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Could ‘ceasing active membership’ prove to be auto-enrolment’s Achilles heel?

Employees at the mercy of unscrupulous employers, the ability for staff to put contributions on hold indefinitely while technically remaining ‘opted in’, and a pension scheme lottery surrounding payment holidays — all this and more could arise from the grey area within auto-enrolment legislation that is ‘ceasing active membership’.

In its research into the ability of enrolled employees to take ‘payment holidays’ (or ‘take a break’ to use the terminology of Government-backed workplace pension scheme, NEST), payroll platform, Paycircle, has revealed a significant amount of confusion and inconsistency around the option to ‘cease active membership’, under which payment holidays fall — and a potentially serious loophole. For example:

  1. 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?
  2. ​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.
  3. According to The Pensions Regulator, every pension scheme can decide if it wants to allow payment holidays, and whether the employer is required to approve them. But is this fair for employees, whose ability to take a break from payments if they are in a tight spot financially depends on the scheme that their company has chosen? Likewise, if certain pension schemes do not allow payment holidays, could this make the companies signed up to them less attractive to potential employees?

Jamie Costello, co-founder, Paycircle, comments: “Drill down deep into the legislation and the ability to cease active membership — or in plainer English take a payment holiday — appears to be the workplace pensions equivalent of Pandora’s Box. Enabling people to stop making contributions, potentially indefinitely, without the formal procedures that apply to opting out could not only be exploited by unscrupulous employers but gives employees who failed to opt out in the first place another crack on the whip — once again undermining, for many, the whole idea of auto-enrolment. What we may be left with is a situation where the headline figure of enrolled employees is significantly higher than the number of people actually contributing to a pension. But the cynics out there might argue that, for the Government, that will be job done.”