The Department for Work and Pensions (DWP) has launched a call for evidence on the alternative quality requirement for defined benefit (DB) pension schemes that are used for automatic enrolment (AE).

The requirements allow for simpler alternative tests to be used so that a scheme can demonstrate that it is of sufficient quality to be used by employers to fulfil their automatic enrolment duties.

The overarching aim of the review is to test to what extent the regulations are operating as intended, including whether there are any unintended consequences.

The government is required to review the regulations made under the powers in Section 23A(1) of the Pensions Act 2008, which introduced the alternative quality requirements for UK DB schemes, with these reviews to take place at no more than three-yearly interval.

In particular, the call for evidence is looking at how the simplifications and flexibilities work in practice, and whether any new issues have arisen since the last triennial review in 2020.

For the 2023 review, the DWP will also be including collective defined contribution (CDC) schemes for the first time.

The DWP explained that the legsiltative framework for CDC requires employers who choose to use a CDC scheme to meet their AE duties are required, as with other schemes, to ensure that the scheme meets the minimum quality requirements for qualifying schemes.

"It therefore makes sense to include a review of the AE quality test which applies to CDC schemes as part of the triennial review of alternative AE tests thus syncing all the review timings (AE and CDC) together on the same cycle," it stated.

The last review was held in 2020, and found that, broadly, the alternative quality requirements are still providing a simplified route to comply with the automatic enrolment scheme quality requirements.

However, LCP head of pensions research, David Everett, suggested that the call for evidence could look further, arguing that whilst the tests on DB scheme benefit quality are working as intended, "as with all these things, there can always be improvements".

“One of the drawbacks of the DB cost of accruals test is that it assesses scheme quality in two distinct steps – first by checking whether the scheme’s pensionable earnings definition is at least as generous as any one of the permissible “relevant earnings” definitions, and only if this test is passed, going on to check whether the contribution rate required to be paid is no less than the “prescribed percentage”," he explained.

"This can work against some schemes whose generosity is not in doubt, but who have a pensionable earnings definition that doesn’t match up to one of the DWP’s definitions. Making the test work for these schemes would be most welcome.”

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