I have spent quite a large chunk of this week reading the notes from the Committee stage of the Pensions Bill. Whilst not quite as word-heavy as the Lords debates, it has still been a long and painful slog.

Still, whinge over, the debates did help clarify a few points which I will be picking up over the next few weeks. Not that any of this is law yet, but the final shape of the legislation is becoming ever clearer.

Perhaps the single most important point in the debate for employers was around the ‘Certification’ criteria.

To remind you, the certification process (also variously, and previously, known as ‘exemption’ or ‘qualifying’ test) is the process by which a pension scheme achieves, or surpasses, set benchmarks. In achieving certification, the employer will be able to offer the certified scheme to employees, and then automatically enrol employees to that scheme without also having to offer the option of NEST.

If that sounds a little complex, let’s borrow from the Minister for Pensions comment in the debate (12/07/11):

‘What is certification all about? The idea is that firms have to auto-enrol a set of workers, but what do they auto-enrol them into? The have to auto-enrol them into a scheme that is good enough. It does not have to be perfect, it has to be good enough.’

Regular followers of the blog, or those that have attended my talks over the last year, will know that the actual certification criteria (to establish if your scheme is indeed ‘good enough’) has been a movable feast for a little while now. This is problematic for employers who need this detail to finalise their forward planning.

Last October a document set out three proposed minimum contribution criteria for this test as follows:

1) a total contribution of 9% of pensionable pay, including 4% from the employer OR

2) a total contribution of 8% of pensionable pay (including 3% from the employer), as long as pensionable pay is at least 85% of the total pay bill OR

3) a total contribution of 7%, including 3% from the employer, as long as the total pay bill is pensionable

From the committee minutes it appears that these definitions have been tweaked again over the last few months. For options 1 & 2 PENSIONABLE pay has been replaced with BASIC pay.

It’s not often I can say this, but to my mind this change is sensible and for the better.

Why?

Some employers had already latched on to the term ‘pensionable’, and at least a few were considering using the definition of pensionable pay as a way of reducing costs. For instance, an employee with a basic salary of £30k, might have been restricted to a pensionable salary of £15k. Clearly this was loophole that could be exploited, and would probably result in an employee receiving a lower company contribution than that under NEST.

So a good change, and one that I expect to see in the final legislation. This will help employers forward-plan with more certainty than before.

Many more pension anorak points to follow in the coming weeks.

Best regards

Steve