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Back to the drawing board

News that the DWP is reworking its draft legislation on auto-enrolment of DC pensions into the Nest scheme has been welcomed but, reports Lee Jones, the new solution will only be workable if the Government plays it simple this time

The Department for Work and Pensions revealed it has scrapped draft regulations to allow occupational pension schemes exemption from the National Employment Savings Trust (Nest) and has gone back to the drawing board to come up with a workable solution.

Last week, the DWP published its final regulations on the timescale for auto-enrolment into Nest.

However, the announcement did not include the details for the rules that would allow employers to self-certify that their existing pension scheme met the minimum standard.

A DWP spokesman says: “We had some strong reactions saying that certification regulations simply were not going to work. So we have bulldozed those rules out of the legislation and now we are going to go away and start again to see what we can do to better get the job done.”

The industry is happy the Government is reviewing regulation on automatic enrolment of DC schemes but many are worried it will not go far enough in making it as simple as possible for employers to certify their existing scheme, ultimately putting employee contributions at risk.

Initially, the DWP proposed a system whereby schemes must contribute an equivalent of 8 per cent of qualifying earnings within the band of £5,035 and £33,540. It required employers to individually test at-risk groups of workers each year to prevent repeat failure. If failures were discovered, every individual must be tested to ensure the scheme works.

Aegon head of pensions development Rachel Vahey says these plans were “nonsensical” and did not translate into the real world.

She says: “I am delighted the DWP is looking at these rules again. The initial regulation said employers had to assess their scheme each year and if you found that one or two people are being failed, then you have to carry out checks for everyone. This would trigger a massive scale of checks for every employee.”

Standard Life senior pensions policy manager Andy Tully believes the plan went against the whole ethos of self-certification which is to make it “as simple and straightforward as possible for an employer”.

Tully says the industry was concerned that if these “horrendously complicated” rules did make it into legislation, many employers would have opted to level down to the legislative bare minimum of Nest instead.

He says: “Employers could have potentially decided to reduce contributions for everyone as it would have been easier. That is the last thing we want and I hope that is the last thing the Government wants.”

Vahey says: “If employers did level down to band-earning definitions, it will be the lower-paid, predominantly female employees, who will be hit hardest and that is ironic because those are the ones the reforms are aimed at the people who could not afford or did not want to pay into a pension.”

As a result of such concerns, the Government has invited stakeholders and the pensions industry to help put together a new set of rules.
National Association of Pension Funds senior policy adviser Richard Wilson says he wants the DWP to remember that this exercise is an easement and was never supposed to create another layer of regulation for DC schemes.

He says: “We want employers to be able to just look at a scheme and be able to say it is a good scheme and the employees in it will do better than they would with Nest. One or two people might miss out on something but that is not a reason for the scheme to rewrite all its rules.”

Tully agrees and adds that the DWP must consider the greater good of self-certification: “The Govern-ment wanted to try and make absolutely sure that no individual could ever be worse off. That might protect the one person who would have been worse off but because you are putting all these rules in place, the other 99 would miss out.”

But for that to happen Vahey says the DWP may have to rewrite the primary legislation. “The legislation puts checks on the individual, not on the scheme, and, in the real world, employers do not work like that.

“We need a broad-brush approach to enable the vast majority of people carry on getting the pension contributions they are currently receiving.”

Wilson says the key is to rely on employers’ ability to serve their employees. “There needs to be a simplification and more reliance on employers’ good judgement. Any rules must also use the processes employers are used to.”

Richard Jacobs Pension and Trustee Services managing director Richard Jacobs says: “There is an easy solution to all this if someone wants to carry their own scheme and have an alternative to Nest, then so be it. Simple solutions seem to be anathema to pension regulation.”

Vahey agrees that more trust should be put in existing schemes and the existing provisions offered by good employers: “The Government
should not forget that millions of people in the UK have a good pension. Those who do get a decent income should not be punished and employers should not be punished for doing the right thing.”

But Jacobs warns it might be too late as he is already seeing examples of businesses “dumbing down” their schemes to avoid the confusion of the new legislation. “The more complicated the rules, the easier it will be for employers to dumb down.”

The pension industry is optimistic that the Government’s decision to scrap the unpopular rules is an indicator that it is ready to listen. Talks
have already begun between the DWP, stakeholders and experts but no date has been set for the launch of the new rules.

Wilson is confident things will be easier this time round because the rest of the legislation is in place: “We now have a clear idea of what the other option is so it might be easier to see the problems and work out what certification needs to achieve.”

Tully is also hopeful that a workable solution can be found. “It is a good sign that the DWP has not rushed through some ill thought-out legislation. There are signs Government is willing to get it right and there are certainly signs of willingness from the industry.”

Even if the current political masters at the DWP are not prepared to compromise on the standards for exemptions for existing schemes, the Conservatives have said that fast-tracking auto-enrolment into existing schemes and simplifying the exemption tests so employers can continue to provide their own schemes after 2012 is a priority.

Conservative Work and Pension Shadow Secretary Nigel Waterson says: “For us, the prize is to auto-enrol people into existing schemes.”

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