arises. An unintended consequence of the way the exception was drafted is that it allows the employer this choice when the re-employment occurred within 12 months of the AE duty but the WULS was paid more than 12 months previously.
The policy intention was that the exception applied when all three events – payment of a WULS, re-employment and eligibility for automatic enrolment – occur within the same 12‑month period. This consultation proposes an amendment to clarify the intention.
4. Last year, the DWP introduced an exemption from the duty to enrol where the employer has reasonable grounds to believe that the individual has transitional protection against the effects of reductions in the Lifetime Allowance (LTA). The exemption helps avoid retrospective tax charges if an affected individual fails to opt out.
To maintain the purpose of this exemption, the consultation proposes an amendment to reflect the further reduction in the LTA from £1,250,000 to £1,000,000 that comes into effect from 6 April 2016.
In summary, the proposed technical changes reduce the complexity and ambiguity of some AE processes, thereby reducing administrative burden and the risk of employer error.
The consultation, which applies in England, Wales and Scotland but not to Northern Ireland, closed 16 February 2016. The CIPP has submitted a response based on a recent survey of members. The DWP’s response is expected in early March.
Julie Hodgskin and Terri Bethel are Technical Material Authors for the CIPP
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