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

The Department for Work & Pensions (DWP) has launched a new [call for evidence](https://www.gov.uk/government/consultations/automatic-enrolment-alternative-quality-requirements-for-defined-benefits-and-hybrid-schemes-being-used-as-a-workplace-pension/automatic-enrolment-alternative-quality-requirements-for-defined-benefits-and-hybrid-schemes-being-used-as-a-workplace-pension) in which it primarily seeks feedback on the functioning of the alternative quality requirement tests that are used to assess whether or not a pension scheme satisfies the requirement for being considered an automatic enrollment pension scheme available for employers to choose from. The consultation is very high level in nature and does not propose any regulatory changes or enhancements. Instead, it simply raises some questions as to the adequacy of the tests in terms of simplicity and flexibility and as to the appropriateness of the tests for defined contribution schemes for whole-life multi-employer.
#### As to the background
In 2012, the automatic enrollment in workplace pensions was initiated with the aim of facilitating greater retirement savings among individuals. Thereafter, all employers are obligated to enroll all eligible workers into a qualifying workplace pension scheme and provide pension contributions.
If employers opt to utilize a defined benefit or hybrid pension scheme to fulfill their responsibilities related to automatic enrollment, they must ensure that these retirement schemes adhere to the minimum quality standards outlined in the Pensions Act of 2008 and the accompanying subordinate legislation. To ensure that these standards are met, employers or their advisers must meet to so-called test scheme standards (TSS). These standards are represented in a hypothetical pension scheme which incorporates all the quality criteria against which the defined benefit schemes must be compared. According to the DWP, „a scheme satisfies the TSS, if it provides pension benefits broadly equivalent to those of the ‘test scheme’.
The TSS subsequently proved to be difficult to implement which is why the DWP introduced the alternative quality requirement tests framework in 2014. Under this framework, employers may use any of the two following tests to ensure that the pension scheme fulfills the requirement for automatic enrollment defined benefit schemes – as quoted:
(1) Test one: A test 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) and
(2) Test two: A ‘cost of accruals’ test – based on the cost to the scheme of the future accrual of active member benefits. Under this test, a defined benefits scheme (or defined benefits element of a hybrid scheme) is a qualifying scheme, 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.
Additionally, in 2022, the Department introduced a new regulatory framework (Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022 (SI 2022/255) for employer-sponsored defined contribution plans – also know as „collective money purchase schemes“ or „Collective Defined Contribution (CDC) schemes“. Under this framework, a test was introduced to ensure that a scheme satisfies the quality requirements for being considered a CDC option for employers. According to the DWP, the test looks at monetary contributions of all jobholders over the certification period, and „these are assessed against prescribed percentages of their total relevant earnings over that period“ – similar to the first test for defined benefit plans.
The Department is now seeking feedback and evidence on these two alternative quality requirement tests and their functioning for defined benefit schemes and on the appropriateness of the CDC test for whole-life multi-employer CDC schemes.