Previously, DB and DB/DC hybrid schemes were automatically considered to have met their auto-enrolment (AE) quality tests just by being contracted out. However, with the end of contracting-out, there are new tests that employers have to ensure their DB and DB/DC hybrid schemes meet to ensure the schemes are of sufficient quality to be used for AE. Unfortunately, this is likely to mean some extra work to check this.
Employer action for DB Schemes
From 6 April 2016, employers can no longer use the existence of a contracting out certificate as evidence that their scheme satisfies the relevant quality test. The DWP guidance issued in April 2016 states that scheme quality must instead be demonstrated by comparing the scheme against the test standard set out in legislation. What this means in detail is set out in an [accompanying employer’s guide and actuarial guide.]
The guidance covers matters and issues that an employer, or its adviser, must consider when applying the alternative quality requirements. There is also a comment that if the Plan actuary is asked to check whether the test is satisfied then, for these purposes, the Plan actuary must be appointed to advise the employer so the employer can rely on the advice.
The new actuarial report, duly signed, must be kept by the employer for six years as evidence that the scheme meets the quality requirements. The old contracting out certificate should also be kept for six years. The guidance also suggests that the compliance test should be re-run for the employer as part of every actuarial valuation.
Employer action for DB/DC Hybrid Schemes
A hybrid scheme (a scheme that is neither fully a defined benefits nor a defined contribution scheme) must satisfy both the AE quality requirements for a money purchase scheme and the AE requirements for a defined benefit scheme, as set out in the Rules made from time to time by the Secretary of State. The latest such Rules are the Hybrid Schemes Quality Requirements Rules 2016, which apply from 4 July 2016.
The DWP’s April 2016 guide sets out the requirements that the DC Section of the Scheme needs to be assessed against to ensure that it satisfies the AE money purchase requirements.
a) members’ benefits are calculated by reference to factors which include the contributions made to the DC section by, or on behalf of, the member;
b) the contributions in sub-paragraph (a) are converted, in accordance with scheme rules, as soon as reasonably practicable and no later than a month after receipt, into a right to an income for life;
c) the benefits payable to the member under the scheme become payable no later than the member’s state pension age;
d) following the conversion of the benefits in sub-paragraph (a), the amount of the members’ benefits cannot be reduced unless this is at the member’s request;
e) following any actuarial valuation, the trustees or managers have absolute discretion to use any excess funds to increase members’ benefits; and
f) where benefits have been increased using the excess assets referred to in (e), they cannot be reduced except at the member’s request.
Since the AE legislation was drafted in 2008, there have been some changes to the legal definition of what is a money purchase scheme, as well as some general tightening up in the governance standards for money purchase schemes. These changes are reflected in the latest DC AE compliance tests.
If you would like any further advice on any of the above, please contact Penny Cogher or your usual member of the team.