The latest thinking is that auto-enrolment will begin on a date set by the government, sometime between October 2012 and April 2014, depending on the size of the employer. After introduction, if a scheme does not meet the postponement criteria, employees will be auto-enrolled on their first day of work, or the date they become eligible (for example their 22nd birthday).
The joining process
The DWP proposes that occupation schemes will have a 14-day ‘joining window’ and ‘information provision window’. This means that after the auto-enrolment date, the employer will have up to 14 days to provide the employee and scheme with the relevant information, but could do on day one if they wish. ‘Active membership’ and the opt-out period commences once these requirements have been met.
For a contract-based scheme the information must be provided to the employee within seven days – to allow for a further seven-day period for the contact to be ‘deemed’. In both cases, active membership commences once these requirements have been fulfilled, and only then can the opt-out period begin.
Many National Association of Pension Funds (NAPF) members have already raised concerns about whether these timescales are too tight, and whether it would be better to take a more flexible approach.
Another concern is around what administration employers actually have to do to achieve active membership. Many employers will want to postpone any administration until later, to avoid the expense of processing the details of people who decide to opt out.
Opt out
The draft regulations state that once information has been provided to an employee, there is then a 30-day opt-out period (so the total process must be completed within 44 days). Again many employers are concerned that this period is too short, and that experience suggests lots of opt out requests will be received after 44 days. Current rules allow occupational schemes to give full refunds for up to two years after enrolment, potentially allowing a much longer opt out period, and the NAPF is already asking the DWP how these rules will work together.
One tricky aspect is the proposal that opt-out forms can only be obtained from the scheme not the employer. The DWP believes that this will reduce the likelihood of employers pressuring employees to opt out of schemes. But it is not obvious what this achieves in an occupational scheme where the difference between the scheme and the employer may not be clear to the employee.
The DWP believes that employees should give completed forms to the employer to ensure payroll can be altered quickly. The employer must then stop deductions immediately, but has seven days to notify the scheme of an opt-out. Another stipulation that might cause problems is that if the employee tries to incorrectly opt out (for example, does not use the right form) the employer must inform the employee his or her opt-out is not valid within five days.
Contributions and refunds
According to the draft regulations, contributions will be calculated from day one and deducted from the first occasion the employee is paid, regardless of whether this is before active membership has commenced, and before the employee has had any chance to opt out. If the employee opts out, refunds must be made by the employer within two pay days or 21 days (whichever is later). The scheme must refund payments to the employer within 21 days of being informed of the opt-out.
A key question is whether contributions need to be vested in this time. Many employers will want to ensure that contributions can remain held in cash until the opt-out period is over.
Postponement
The vast majority of defined benefit schemes, and defined contribution schemes with double the employer contribution (6% employer contribution +5% employee = 11% total) will be able to postpone the auto-enrolment date for a maximum period of 90 days. The regulations will then stipulate that the employer must offer contributions at the same rate for the next 90 days. This is to protect against the theoretical risk that that employees could be enrolled at 11%+ and then have their contributions cut straight back the following day.
The way forward
While the regulations do flesh out the framework of how the DWP expects auto-enrolment to work, they raise more questions than they answer. However, the DWP is doing its best to engage with the NAPF and its members during the consultation, which ends in June. For the NAPF, the goal must be to ensure maximum flexibility for employers with good existing schemes, and to make sure there really are no devils lurking in the detail of the regulations.
Richard Wilson is senior policy adviser at NAPF
KEY points
■ Defined benefit schemes, and defined contribution schemes with 11% contribution rates will be able to defer auto-enrolment for up to 90 days.
■ Contributions must be deducted from payroll as soon as auto-enrolment begins
■ After auto-enrolment, employees have a 30-44-day period to opt out and get a full refund of the contributions they have paid.
