My Lords, this introduces alternative quality requirements for defined benefits schemes being used for automatic enrolment. It will simplify the task of determining whether a defined benefits scheme is good enough to provide both increased flexibility for employers and protection for members’ benefits.
By way of context, I should first explain that currently, if an employer wishes to use a defined benefits scheme for automatic enrolment, the scheme must either be contracted-out, and provide benefits broadly equivalent to the state second pension, or provide benefits broadly equivalent to, or better than, a hypothetical “test scheme”. There is a separate test for money-purchase schemes based on minimum contributions, set at 8% of qualifying earnings.
These amendments add to these arrangements in two ways. First, they make it possible for certain schemes that are defined benefit in legal terms, but actually have a defined contribution structure, to be assessed against the money-purchase scheme requirement.
The Government will define the schemes to which this could apply in regulations but an example might be one where contributions are set out in the scheme rules—as with a money-purchase scheme—but there is a guarantee over investment performance that means it does not meet the strict legal definition of a money-purchase scheme. Such a scheme might well meet the money-purchase quality requirements but it would be difficult to show how it satisfies the test scheme standard. That is because the benefits are not defined in a way that is comparable with the test scheme benefits.
These amendments also—
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