Workplace pensions For professional advisers only AUTO ENROLMENT AND THE EMPLOYER DUTIES SECTIONALISATION FACTSHEET Sectionalisation allows employers to have sections within a pension scheme that don t meet the minimum contribution quality requirement for auto enrolment. This factsheet will tell you what you need to know about sectionalisation. It will also explore some of the areas you should consider if you re thinking of using sectionalisation. We ve based this factsheet on our current understanding of the relevant legislation and regulations (including drafts) which might change in the future. WHAT IS SECTIONALISATION? Put simply, it means that employers can have sections within a pension scheme where the contributions are lower than the minimum contribution quality requirement for auto enrolment. One reason why workers may opt out of an auto enrolment scheme is affordability. The Department for Work and Pensions (DWP) recognised this issue and decided to allow pension schemes to have lower sections rather than having lots of workers opting out and stopping saving altogether. However, employers need to consider how they can make sectionalisation work without breaking the rules around auto enrolment. The DWP haven t created specific rules or regulations in this area but the Pensions Regulator (TPR) have given some guidance: Employers are under no obligation to offer sectionalisation to any of their workers. Jobholders must be automatically enrolled into a qualifying section of a pension scheme. They can t automatically enrol jobholders into a lower section. Where employers offer a lower section, the jobholder will have to ask to be moved to the lower section after they have been automatically enrolled. Employers must ensure that they do not break the inducement rules if they offer a lower section.
TPR has identified two ways that sectionalisation can be used. Option 1 The jobholder is auto enrolled into an auto enrolment scheme. They opt out within the opt out period and receive a refund of any contributions they have made. As long as the scheme rules allow, the employer can then make arrangements to enrol the jobholder back into the scheme on a lower contribution level. Option 2 The jobholder is auto enrolled into an auto enrolment scheme. Rather than opt out, they complete whatever documentation is required by the scheme to continue membership at a lower contribution level. The jobholder would only receive a refund of any contributions they have made if the scheme rules allow this. Current contribution levels below the minimum contribution quality requirement Where workers are currently saving at a lower level than the minimum contribution quality requirement, and can t afford to increase their contributions, they may opt out and stop saving altogether. Sectionalisation would allow them to continue at the lower level. Flexible benefit arrangements Some employers allow workers to choose their pension contribution levels as part of a flexible benefit arrangement. For example, they may be able to choose pension contributions and other benefits from a flexible benefits fund of 20% of their earnings. If the pension contributions chosen were lower than the minimum contribution quality requirement, workers may not be able to afford to increase their contributions, or may not be willing to give up or reduce other benefits to make up the difference. Sectionalisation could allow workers to continue at the lower level whilst not affecting other flexible benefits. There are a number of situations where sectionalisation may be useful. Non-contributory pension schemes Where an employer has a non-contributory pension scheme in place at the moment, they may have to ask their workers to start contributing in order to meet the contribution quality requirements. If a worker couldn t make contributions and decided to opt out, the employer would be under no obligation to keep making contributions on their behalf, meaning the worker would have no ongoing retirement savings. A lower section could be used to allow the employer to keep making contributions with no contributions required from the worker. 2
CONSIDERATIONS FOR EMPLOYERS If you re thinking of using sectionalisation, there are a lot of things you need to consider. You should speak to your adviser to make sure you understand the implications. The impact of sectionalisation on administration You must have an auto enrolment scheme in place for workers who will be automatically enrolled. You have to automatically enrol workers into a qualifying section of an auto enrolment scheme that meets the minimum contribution quality requirement. You can t automatically enrol any workers into the lower section. You would have to put in place a process to move workers into the lower section, either through the opt out process or by creating documentation that allows this. This will complicate the administration of the scheme. You will have to keep records of workers in the lower section and re-assess them on the re-enrolment date. If they are eligible jobholders they will need to be automatically re-enrolled back into a qualifying section. Each time a worker is automatically re-enrolled, if they want to stay in the lower section they ll need to opt out or complete the required documentation again. You will need to ensure you have robust administration systems in place that can cope with the additional administration required for sectionalisation. If you want to create more than one lower section to maintain existing contribution structures, this could further complicate the administration of your scheme. SECTIONALISATION IN PRACTICE Process starts here Worker is reassessed roughly every three years Worker is automatically enrolled into qualifying section of scheme Worker joins lower section 1. Worker opts out of qualifying scheme or 2. Completes documentation The impact of sectionalisation on scheme design You will need to decide who you make the lower section available to. Will you only offer it to existing members of your scheme or will you offer it to new members? You must ensure there is no discrimination when deciding which workers are offered the lower section for example, based on age, sex or disability. You will need to consider if you will allow workers to move between sections outwith the re-assessment period. If you do, you will need to put a process in place to deal with this. TPR haven t given any guidance on the level of contribution that s acceptable where sectionalisation is used, or even if an employer contribution is required at all. You will have to consider how you want to use sectionalisation and how you will communicate this to your workforce. 3
The impact of sectionalisation on the workforce Where workers want to continue saving for retirement but can t meet the minimum contribution quality requirement for auto enrolment, sectionalisation gives them the opportunity to continue saving rather than opting out. Contributions for workers in the lower section will be below the minimum contribution quality requirement, so they are unlikely to provide a high standard of living in retirement. The availability of a lower section may encourage workers who would have contributed the minimum contribution quality requirement for auto enrolment, to opt for lower contributions. The impact of sectionalisation on communications You will need to think about when you communicate the lower section to workers to ensure they don t break the inducement rules and incur penalties from TPR. You will need to ensure that the communications don t encourage workers to go into the lower section as this could look like an inducement to give up membership of a qualifying section. You will need to create different communication strategies for each section to explain to workers how it works and what it means for them. The communications should educate workers about the level of retirement benefits they are likely to receive if they go into the lower section. Sectionalisation in practice A simple example Tasty Foods Ltd. has decided to offer a lower section within their pension scheme. They are thinking about how and when to communicate the lower section to their workers as they don t want to break the inducement rules. They are considering two options. 1. Give all workers information about the lower section as part of their enrolment information before the end of the opt out period. 2. Only give information to workers who have opted out. They are worried that option 1 may look like they are encouraging workers to go into the lower section and could result in penalties from TPR. So for that reason, they decide on option 2. HOW ROYAL LONDON CAN HELP As you can see there is a lot for you to think about before using sectionalisation within your pension scheme. We re pension experts and we can help you prepare for auto enrolment and the employer duties. To find out more speak to your adviser or visit the auto enrolment area of our website at employer.royallondon.com/autoenrolment 4
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