What is this?
In March 2013 the Government issued a consultation paper “Technical Changes to Automatic Enrolment: Public consultation on draft regulations and other proposed changes”. This proposed a clause in the Pensions Bill to provide regulatory powers for additional exclusions from the current scope of automatic enrolment, seeking opinion on four specific scenarios. The government has now published its response as follows:
Scenario 1: Workers who have tax protected status for existing pension savings
There is a strong case to exclude these workers from the employer duties, given that failure to opt-out would incur significant tax penalties. However, this would be reliant upon the employer having prior knowledge of such protection otherwise the worker would need to opt-out under the existing process.
There is less evidence to support exclusion of those approaching the Lifetime Allowance* but who have not yet applied for tax protection. These individuals would also need to opt-out.
It should be noted that contractual enrolment (where the worker is enrolled through the contract of employment before the automatic enrolment date) is outside this legal framework. These workers do not have a right to opt-out and will lose any tax protected status.
Scenario 2: Workers who are about to leave employment
There is currently a requirement to automatically enrol individuals who are about to leave, and to enrol those who actually leave within the joining window**. The Government agrees that this provides a seemingly nugatory administrative burden, but it needs to carefully consider the practical implications of any exclusion so that it is simple to operate and remains fair to the worker. Those who are at risk of redundancy will not be considered for any such exclusion.
Scenario 3: Workers who have provided notice of retirement
There is a case to exclude those who have provided notice of retirement, where the duty to automatically enrol or re-enrol falls within this period. However, the Government does not agree that there is a case to exclude those who have either reached maximum accrual in their employer’s scheme nor those who are already receiving retirement benefits from other schemes, as this would provide an unreasonable administrative burden on employers.
Scenario 4: Workers who have recently cancelled membership following contractual enrolment
Any workers who are contractually enrolled and then cancel or cease active membership to a pension scheme will need to be automatically enrolled when they become ‘eligible jobholders’ for the first time, even if this happens soon after. The Government agrees that there is limited value in forcing employers to re-enrol such workers within a short period of time, and has previously sought to address this issue.
Once the Pensions Bill has received Royal Assent the Government aims to develop proposals for these exclusions and will request further consultation.
The Government also commented on additional scenarios raised by respondents to the consultation, where it does not intend to take any further action:
Workers absent due to serious or terminal illness may not be in a position to complete the opt-out process. Whilst the Government recognises the sensitive nature and practical problems of this issue, it does not feel that providing an exception would be appropriate given the administrative challenges it would present to employers and the issue of survivors’ rights.
There are regulatory barriers for providers of contract-based pension schemes, such as Group Personal Pensions, that prevent the automatic enrolment of non-UK residents. Providers must have the necessary regulatory permissions to operate in the country in which the worker resides, and such contracts may otherwise be deemed illegal. In addition, non-UK taxpayers are not entitled to income tax relief on their personal contributions, which requires providers to implement additional administration systems.
The Government has considered and ruled out an exception for workers who are deemed to reside outside the UK. This is because employers may use an occupational scheme to meet their duties. To permit an exception would create regulatory arbitrage and may otherwise exclude workers who are in scope for automatic enrolment.
It does not intend to make any further provisions for non-UK taxpayers, given that these individuals are unlikely to be defined as UK workers under The Regulation, and that there are already provisions for members of non-EEA pension schemes.
A number of consultation respondents highlighted specific examples of occupations where special tax arrangements existed or where individuals were not dependent upon the employer for a livelihood or an income in retirement. Examples included examiners, non-executive directors, councillors, students, high-earners and temporary or casual staff.
The Government concluded that in many of these cases the existing regulations provided sufficient flexibility, and that exclusion would undermine the policy and jeopardise the reform consensus. However, the Government appreciates the complexity and burden of the information requirements under The Regulations and proposes to review these.
Corporate and group restructuring
It was suggested that workers transferred between employers of the same group should be treated as having continuous employment, in order to minimise the administration burden. The Government does not consider is appropriate to consider this issue as a potential exception.
Thomsons will monitor developments to the policy and will publish further guidance should the Government implement any additional exclusions to the automatic-enrolment duty. In the meantime, employers should continue to ensure that their policies and processes comply with the existing regulations.
* The Lifetime Allowance is the maximum amount a worker may accrue in their pension, £1.25m in 2014/15
** The joining window is the one-month period from the automatic-enrolment date in which membership must be established, extending to 6 weeks from 6th April 2014