It looks like there will be more paperwork for trustees to do, with the arrival of auto-enrolment warns Lesley Browning, Norton Rose
learly, auto-enrolment is primarily an obligation of employers who employ "eligible jobholders", but there are still a number of issues which trustees will need to consider and agree with employers in advance of the employer’s staging date. HM Revenue & Customs and the Pensions Regulator (TPR) have provided guidance and information which will help trustees, including a short checklist which TPR has prepared. However, most of the available information is directed at employers, not trustees.
The obvious starting point for trustees is to establish the employer’s staging date. Employers need to comply with the auto-enrolment legislation in phases, starting with large employers in October 2012. Staging dates are based on PAYE systems calculated as at 1 April 2012, but trustees will need to take some care, as employers can opt for an earlier staging date and different staging dates may apply for different companies within a group of companies.
If Nest or a new contract based scheme is to be used by the employer for all eligible jobholders, no trustee action will be required.
However, the Association of Consulting Actuaries has estimated that 73% of employers will opt to use an existing scheme. If an existing scheme is to be used, there will undoubtedly be a role for trustees in considering rule changes for both new and existing members (see Box). The most obvious question is whether the existing benefit structure will apply or whether the employer will opt to add a new "auto-enrolment" category. Some employers may wish the auto-enrolment category to operate as a "foundation" scheme, so that employees graduate to the more generous category after a certain period of service. Trustees will have to consider the provisions of the relevant power of amendment, notably how it is exercised (for example, by way of a deed or resolution) and whether trustee consent to changes will be required. It may also be necessary for the employer to consult affected employees on any changes (for example, changes to contribution rates) and there will be a role for trustees in ensuring that the consultation is carried out in accordance with the legislative requirements.
The scheme chosen by the employer to satisfy its auto-enrolment obligations needs to comply with the:
These protections have been introduced to ensure that there are no barriers to auto-enrolment.
This is likely to result in a lot of additional paperwork for trustees, as the National Association of Pension Funds (NAPF) has estimated that one third of people who become subject to auto-enrolment will decide to opt out.
Trustees will also need to be satisfied that the qualifying criteria are met, namely that the scheme is an occupational or personal pension scheme, that it is tax registered and that it satisfies the minimum contribution criteria, according to the type of scheme. This in itself is quite complicated, given that the pensionable pay definition used in the auto-enrolment legislation may not dovetail with any existing schemes’ definitions of pensionable pay. It seems likely that most employers will wish to designate defined contribution (DC) schemes. To qualify, such a scheme must meet one of three minimum contribution requirements. Different tests apply for defined benefit (DB) and hybrid schemes.
Trustees and employers will need to consider appropriate communications to existing and new members, bearing in mind that different types of eligible jobholders may require different types of communication; for example, the membership profile may dictate that email and internet communications are not appropriate. The Department for Work and Pensions has prepared template communications which may help here. Trustees will want to work with employers to check communications and will also need to consider changes to booklets and other scheme materials. The one communication that purely concerns trustees is the opt out form, which the employer is not able to send out itself.
Trustees will no longer be able to request the completion of an application form, thus they need to consider how they will obtain the information they need, for example in relation to marital status and dependants, and evidence of health if life cover is provided under the scheme’s rules. A new process for the completion of statement of wish forms for life cover will also be required and the trustees will need to create a new opt out form.
There are also a number of other issues that trustees need to consider. The first important issue for trustees of DB schemes is whether there is any impact on the employer covenant. At first blush this may look like an odd question but, given that it has recently been estimated that 15% of FTSE 100 companies with DC schemes have less than 20% take up among employees who are eligible to join, for many companies auto-enrolment may result in significantly increased pension costs.
For DC schemes, thought needs to be given to the default investment fund. Trustees will need to consider whether the existing fund is suitable and to comply with the TPR guidance, including reviewing the default fund regularly and comparing it to that offered by other providers. These may not be issues which the trustees consider regularly at present. Trustees should also have discussions with the scheme administrators to check whether the administration systems will be able to cope with potentially significantly increased contributions and the changes in timing of contributions. For some trustees, the processing of opt out forms will be a real headache, given that the refunds need to be processed within one month. That in itself raises questions as to whether the first staging date contributions ought to be held in cash to facilitate the processing of opt outs. Trustees also need to take advice as to whether these changes will result in increased administration costs.
We would recommend that trustees have an early dialogue with the employer and we endorse TPR’s suggestion that an employer/trustee working group should be established to agree a timetable and ensure that the process is planned well. Trustees should consider TPR’s online guidance and the trustee training module and should also be prepared to assist the employer with communications and making changes to existing schemes to facilitate auto-enrolment.
In conclusion, auto-enrolment may result in more challenges for trustees than immediately meets the eye.
Typical scheme rules which may need amendment
The following scheme rules will need to be looked at in the majority of pension arrangements:
Lesley Browning is a pensions partner based in the London office of Norton Rose; email@example.com
Author: Lesley BrowningLesley Browning is a pensions partner based in the London office of Norton Rose; firstname.lastname@example.org