DWP seeks input on AE requirements for DB and hybrid schemes
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The Department for Work and Pensions is seeking views on its alternative quality requirements for defined benefit and hybrid schemes to act as auto-enrolment schemes.
It is looking to understand if these are continuing to deliver the intended simplifications and flexibility for sponsoring employers and pension schemes that are unable to use the test scheme standards, and if there are any issues or unintended consequences employers and schemes want to highlight. The department is also trying to understand who is carrying out the tests in practice, the employer or its advisers.
With the introduction of auto-enrolment, employers who only provide a defined benefit or a hybrid scheme had to show that this complies with the necessary requirements, including the minimum contributions.
Two alternative tests to the test scheme standard were introduced in 2015:
a test enabling schemes to use the money purchase quality requirements – based on meeting the existing quality requirements for defined contribution schemes, for example, a minimum contribution equivalent to 8% of qualifying earnings
a ‘cost of accruals’ test – based on the cost to the scheme of the future accrual of active member benefits, showing that the cost of providing benefits requires at least the minimum levels of contribution rates prescribed in legislation.
“The policy objective behind both of the alternative quality tests is to provide a simpler mechanism for employers and their advisers to determine if defined benefit or hybrid schemes meet the quality requirements for automatic enrolment,” the department noted. It said that “the alternative tests are of particular help to employers with formerly contracted-out schemes”, which from April 2016 onwards would otherwise have needed to ensure that their schemes met the more complex TSS.
However, there have been unintended problems for some DB and hybrid schemes where members reduced their contributions. Employers are not allowed to exclude members who change their contributions to below the minimum rate, and “this creates a possible risk that a scheme fails to meet the cost of accruals test,” the DWP noted.
The issue was already raised by industry in 2017, when the DWP chose not to alter its requirements as it “wished to avoid adding layers of complexity to the alternative tests, particularly as they seemed to be working for the majority of schemes” and because it felt that this issue would become less acute given the trend to DC.
“We acknowledge, however, that this might continue to be a residual issue for some schemes and sponsoring employers and we therefore invite stakeholders to provide any examples of issues they still face at the current time in this area,” it added.