Consultation outcome

Automatic enrolment: alternative quality requirements for defined benefit and hybrid schemes being used as a workplace pension

Updated 25 February 2021

1. Why are we carrying out these reviews?

The Secretary of State is required to review the regulations made under powers in the Pensions Act 2008 which introduced the alternative quality requirements for pension schemes being used for automatic enrolment into workplace pensions. There are two statutory reviews set out in the legislation which must take place at no more than 3-yearly intervals ^{[footnote 1]} and the last review was carried out in 2017.

Regulations made under section 23A cover the alternative quality requirement for defined benefit pension schemes and defined benefit sections of hybrid schemes (section 24(1)(b)). The legislation provides for a simpler alternative test that schemes and employers sponsoring defined benefit schemes can use to demonstrate that such a scheme is suitable to be used for automatic enrolment by meeting the relevant minimum quality requirements.

The findings of this review are set out in section 4.

Section 28(2C) of the Pensions Act 2008 requires a review to be carried out into whether the test in subsection (2A) continues to be satisfied. The schemes to which section 28 applies are set out in sub-section (3), (3A) and (3B) of section 28 and cover money purchase schemes; personal pension schemes; hybrid schemes; and defined benefit schemes of a description prescribed under section 23A(1)(a).

The findings of this review are set out in section 5.

2. Background to the review of alternative quality requirements for defined benefit pension schemes

Automatic enrolment into workplace pensions was introduced in 2012 to enable more people to save for their retirement and to make retirement saving the norm for most people in work. The law requires employers to enrol all their eligible ^{[footnote 2]} workers into a qualifying workplace pension scheme and pay pension contributions.

Employers who choose to use a defined benefit or hybrid pension scheme to meet their automatic enrolment duties must ensure their scheme meets the minimum quality requirements ^{[footnote 3]} set out in the Pensions Act 2008 and the accompanying secondary ^{[footnote 4]} legislation.

Up until 6 April 2016 a defined benefit scheme with its main administration in the UK could meet the quality requirements for a workplace pension scheme by:

• being contracted out of the State Second Pension (also known as the Additional State Pension)

• or meeting the test scheme standard (TSS) provided for in legislation and statutory guidance ^{[footnote 5]} which allow defined benefit schemes to demonstrate they meet the minimum necessary standard

The ‘test scheme’ is a hypothetical defined benefit scheme and, in simple terms, a scheme satisfies the TSS if it provides pension benefits broadly equivalent to those of the ‘test scheme’. Following the abolition of contracting-out (on 6 April 2016) only those defined benefit schemes that satisfy the TSS in relation to all relevant jobholders ^{[footnote 6]} could be used as a qualifying workplace pension scheme. The TSS remains an option for all employers.

In straightforward cases, The Department for Work and Pensions (DWP) guidance sets out how employers can certify that their scheme meets the TSS. In more complex cases, the scheme actuary will need to certify the scheme.

In a public consultation in 2013 ^{[footnote 7]} (followed by a further consultation in 2014 ^{[footnote 8]}), DWP invited views on whether there was a less onerous way for defined benefit schemes to demonstrate the quality requirement for the purposes of automatic enrolment. The majority of respondents expressed the view that the TSS was unnecessarily complex and employers would benefit from the flexibility to use an alternative, simpler test.

Consequently, the framework for alternative quality requirement tests for defined benefit or hybrid schemes was introduced through the Pensions Act 2014 (which inserted section 23A into the Pensions Act 2008). Details of the operation of the alternative quality requirement tests are set out in regulations (made under section 23A(1)). ^{[footnote 9]}

The policy objective behind both of the alternative quality tests is to provide a simpler mechanism for employers and their advisers to determine if defined benefit or hybrid schemes meet the quality requirements for automatic enrolment. The alternative tests are of particular help to employers with formerly contracted-out schemes which would otherwise need to ensure that their schemes met the TSS.

3. The alternative quality requirements

Since 1 April 2015, there have been two alternative tests of scheme quality available to employers offering defined benefit schemes or hybrid schemes to meet their automatic enrolment duties:

Test one: A test ^{[footnote 10]} enabling schemes, which meet prescribed requirements, to use the money purchase quality requirements – based on meeting the existing quality requirements for defined contribution schemes, i.e. a minimum contribution equivalent to 8% of qualifying earnings (Section 20 of the Pensions Act 2008).

Test two: A ‘cost of accruals’ test ^{[footnote 11]} – based on the cost to the scheme of the future accrual of active member benefits.

Test one

This is a test enabling schemes which meet prescribed requirements to use the money purchase quality requirements.

In response to feedback from a public consultation in 2014, a test was introduced whereby a defined benefit scheme will be able to use the money purchase quality requirement for defined contribution schemes (Section 20 of the Pensions Act 2008).

To determine whether the scheme may apply this test, there are a number of conditions that must be satisfied:

(a) members’ benefits are calculated by reference to factors which include the contributions made to the scheme 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 (b), 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.

Test two

This is the cost of accruals test. The cost of accruals test is based on the cost to the scheme of the future accrual of active member benefits. The test is normally applied at scheme-level and, broadly speaking, a defined benefit scheme (or defined benefit elements of a hybrid scheme) meets the quality requirement for automatic enrolment if “the cost of providing the benefits accruing for, or in respect of, the relevant members over a relevant period would require contributions to be made of a total amount equal to at least a prescribed percentage of the members’ total relevant earnings over that period”. In other words, the cost of providing benefits would at least require the minimum levels of contribution rates prescribed in legislation.

Prescribed percentages in relation to members’ earnings are set at a level that broadly represents the cost of providing the benefits under the TSS. To maintain the existing quality standards for schemes, section 23A of the Pensions Act 2008 provides that the percentage prescribed in regulations cannot be below the 8% total contribution rate required for a qualifying defined contribution scheme.

The cost of accruals test generally applies at a scheme-level. However, where there is material difference in the cost of providing benefits for different groups, the test is applied at a benefit scale level.

4. The 2020 Reviews: Review of Alternative Quality Requirements for defined benefit and hybrid schemes (Pensions Act 2008, Section 23A)

The review process fulfils the requirement set out in legislation to periodically reconfirm that the Government’s policy intentions with respect to the alternative quality requirements are being achieved, i.e. to deliver broad administrative easement for the majority of pension schemes that would otherwise have to fall back on the TSS.

DWP carried out a call for evidence in October 2020 ^{[footnote 12]} to canvass the views of interested schemes, their sponsoring employers and pension professionals about the effectiveness of the alternative quality tests, and whether issues have arisen that would make this deregulatory easement ineffective for schemes that choose to make use of it.

We received responses from 6 organisations with an interest in this aspect of the automatic enrolment framework. In addition, we had a single representation from a member of the public which raised matters unrelated to the triennial review. Names of the organisations can be found at the end of this document.

To what extent have policy objectives been achieved?

The call for evidence asked whether or not the alternative tests were continuing to deliver, in broad terms, a simplified mechanism for demonstrating a pension scheme met the quality requirements. Overall, respondents said that alternative tests continue to provide a more straightforward option for large numbers of schemes which would otherwise have to use the TSS, allowing them to demonstrate suitability to be used as an automatic enrolment scheme.

The evidence gathered for the statutory review confirms, in broad terms, that the original objective of the alternative quality requirements to provide simplified quality tests which cater for the majority of defined benefit and hybrid pension schemes is being met.

Extracts from call for evidence responses:

The cost of accruals tests were very welcome and are not proving to be problematic, except with a handful of employers.

Association of Consulting Actuaries

The cost of accruals test has proved to be an exceptionally welcome alternative to the application of the test scheme standard.

Lane Clark & Peacock LLP

Yes. The main use of this test is as a simpler way to prove that the quality requirement is met.

Society of Pension Professionals

Definitions of pensionable pay

Several respondents highlighted issues with the definitions of pensionable pay used by some of their clients’ pension schemes which mean those schemes can face difficulties in applying one of the 5 available definitions of pay within the alternative tests to their circumstances.

Overall the feedback suggests that the different variations of pay provided in the cost of accruals test work for the majority of pension schemes but that further expansion of the measures of pay might be beneficial for some schemes. For example, to allow for situations where salary increases are capped for the purposes of determining pensionable pay, or indeed where there is a maximum of two or more types of earnings allowances. We acknowledge the definitions of relevant earnings prescribed in current legislation may not be meeting the needs of all schemes or employers. Our position however is that making further bespoke arrangements for particular schemes risks obscuring what is meant to be a broad simplified test. In these cases the TSS is likely to be the more appropriate test.

On the issue of schemes with capped pay, increasingly employers do this to control pension costs. In such circumstances, it may be appropriate that calculations required under the TSS are applied in order to ensure the minimum requirements for automatic enrolment schemes are satisfied.

We do not intend to make changes to the definition of pensionable pay as part of the current review. We will, however, look for opportunities to work with those respondents who have raised this issue on potential solutions for the future, seeking to strike a balance between a framework which continues to provide a robust measure of scheme quality and retains the intended simplicity of the test.

Active members who have voluntarily chosen to lower their contribution rates

In 2017, the first triennial review included a call for evidence which received several responses in relation to cases where a scheme member had voluntarily opted for a lower benefit scale. The legislative definition of ‘relevant members’ ^{[footnote 13]} does not allow employers to exclude members who have ‘opted-down’, to make contributions below the qualifying rate, from their cost of accruals assessment and this creates a possible risk that a scheme fails to meet the cost of accruals test.

DWP does not hold data on levels of opt-down but at the time we anticipated opting down would be less likely in defined benefit schemes as planned increases in phased contributions for automatic enrolment (completed in April 2019) that might have caused individuals to reduce their contributions in defined contribution schemes would not apply.

As in 2017, the department wishes to avoid adding layers of complexity to the alternative tests, particularly as they seem to be working for the majority of schemes. In addition, we expect that relative to defined contribution schemes this is a diminishing issue given the increasing trend for defined contribution pension provision. It should also be pointed out that the TSS is intended for those circumstances where definitions of earnings and calculations of contribution rates remain complex, for example, because they are formed of multiple definitions. At the current time we do not propose to make any changes in this area.

Public Sector Equality Duty

The Secretary of State has paid due regard to the Public Sector Equality Duty (PSED) as set out in section 149 ^{[footnote 14]} of the Equality Act 2010 in carrying out the review and reaching her conclusions. Overall, the alternative quality requirements are designed to offer schemes and their sponsoring employers simplified tests to demonstrate scheme quality. The policy is intended to encourage employers to continue using legacy pension schemes to discharge their automatic enrolment duties. As such, the decision to maintain the regulations unchanged should make it more likely that legacy occupational pension schemes are available to workers covered by the automatic enrolment duties who have a protected characteristic under PSED. The PSED is on an ongoing duty and DWP is committed to continually monitor the impacts of its policies. We will use the next review in 2023, to make a further assessment of whether there are any unintended consequences or adverse impacts on protected groups arising from this policy. In addition, we will continue to monitor feedback from stakeholders and individuals through our normal feedback channels to assess the broader impact of the policy.

5. Analysis of the Alternative Quality Requirements for Section 28 schemes

Section 28(2C) of the Pensions Act 2008 places a statutory duty on the Secretary of State to carry out a review of whether the test in subsection (2A) continues to be satisfied. The schemes to which section 28 applies are set out in subsections (3), (3A) and (3B) of section 28 and cover money purchase schemes; personal pension schemes; hybrid schemes; and defined benefit schemes of a description prescribed under section 23A(1)(a). For ease of reference, these schemes will collectively be referred to as “DC schemes” in the rest of this section. Since its inception, the automatic enrolment legal framework has included certain simplifications for employers who calculate their pension contributions on a definition of pay that is different to the qualifying earnings band. Employers who calculate pension contributions on a different measure of earnings can elect to use the alternative quality requirements as a means of checking their scheme satisfies the minimum requirements for automatic enrolment. These simplifications offer flexibility for employers with good existing pension provision, encouraging them to continue using those schemes. The statutory duty requires a review to be carried out in 2017 (and thereafter at no more than 3-yearly intervals). It was introduced as a safeguard to minimise the risk of jobholders receiving less than the 90% threshold set out in relation to the alternative quality requirement for defined contribution schemes. The aim is to ensure the policy is working as intended for jobholders who have been enrolled into schemes which use a different measure of pay to calculate their pension contributions.

The statutory review requires that for each alternative quality requirement, for 90% of jobholders, both (a) employer contributions and (b) total contributions would be likely to be no less if every scheme satisfied that requirement compared to the usual automatic enrolment requirements. There are 3 ‘sets’ of alternative requirements, laid out in table 1. Employers can certify their scheme as meeting any of these sets as an alternative to the standard automatic enrolment minimum requirements.

In the analysis below we present figures for the proportion of jobholders who would potentially have lower total contributions under Set 1 and Set 2. As explained further below, having demonstrated these tests, the employer contribution tests follow automatically. Both the total and employer contribution tests are met automatically in all years up to 2019 for Set 3.

Table 1: Minimum employer and total contribution level requirement for Set 1,2 and 3 at different staging periods ^{[footnote 15]}

Set	Contribution levels until 5 April 2018	Contribution levels from 6 April 2018	Contribution levels from 6 April 2019
1	The scheme must provide for at least a 3% contribution of pensionable earnings (inclusive of at least a 2% employer contribution) for all of the relevant jobholders in the group or in the scheme. The pensionable earnings of the jobholder must be equal to, or more than the jobholder’s ‘basic pay’.	The scheme must provide for at least a 6% contribution of pensionable earnings (inclusive of at least a 3% employer contribution) for all of the relevant jobholders in the group or in the scheme. The pensionable earnings of the jobholder must be equal to, or more than the jobholder’s ‘basic pay’.	The scheme must provide for at least a 9% contribution of pensionable earnings (inclusive of at least a 4% employer contribution) for all of the relevant jobholders in the group or in the scheme. The pensionable earnings of the jobholder must be equal to, or more than the jobholder’s ‘basic pay’.
2	The scheme must provide for at least an 2% contribution of pensionable earnings (inclusive of at least a 1% employer contribution) for all of the relevant jobholders in the group or scheme. Total pensionable earnings of all relevant jobholders (taken in aggregate) to whom this set applies must constitute at least 85% of their total earnings. The pensionable earnings of the jobholder must be equal to or more than the jobholder’s ‘basic pay’.	The scheme must provide for at least an 5% contribution of pensionable earnings (inclusive of at least a 2% employer contribution) for all of the relevant jobholders in the group or scheme. Total pensionable earnings of all relevant jobholders (taken in aggregate) to whom this set applies must constitute at least 85% of their total earnings. The pensionable earnings of the jobholder must be equal to or more than the jobholder’s ‘basic pay’.	The scheme must provide for at least an 8% contribution of pensionable earnings (inclusive of at least a 3% employer contribution) for all of the relevant jobholders in the group or scheme. Total pensionable earnings of all relevant jobholders (taken in aggregate) to whom this set applies must constitute at least 85% of their total earnings. The pensionable earnings of the jobholder must be equal to or more than the jobholder’s basic pay.
3	Total contributions of at least 2% of the jobholder’s earnings (including an employer contribution of at least 1%) for each relevant jobholder in the group or scheme.	Total contributions of at least 7% of the jobholder’s earnings (including an employer contribution of at least 3%) for each relevant jobholder in the group or scheme.	Total contributions of at least 7% of the jobholder’s earnings (including an employer contribution of at least 3%) for each relevant jobholder in the group or scheme.

Methodology

Our analysis uses data from the Office for National Statistics’ Annual Survey of Hours and Earnings (ASHE), which is the primary data source on employees’ earnings. Our analysis examines all jobholders (employees working in Great Britain aged 16 to 74 and earning above the lower earnings limit), regardless of whether they are contributing into a pension or not in the dataset, to compare their notional pension contributions under minimum automatic enrolment contributions on qualifying earnings against their notional contributions under each alternative requirement.

Results

Set 1

Table 2 shows that since the introduction of automatic enrolment in 2012, certification under Set 1 would have delivered at least as good an outcome for total contributions for over 90% of jobholders.

Table 2: Proportion of jobholders for whom total contributions under Set 1 (contributions on basic pay from pound one) are at least as much as under minimum contributions on qualifying earnings, 2012 to 2019

	2012	2013	2014	2015	2016	2017	2018	2019
3% basic pay from pound one at least as much as 2% of qualifying earnings	99%	99%	99%	99%	99%	99%	99%	99%
6% basic pay from pound one at least as much as 5% of qualifying earnings	96%	97%	97%	97%	97%	97%	97%	97%
9% basic pay from pound one at least as much as 8% of qualifying earnings	95%	95%	95%	96%	96%	96%	96%	96%
Total contributions under Set 1 at least as good as minimum contributions of qualifying earnings	99%	99%	99%	99%	99%	99%	97%	96%

Source: DWP estimates derived from ONS ASHE, GB, 2012-2019.

From 2017 to 2019 there was a slight decrease in the proportion of jobholders for whom Set 1 would deliver at least as good an outcome as minimum contributions on qualifying earnings, from 99% in 2017 to 96% in 2019.

This is attributable to the phased increases in minimum contribution rates in April 2018 and April 2019. ^{[footnote 16]} In Table 2, we have included figures throughout the entire time series for each separate set of contribution rates, which individually show little to no change over time. For any employee under a Set 1 arrangement whose total contributions are at least as much as minimum contributions on qualifying earnings would be, the same is automatically true of their employer contributions. ^{[footnote 17]} Therefore, since the total contributions element of the statutory test is met for Set 1, the employer contributions element of the test is also met.

Set 2

Certification for a scheme under Set 2 requires that the total pensionable earnings of all relevant jobholders (taken in aggregate) in the schemes where this set applies must constitute at least 85% of those jobholders’ total earnings. As ASHE is a survey of employee jobs, it is not possible to use it to look at total employer aggregates. Therefore, for the purpose of our analysis we assume that this condition of Set 2 plays no part. Any additional condition on a scheme can only increase necessary contributions under that scheme. Therefore, by not accounting for it, the proportion of jobholders we estimate would receive at least as good an outcome under Set 2 will be lower than the true figure.

An individual receives at least as good an outcome under Set 2 as under minimum contributions on qualifying earnings, for both total and employer contributions, if and only if their basic pay from pound one is at least as much as qualifying earnings. Table 3 shows that since the introduction of automatic enrolment in 2012, this has been the case for over 90% of jobholders. Therefore, both elements of the quality tests are met for Set 2.

Table 3: Proportion of jobholders with basic pay from pound one at least as much as qualifying earnings, 2012 to 2019

	2012	2013	2014	2015	2016	2017	2018	2019
Proportion of jobholders with basic pay from pound one at least as much as qualifying earnings	91%	92%	92%	92%	92%	92%	92%	93%

Source: DWP estimates derived from ONS ASHE, GB, 2012-2019.

Set 3

It has been the case in every year from 2012 to 2019 that certification under Set 3 has automatically delivered at least as good an outcome (for both total and employer contributions) for any jobholder as minimum contributions on qualifying earnings. ^{[footnote 18]} Therefore, both elements of the quality test are met for Set 3.

Equalities Analysis

The following tables compare the breakdowns - by age group and gender - of jobholders who would not receive as good an outcome in 2019 under Sets 1 and 2 as under minimum contributions on qualifying earnings against the equivalent breakdowns for the overall population of all jobholders.

Age and gender are the only protected characteristics in relation to the public sector equality duty for which there are variables in ASHE. There are no other available data sources that would readily allow analysis of the potential impact of the alternative quality requirements by other protected characteristics. The number of people actually negatively impacted by the alternative quality requirements is likely to be very small. The analysis conducted for the quality tests assesses the number of jobholders who would be potentially worse off if they were in an alternative scheme compared to having minimum contributions under qualifying earnings, but many of these will be individuals who are not in fact saving under an alternative scheme arrangement. ^{[footnote 19]} Therefore, any potential positive or negative impact on protected groups is likely to be small.

Distribution of jobholders by gender, 2019

Tables 2 and 3 show that in 2019, 4% of jobholders would be worse off in Set 1 than with minimum contributions on qualifying earnings, and 7% of jobholders would be worse off in Set 2. For both these sets, 21% of these jobholders potentially worse off are female. This compares to 43% of the overall population of jobholders who are female.

Table 4: Gender breakdown of jobholders potentially worse off under alternative scheme requirements, 2019

	Jobholders who would be worse off under Set 1 than with minimum contributions on qualifying earnings	Jobholders who would be worse off under Set 2 than with minimum contributions on qualifying earnings	All jobholders
Male	79%	79%	57%
Female	21%	21%	43%

Source: DWP estimates derived from the ONS ASHE, GB, 2019.

Distribution of jobholders by age, 2019

For both Set 1 and Set 2, the distribution by age of jobholders who would have worse outcomes than with minimum contribution on qualifying earnings is broadly no different to the distribution by age for the overall population of all jobholders.

Table 5: Age breakdown of jobholders potentially worse off under alternative scheme requirements, 2019

Age group	Jobholders who would be worse off under Set 1 than with minimum contributions on qualifying earnings	Jobholders who would be worse off under Set 2 than with minimum contributions on qualifying earnings	All jobholders
16 to 21	4%	3%	6%
22 to 29	19%	18%	19%
30 to 39	26%	26%	25%
40 to 49	23%	24%	22%
50 to 59	22%	23%	21%
60 to 69	7%	7%	7%
70 to 74	–	0%	1%

Source: DWP estimates derived from the ONS ASHE, GB, 2019
Note: numbers might not add up due to rounding
Note: Numbers supressed where ASHE sample size is small (less than 20).

Conclusion

Based on the evidence gathered and the analysis set out in this government response document, the Secretary of State has concluded that the alternative quality requirements for UK defined benefit schemes set out in regulations made under section 23A(1) of the Pensions Act 2008 should continue in place without changes at the current time.

The Secretary of State has also concluded that the test in section 28(2A) of the Pensions Act 2008 continues to be satisfied.

The evidence and analysis shows that the overall objective of the alternative quality requirements to act as simplified quality tests for relevant pension schemes is being met.

DWP will seek opportunities to work with those organisations which have made suggestions on technical changes to the statutory guidance that supports the tests for defined benefit and hybrid schemes. The Department will seek to understand what scope there might be for proportionate easements in the future that preserve the rigour of the automatic enrolment regulatory framework and maintain the simplified operation developed in the original consultation with industry on the design of the alternative quality requirements for legacy pension schemes.

The next statutory review will take place in 2023.

Glossary

Hybrid schemes

Hybrid schemes are defined, for the purposes of automatic enrolment only, as schemes that are neither money purchase nor defined benefits. They generally have elements of both types of benefits, and depending on the type of scheme involved, they may need to satisfy a combination of the defined benefits quality requirement (including the alternative quality requirements prescribed under Pensions Act 2008 section 23A) and the money purchase quality requirement, or they may only need to satisfy either of the requirements. ^{[footnote 20]}

Contracting out

Up to and including 5 April 2016, individuals were able to ‘contract out’ of the Additional State Pension. This meant that workers and employers could pay less NI contributions into the NI fund. It was not possible to contract out of the Basic State Pension. Individuals could only opt out (‘contract out’) of the Additional State Pension if they were part of a private pension – such as a workplace or personal pension scheme – that could accrue similar benefits.

New State Pension was introduced by the Pensions Act 2014 for those reaching state pension age on or after 6 April 2016, and contracting out was abolished under the Act.

Defined benefit contracting out

Many workplace pension schemes where the pension is linked to the individual’s earnings contracted out all of their scheme members as part of their scheme rules. The new State Pension has replaced the previous Basic and Additional State Pension for those reaching state pension age on or after 6 April 2016 and ended contracting out for defined benefit pension schemes.

Terms in the ‘cost of accruals’ test ^{[footnote 21]}

Under the test, a defined benefits scheme (or defined benefits element of a hybrid scheme) satisfies the quality requirement if the cost of providing benefits accruing for or in respect of the relevant members over a relevant period would require contributions to be made of a total amount equal to at least a prescribed percentage of the member’s total relevant earnings over that period.

Relevant members

Relevant members for the purposes of the cost of accrual test are the active members of the scheme of which the jobholder is a member. However, where there is or was a material difference in the cost of providing the benefits accruing for different groups of relevant members over the relevant period, then (subject to the transitional arrangement) the testing is carried out separately for each sub-group (i.e. benefit scale). The actuary, having considered a range of factors, will determine whether there is a material difference in cost. ^{[footnote 22]}

Relevant period

The relevant period is the period over which the cost of providing the accruing benefits is estimated. The period is normally to be taken from the most recent written report signed by the actuary, containing information about the cost of future benefit accrual by reference to a period which begins later than the date report takes effect. ^{[footnote 23]}

Relevant earnings

The relevant earnings are the earnings which the scheme uses to determine pensionable earnings, provided that they are at least equal to or more than the earnings calculated using one or more of the definitions set out in the table below, for all of the relevant members. To ensure that the cost of providing benefits, under the alternative quality requirements, is broadly equivalent to the cost of similar benefits, under the test scheme standard, the earnings definitions have a corresponding prescribed percentage (see table below) contribution rate. ^{[footnote 24]}

Earnings definition and corresponding minimum contribution rate ^{[footnote 25]}

Legislative definitions	Prescribed percentage of relevant earnings
Relevant earnings must be at least equal to or more than	Survivors' pension benefits provided by scheme	Survivors' pension benefits not provided by scheme
Qualifying earnings	10%	9%
Basic pay	11%	10%
Basic pay and, taking all of the relevant members together, the pensionable earnings of those members constitute at least 85% of the earnings of those members in the relevant period	10%	9%
Earnings	9%	8%
Basic pay above the single person's basic State Pension or the Lower Earnings Limit	13%	12%

Respondents to the call for evidence

Association of Consulting Actuaries

Lane Clark & Peacock LLP

Linklaters LLP

Society of Pension Professionals

Universities Superannuation Scheme

Willis Towers Watson

Member of the public – Nick T

1. Section 23A(7); Section 28(2C) Pensions Act 2008. ↩

2. Section 3(1) Pensions Act 2008: a jobholder who is aged between 22 and pensionable age, earning over £10,000. ↩

3. Sections 21 to 23 Pensions Act 2008. ↩

4. S.I. 2010/772. ↩

5. Automatic enrolment: Guidance for employers on certifying defined benefit and hybrid pension schemes. ↩

6. Jobholder is defined as a worker: (a) who is working or ordinarily works in Great Britain under the worker’s contract; (b) who is aged at least 16 and under 75; and (c) to whom qualifying earnings are payable by the employer (Section 1, Pensions Act 2008). ↩

7. Workplace pensions: proposed technical changes to auto enrolment ↩

8. Workplace pensions automatic enrolment: simplifying the process and reducing burdens on employers ↩

9. https://www.legislation.gov.uk/uksi/2010/772 ↩

10. S.I. 2010/772 ↩

11. S.I. 2010/772 ↩

12. Automatic enrolment: alternative quality requirements for defined benefit and hybrid schemes being used as a workplace pension ↩

13. Used for the ‘cost of accruals’ test (Regulation 32M S.I. 2010/772). ↩

14. Details of the duty are contained in the Equality Act 2010 (s149(1)) and (s149(7)). ↩

15. Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations 2010, S32E. ↩

16. This change is to be expected because the ratio between the Set 1 total contribution rate (of basic pay) and the usual minimum total contribution rate (of qualifying earnings) decreased, from 3% : 2% in 2017 to 9% : 8% in 2019. ↩

17. This follows from the fact that in each year, the ratio between the Set 1 total contribution rate (of basic pay) and the usual minimum total contribution rate (of qualifying earnings) is lower than the corresponding ratio of relevant employer contribution rates. For example, in 2019 the former ratio is 9%: 8% and the latter is 4%: 3%. ↩

18. For all jobholders, their gross earnings are higher than their qualifying earnings. This automatically means the employer contributions test is met for all years, and the total contributions test is met up to 2018. The ratio of gross earnings to qualifying earnings is lowest for an employer earning at the upper earnings limit. From the 2019 thresholds this was 0.877, meaning that 7% of gross earnings at this level was slightly higher than 8% of qualifying earnings, and so the total contributions test was still automatically met in 2019. ↩

19. We do not have available data to assess the number of individuals actually saving under alternative scheme arrangements. ↩

20. Section 99, Pensions Act 2008. ↩

21. Regulation 32M S.I. 2010/772. ↩

22. Regulation 32M S.I. 2010/772. ↩

23. Section 23A(2) Pensions Act 2008. ↩

24. Section 23A(2) Pensions Act 2008. ↩

25. Section 23A Pensions Act 2008 and Regulation 32M S.I. 2010/772. ↩