PENSIONS INSIGHT
Ceasing active membership
Jamie Costello, co-founder of Paycircle, reveals a strange feature of AE
I _ suspect a lot of people in the payroll .. world are a tad bored of automatic enrolment (AE) by now. In recent years an endless amount has been written about the new workplace pension and its noble aims — above all, to shield us from the ticking pensions time bomb. Just as much has been written about its impact on businesses, their employees and the companies that support them. Now, given that payroll and AE are closely entwined, most of you will almost certainly have a decent idea of what’s going on and what companies are obliged to do under the new workplace pension rules. But there’s a very grey area of AE that even payroll specialists like yourselves may know less about, but one that is potentially vital to your due diligence on pension schemes — as well as being a general ‘good-to-know’. We certainly knew nothing about it until we started developing our own payroll and AE platform; it’s called ‘ceasing active membership’. In the simplest terms possible, ceasing active membership is the facility within AE that enables employees who are opted in to a pension scheme to choose to stop making payments (whether temporarily or permanently) once the official opt-out period has ended. The Pension Regulator (TPR) explains it as follows: “A jobholder’s right to choose to opt out expires at the end of the opt-out period. If they want to leave the scheme after this, they can cease active membership in accordance with the scheme rules.” Now the words ‘in accordance with the scheme rules’ is where it starts to get interesting. Essentially, what TPR is saying is that each individual pension scheme can decide its own position on ceasing active membership. For example, research we carried out
found that under some schemes the employer’s approval is required before someone can stop making payments. Other schemes, meanwhile, appeared to not want to allow people to cease contributions full stop. In contrast, others – and the government-approved workplace pension scheme National Employment Savings Trust (NEST) is an example – appear to allow employees to cease making payments very easily with minimal input from the employer. According to the NEST website, the employer is simply informed after the event: “You can take a break from paying contributions at any time if you want to. You just need to log into your online account, go to ‘Contributions’ and then ‘Contributions made by your employer’. Then click on the button ‘Stop contributions’. We’ll let your employer know that you want to stop making contributions so that they can stop taking money from your pay.” ...each individual pension scheme can decide its own position... There’s no doubt that many businesses, along with the payroll specialists supporting them, will want to know whether the scheme they are about to sign up to (or already belong to): ● allows employees who have ‘opted in’ to stop making payments, temporarily or permanently, and ● requires them to give their permission for an employee to stop contributions or lets the employee to decide themselves. After all, if certain pension schemes do not allow payment holidays could this make the companies signed up to them
less attractive to prospective employees, who may be attracted by the ability to take a break from payments if they are in a tight spot financially? Likewise, certain employers may want to retain control over the ability of their employees to stop making payments when they have opted in; but with some schemes such as NEST this doesn’t appear to be an option. In short, payroll specialists may want to ask any existing or prospective pension scheme about its approach to payment holidays and ceasing active membership — because there really is very little clarity on this area of AE, despite the fact we are several years into the great roll-out. There’s another angle to all this, too: the potential for unscrupulous employers to use the ability of employees to cease active membership as a way to dodge their own financial obligations under AE. The reason for this is that none of the formal safeguards and protections that are in place for employees when choosing to opt out apply if they choose to cease active membership; in other words, rather than be required to go direct to their pension scheme or complete a detailed form through their employer, with certain pension schemes employees can simply inform their employer that they wish to ‘take a break’ or ‘payment holiday’. For companies keen to avoid the extra cost of paying employer contributions, why try to convince them otherwise? And there’s more; if an employee chooses to opt out, they are automatically opted in again after three years. But this protection is effectively overridden when simply ceasing active membership. In other words, it is easier for people to stop saving for their retirement indefinitely if they remain opted in but simply take a permanent contribution holiday — undermining the whole idea of AE. n
| Professional in Payroll, Pensions and Reward | December 2016/January 2017 | Issue 26 32
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