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Government must clarify auto-enrolment "loophole", pensions consultants warn

A "loophole" in the Government's automatic enrolment legislation could see four million workers miss out on pension contributions from their employers until 2017, a pensions consultancy has warned.21 Nov 2012

Lane Clark and Peacock (LCP) said that many employers who would otherwise have had to enrol their workers into a pension scheme from next year would be able to use transitional arrangements to "defer" enrolment until 2017 if they were operating a "hybrid" pension scheme. Hybrid schemes are those which offer both defined contribution (DC) and defined benefit (DB) benefits to members.

DB schemes, which promise a set level of pension once an employee reaches retirement age no matter what happens to the stock market or the value of the pension investment, typically provide more generous benefits than DC schemes, where the final value of an employee's pension 'pot' depends on the performance of their individual contributions. The regulations allow employers operating purely DB schemes to wait until 2017 before automatically enrolling the rest of their workforce into the scheme, as well as employers operating hybrid schemes.

Andy Cheseldine of LCP said that the "policy intention" behind the loophole was to allow employers to wait where scheme members had a choice between DB and DC benefits. However, he said that the legislation had been drafted so broadly that any employer operating a hybrid scheme would be able to defer, even those schemes which only offered DC benefits to new members while continuing to offer DB benefits to existing members.

"This loophole appears to have remained unnoticed until now because of the sheer complexity of the legislation," he said. "We estimate that over 3,000 private sector employers were due to auto-enrol over four million workers in 2013 and the majority of these enrolments could be pushed back to 2017 without any compensatory backdating. We understand that primary legislation will be required to rectify this situation."

The largest employers, such as banks and supermarkets, began automatically enrolling eligible workers into a suitable workplace pension scheme on 1 October this year. Smaller employers are due to follow in a staggered implementation, with 'staging dates' running until April 2017. By the end of 2013, all companies with 500 employees or more will have begun automatic enrolment.

Once the process begins, employers will be legally obliged to make contributions towards the pensions of automatically enrolled workers who do not opt out of the scheme. Between six and nine million of the 11 million people expected to be eligible for auto-enrolment will be new savers or saving more than before, according to Government estimates; while Pensions Minister Steve Webb has described minimum employer contributions as "effectively getting a pay rise".

A spokesperson for the Department of Work and Pensions (DWP) said that the Government was "looking at the issue" raised by LCP.

"Our intention remains that transitional arrangements only apply to employers who automatically enrol their existing workforce into the hybrid or defined benefit element of their pension scheme," the spokesperson said. "In additional, all new members of staff joining these firms after their staging date will be automatically enrolled - and existing staff can still choose to opt in."