Cooling off period and raised salary threshold concessions to employers on auto-enrolment

The auto-enrolment salary threshold should be raised to £7,475 and employers should not have to sign up staff for three months, the review into auto-enrolment has recommended.

The review, Making Automatic Enrolment Work, carried out by Paul Johnson of Frontier Economics and Institute for Fiscal Studies, David Yeandle of the Engineering Employers’ Federation and Adrian Boulding of Legal & General, also calls for Nest to go ahead.

The review calls for the government to legislate now so the cap on contributions is removed from 2017. It also calls for an urgent review of the potential for regulatory arbitrage between trust and contract-based pensions.

Johnson says: “In the long run we would look to see people move from job to job and take their pension with them. Providers want this too so there are less small pots. We would like people to be able to move money to Nest from other pensions, but not until 2017, as otherwise that would affect behaviour in Nest’s early years.”

Review recommendations

  • Communications to micro employers from The Pensions Regulator should flag as strongly as possible that the design of Nest specifically takes account of their needs, and should support easy access to Nest
  • DWP should look to provide maximum possible comfort to employers that they will not be held liable for their scheme choice, particularly if they opt for Nest or a stakeholder scheme to fulfill their new duties.
  • There should be a simpler system by which employers can certify that their defined contribution pension scheme meets the required contribution levels.
  • There should be an optional “waiting period” of up to three months before an employee needs to be automatically enrolled into a workplace pension. Workers can, however, opt in during the waiting period. The largest employers, who are scheduled to be brought into the reforms in October and November 2012 should be allowed to automatically enrol ahead of the planned start date of October 2012, and as early as July 2012, if they wish to do so.
  • Employers should be given flexibility around the date they re-enrol employees who have previously opted out by allowing a six month window for this activity to take place. NEST should go ahead as planned to support successful implementation of automatic enrolment.
  • Legislation should make clear that Nest’s “contribution cap” will be removed in 2017.
  • Government and regulators should review as a matter of some urgency how to ensure that it is more straightforward for people to move their pension pot with them as they move employer, so that, by the time of the 2017 review, the more general issue of pension transfers has been addressed and Nest is able to receive transfers in and pay transfers out. Government should review as a matter of some urgency the scope for regulatory arbitrage between the trust and contract based regulatory environments.
  • Government should continue with work to review whether the existing regulatory regime for the provision of defined contribution workplace pensions remains appropriate in the post automatic enrolment world.
  • Government should ensure there are effective communications to individuals, employers (and especially smaller employers) and the pension industry in the lead up to and during the implementation of the reforms.