Loophole means 4 million could miss out on 2013 auto-enrolment

Three thousand employers could avoid having to automatically enrol 4 million staff into pension schemes next year because of a loophole in the Pensions Act.

Employees could miss out on employer pension contributions until 2017 because what is believed to be a drafting error around the definition of a hybrid scheme that qualifies for postponement, it has emerged.

Last month saw the start of a five-year process of automatically enrolling all eligible employees into workplace pensions.

The problem stems around employers offering hybrid schemes that offer both defined benefit and defined contribution (schemes. Because DB schemes are typically so much more generous than DC ones, the automatic enrolment regulations allow employers offering them to postpone auto-enrolment until 2017. The Pensions Act also allows schemes that are hybrids offering employees both DB and DC to defer automatically enrolling staff until 2017.

Experts believe the policy intention was always understood to be that hybrid DB/DC schemes would only be exempt if employees could choose which part of the scheme they wanted to opt for, for example if the DC was more attractive to them for some reason.

But the definition of hybrid scheme has been defined more broadly in the Act, meaning those whose DB section is closed to new entrants can also postpone auto-enrolment until 2017. This means an employer with a DB scheme that has been closed to new members for years, and has an open DC section in the same scheme does not have to automatically enrol staff eligible to join that scheme.

Staff not already eligible to join the DC section of such a scheme will have to be automatically enrolled as expected.

LCP, which identified the drafting error, believes it can only be corrected through primary legislation. Correcting it would therefore require the invoking of emergency powers to fast-track legislation through Parliament.

Corporate pensions consultants face a dilemma as to how to respond to the revelation. Employers could save considerable sums of money by applying the letter of the law and deferring auto-enrolment for their staff for four years, although they could face reputational risk for doing so.

Andy Cheseldine of LCP said: “This loophole appears to have remained unnoticed until now because of the sheer complexity of the legislation.  We estimate that over 3,000 private sector employers were due to auto-enrol over 4 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.

“We are advising our clients to keep a close eye on the outcome of this issue, so that they can carefully consider the impact on their auto-enrolment plans”

A spokesperson for the Department for Work and Pensions said: “All new members of staff joining firms with defined benefit or hybrid pension schemes after the staging date will be automatically enrolled, and other members of staff can still choose to opt in regardless of the transitional period.”

Gregg McClymont, Labour pensions shadow minister said: “The Department for Work and Pensions needs to clarify whether this is the case. If LCP are right then employees could lose out on significant contributions to their pensions from employers and the state.”