The Pensions Faculty


Issue 49 April 2014


The magazine of The Pensions Faculty produced in association with Hymans Robertson LLP


New DB quality requirements proposed


The Government has introduced amendments to the Pensions Bill 2014 that will give the Secretary of State the power to introduce


alternative quality requirements for DB schemes that are used for AE


P


ension schemes used by an employer to satisfy their auto-enrolment (AE) duties must meet the quality requirements set out in legislation. Currently, the minimum quality requirement for a money purchase scheme is that the employer contributes at least three per cent of the jobholder’s qualifying earnings, and that a total contribution of at least eight per cent of the jobholder’s qualifying earnings is made to the scheme. For a defined benefit (DB) scheme to meet the quality requirement the jobholder in question must be in contracted-out


employment or the scheme must meet the ‘test scheme standard’. In March 2013, the Government asked,


as part of a consultation exercise, whether there was a simpler alternative to the test scheme standard, which all DB schemes used for AE will otherwise have to meet when contracting-out is abolished in 2016. As a result of responses received, the Government has proposed new alternative quality requirements for DB schemes (to be available alongside the existing quality requirements). The alternatives are:


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l to allow DB schemes of a prescribed description to satisfy the money purchase quality requirement, and l to introduce two new tests based on the cost of funding future accruals – one to apply at scheme level, and the other at member level.


It is likely that the first alternative above will apply to DB schemes that essentially have a defined contribution structure, but which fail to meet the new statutory money purchase definition, for example due to the presence of a guarantee or underpin. In order to meet one of the alternatives


...single source of reference for public service schemes...


based upon funding cost, the scheme’s cost of accrual must be at least a prescribed percentage of members’ earnings. The scheme must either meet the test in aggregate (at the level of the whole scheme), or on an individual level for at least ninety per cent of the members affected. (It is expected that the minimum costs will be different for the aggregate and individual- member versions of the test.) Many of the specifics of the tests, such as the definition of earnings used, and how to establish whether the alternative standard is met, will be set in regulations by the Government following advice from the Government Actuary and a public consultation exercise. However, the prescribed percentage cost cannot be less than eight per cent (the minimum total contribution for a qualifying money purchase scheme). The Government has not given a timescale for the introduction of the new alternative requirements.

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