We use cookies to give you the best online experience. By using our website you agree to our use of cookies in accordance with our cookie policy. Learn more here.Close Me
Auto-enrolment obligations were introduced from October 2012.
These fall on different employers at different times according to
their
staging dates. The overall effect, of course, is to make saving
for retirement the default option for most workers. To avoid
this outcome, a worker needs to opt out. It still remains to be
seen whether the largest exercise in inertia selling of all time
will be successful or not.
But, before the paint is even dry, the government has already
moved onto the next big thing in inertia selling. This month, the
government has published proposals on new primary legislation to
promote consolidation of pensions savings as workers move jobs
- the so called "pot follows member" policy. The
intent is admirable and well-meaning, aimed at helping ensure
workers maximise their retirement income.
The challenge, however, is to achieve this in a cost effective
and practical fashion. There are other risks too, including
increasing red tape for business.
In more detail
The government's analysis shows that, on average, a worker
works for 11 different employers over a career. Under auto
enrolment, when a worker leaves an employer, a dormant pot also
remains behind. It is estimated that there will be 50 million
dormant pots by 2050 with 33 million of those containing a value of
under £10,000. The concern is that fragmentation of a
worker's pension savings in a number of small pots over a
career will result in less money for that member to purchase a high
quality pension on retirement (because administration charges
will be higher) and/or to obtain the best annuity rates (as
insurers structure their rates to attract the larger pots).
Final salary schemes are excluded from the proposal. The focus
is squarely on money purchase schemes.
Overall, the proposal, as announced, is somewhat tentative. It
sets out the government's thinking, but invites comments from
stakeholders. The main features are:
it will apply to a broad category of workers;
it will apply only to pot sizes up to a maximum value of
£10,000;
a power will be provided under secondary legislation to set
quality standards for schemes receiving automatic transfers;
the scheme which a member leaves will be required to identify
the member's pot which is potentially eligible to transfer and
to provide specified information about the pot so that it
can be identified when the member joins the scheme of his new
employer; and
the new employer's scheme will be required to search for
information about dormant pots and if it finds any, it will be
required to inform the member that the pot will be transferred
unless he/she opts out. This has the potential to be a very
significant burden on schemes.
Clearly, it is difficult to assess, at this stage how the
proposal will work in practice as the detail still remains to be
worked out. Broadly though, and unlike the auto-enrolment regime,
the spotlight is on the schemes rather than employers.
There seems, on the face of it, little for employers to do but
this does not mean that employers should not be aware of the
proposals. It is easy to see how a worker moving jobs might become
confused when working out the differences between being
automatically enrolled into an auto enrolment scheme and the
automatic transfer of a dormant pot to a new automatic enrolment
scheme. Clear communication will be essential.
The reason why the Government initially settled on a pot size
maximum limit of £10,000 seems to be that this is generally
considered to be the lowest level at which a person can buy an
annuity on the open market at a competitive rate. The Government
does not want to capture larger pots because it is recognised that
some may contain features which may potentially cause detriment to
members where they are moved between different schemes, such as
surrender penalties.
Finally, the reference to setting quality standards is a telling
indication of the direction of travel for regulation. The proposal
makes specific reference to the Pensions Regulator's draft
code of practice and guidance on providing good member outcomes for
money purchase schemes. We do not know what the standards will look
like, if introduced, but it is plausible that they will be similar
to those standards set out in the Regulator's draft code and
guidance. This is another reason for employers to take care in the
quality of schemes they select for auto-enrolment purposes.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
With the summer holidays drawing to a close, the coming months are set to be busy for many HR practitioners. Below we look at some of the key employment and immigration issues on the HR agenda this autumn:
The Information Commissioner's Office (ICO) has updated its code of practice on subject access requests (SARs) to reflect two important Court of Appeal judgments published earlier this year...
For the first time the Court of Appeal has given guidance on the factors to take into account in order to assess whether a whistleblower's disclosure meets the "public interest" requirement.
An employee's bid to use an objection to a TUPE transfer to gain freedom from his lengthy garden leave clause failed in the recent decision of ICAP Management Services Limited v (1) Dean Berry...
As a working mum, I know how challenging it can be to return to work after a period at home with your baby. As an employment lawyer, I also know the mistakes made by employees...
Employed parents who have lost a child may soon be entitled to take paid bereavement leave. The Parental Bereavement Pay and Leave Bill was introduced into the House of Commons...
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Pensions Legal Update - Spring 2017 (Video)
