Pensions auto-enrolment could be delayed by up to four years for over 3,000 employers due to a significant loophole in how the legislation underpinning the system was drafted, Lane Clark & Peacock claimed yesterday.
According to the consultancy, rules governing 'hybrid' pension schemes offering both defined benefit and defined contribution benefits have been drafted too broadly and legislation could be needed to change them.
Currently, employers with an existing hybrid scheme that meets the criteria for an auto-enrolment pension scheme are able to defer auto-enrolment until October 1 2017 for any worker who has previously had the right to join the scheme but chose not to do so.
LCP understands this flexibility was intended to be limited to hybrid schemes that would not benefit from the phased approach being used to increase the minimum contributions made by employers towards auto-enrolment pensions. This could be because they already offer new entrants to their scheme the best choice between a DC and DB benefit, LCP explained.
'However, the definitions appear to have been drafted more broadly, enabling schemes making only DC benefits available to new entrants, within an otherwise mixed scheme, to qualify,' it said.
Andy Cheseldine of LCP said: 'This loophole appears to have remained unnoticed until now because of the sheer complexity of the legislation.
'We estimate that over 3,000 private sector employers were due to auto-enrol over 4 million workers in 2013 and the majority of these enrolments could be pushed back to 2017 without any compensatory backdating. We understand that primary legislation will be required to rectify this situation.'
A spokesman for the Department for Work and Pensions said: 'We are grateful to LCP for bringing this to our attention and are looking at the issue. Our intention remains that transitional arrangements only apply to employers who automatically enrol their existing workforce into the hybrid or defined benefit element of their pension scheme.
'In addition, all new members of staff joining these firms after their staging date will be automatically enrolled - and existing staff can still choose to opt in.'
This is one of those headlines which seem sufficiently odd to prompt you to look at the story.
In contrast, if it said that there had been a slight decline in the use of hedge funds amongst pension schemes then we would just assume that the information was right.
Is it plausible that fewer pension schemes are using LDI?
It is quite likely that a few schemes which were using LDI have now moved to buy out, and probable that a few schemes have merged. It is also plausible that some schemes which were planning to implement LDI have put it off because rates are 'too low'. There are also some schemes that have reduced their LDI hedge ratios, but which are still using LDI. Overall, the number ceasing to use LDI must be tiny.
In contrast, the number of schemes taking up LDI has continued to grow. On a like-for-like basis I'd be amazed if there wasn't a net increase.
A closer reading suggests that the real change is a greater awareness of LDI in a broader range of markets, and a changed usage of the term.
Derek McLean, Head of Insurance Advisory, F&C