If the rules allow employers to recoup pension contributions from early leavers, then pension providers should furnish them with ways to do it.
Pensions minister Steve Webb says he wants to send a clear message to employers he does not want to see people ending up with no pension because they keep getting refunds. Surely, the only clear message that companies will understand is a change in the law.
At present, some employers enjoy the balance-sheet benefit of refund of contributions from staff who leave within two years. They do not get it back in their hands but it can be allocated to the contributions due to another employee within the scheme, so this flexibility is a cash benefit in real terms.
It seems inconceivable that those schemes that are already established on an occupational basis should be allowed to continue to do so while newly set up schemes are “encouraged” not to. If you have two identical companies but one has a trust-based scheme and one a contract-based scheme, then the former has a clear commercial advantage. Fine, the trustee duties may increase costs to the provider, even through the economies of scale of a single master trust. But providers can, should and will design products that will cut employers’ contribution bill after auto-enrolment as much as possible.
The Making Auto-enrolment Work review headed by Paul Johnson of the Institute of Fiscal Studies looked at regulatory arbitrage between trust and contract and decided it was such a big issue it needed a review all of its own but did recommend the minister to address the issue as a matter of urgency.
At the time of publication of that report, Johnson thought it questionable there would be sufficient time to bring in the legal changes necessary to level the playing field between the two regulatory structures.
But with several firms developing new or existing propositions to target the area, closing the loophole is imperative.
It has always been curious there should even be two different regimes for workplace pensions, with such different rules. Unravelling this difference may cause problems for existing occupational schemes, who will balk at the prospect of having to maintain records for thousands of staff with short service. But then isn’t this what contract-based schemes are being asked to do?
One solution is that trust-based schemes could be allowed to roll contributions of those who leave within two years into Nest. If that happens, the same should apply to contract-based schemes. Providers are already worried that new members of existing schemes are likely to be low value savers, bringing schemes’ profitability down.
It will be interesting to find out what Tim Jones at Pada thinks of the problem. On the one hand, he does not want his potential market of recalcitrant employers hovered up into master trust schemes so employers can cut their contribution bills. On the other hand, he probably also does not want every single short-service employee currently looked after by existing schemes.
Johnson suggested in November that one option for the Government is to wait and see how big an issue this turns out to be. This is the easy option in the short term, especially as quite a bit of legislation needs to be passed to enact the necessary changes, I am told. But the head in sand approach will only end up costing the pension industry money, time, resources and effort.
The matter needs urgent resolution because, as we speak, all group pension providers are either working on their mass-market trust-based propositions or considering if they need to follow suit. At the same time, corporate intermediaries are having to consider what they tell their clients.
The hunt is on for a workable solution.
John Greenwood is editor of Corporate Adviser