DWP to review the regulatory differences between occupational and workplace personal pensions

2 February 2011

The Government realises that it must transform and encourage workplace pension saving or face a flood of pensioner poverty in the next few decades. The ageing population of the United Kingdom combined with the fact that 44% of working age employees are not contributing to a private pension, has led the Government to introduce automatic enrolment from 2012. In preparation for auto-enrolment, the Department for Work and Pensions (“DWP”) has issued a “call for evidence” to help the Government review the regulatory differences between occupational and workplace personal pension schemes.

Occupational and workplace personal pensions have a passing similarity because they perform a similar function. However, they have developed separately to serve the divergent needs of employers and individuals and there are different regulations that some employers may endeavour to exploit to their advantage which could hinder the success of auto-enrolment. The Government is determined to prevent this:

“One concern highlighted by the Making Automatic Enrolment Work Review team was that regulatory differences, particularly in relation to short service refunds and trivial commutation rules, could create regulatory arbitrage. The review team recommended that Government should review as a matter of urgency the scope for regulatory arbitrage between the trust and contract based regulatory environment…The use of short service refund rules is an area where we will take action if it appears that the rules risk the success of the workplace pension reforms.”

“We have already seen evidence in the pensions market of specific products, such as multi-employer Master Trusts, being developed and promoted to employers to take advantage of the short service refund rules. While we do recognise that the rules offer an attractive administrative easement for pension schemes and employers, our concern is that this may lead to large numbers of individuals missing out on building their pension savings”.

A consequence of these regulatory differences is that employees may be dissuaded from saving for their retirement. The DWP state that:

“…we want to make sure that the separate rules and regulations governing workplace personal pensions and occupational pension schemes are consistent with the aims of automatic enrolment. We do not want to see instances of regulatory differences being exploited or adding unnecessary burdens on business. In particular we are interested in views and evidence concerning the use of short service refunds and disclosure of information.”

The DWP have confirmed that any changes they propose or that are proposed to them by the pensions industry in the call for evidence process, should not be unduly complex or a disproportionate burden for employers. Neither should the suggested changes be unaffordable, or not sustainable, thereby creating excessive costs for the Government.

The full text of the call for evidence is available by clicking here >>

The call for evidence will close on 18 April 2011 and the DWP will respond in the autumn, outlining the actions it intends to take.