A cornerstone of the Government’s new pensions policy is already showing up serious flaws. Remember this legislation was borne off the back of a creaking welfare state, people living much longer and a need to enforce individual pension provision.
Starting off with the largest employers October 2012 was the beginning of a process where eligible employees would be automatically enrolled into a workplace pension scheme. However, a loophole could leave a whole section of the working community high and dry. It’s estimated more than four million employees could be effected.
The issue centres on some 3,000 private sector employers who already have a scheme offering both a defined benefit (final salary related) and defined contribution option. More often than not the defined benefit schemes are closed to new members and all new and more recent employees are directed to the less generous defined contribution scheme. The long and short of it is that employers who operate such “hybrid” group arrangements and who are due to enrol staff into schemes in 2013 will not have to do so unless the Government introduce urgent corrective legislation.
What does this mean for employees affected? Basically employers working to the letter of the law could postpone auto-enrolment until 2017, save substantial sums and defer the impact of auto-enrolment for up to four years. For an employee earning £40,000 in a scheme with an employer contribution of 5% this could amount to a loss of £8,000.
It’s a loophole that needs fixed quickly by the Department for Work and Pensions.
by Tom Calvert