Co-founder at cloud-based payroll provider Paycircle, Jamie Costello, discusses the implications of this lesser-know aspect of the switch to pensions auto-enrolment for smaller employers.
A lot has been written about auto-enrolment, its impact on smaller businesses and their employees, and the technical nitty-gritty of “opting in” or “opting out”.
Far less, however, has been written about the small matter of “ceasing active membership”, which is a particularly grey area of the whole auto-enrolment project.
It’s an area that all business owners should know about when doing their due diligence on pension schemes but one that, surprisingly, has been largely ignored by the media and industry alike.
Ceasing active membership
So what is ceasing active membership? In the simplest terms possible, it’s the facility within auto-enrolment that enables employees who have “opted in” to a pension scheme to choose to stop making payments (whether temporarily or permanently) once an official opt out period has ended.
The Pension Regulator 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 for business owners — and indeed their employees. Essentially, what The Pensions Regulator 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 stop contributions full stop.
Others still, by contrast, and the government-approved workplace pension scheme Nest is an example, appear to allow employees to stop 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.”
There’s no doubt that many business owners will want to know whether the scheme they are about to sign up to a) allows employees who have ‘opted in’ to stop making payments, temporarily or permanently, and b) 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, business owners may want to ask their potential pension scheme about its approach to payment holidays and ceasing active membership alongside all the other questions they have lined up — because there really is very little clarity on this area of auto-enrolment, despite the fact we are several years into the great auto-enrolment roll-out.
But there’s another angle to all this, too, not that this would apply to readers of Business Advice: 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 auto-enrolment.
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 auto-enrolment.
Jamie Costello is co-founder at cloud-based payroll provider Paycircle.
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