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The Pensions Regulator's ambiguous guidance and regulations are having the effect of increasing salaries, not pension savings

21 March 2016

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Automatic enrolment is a red tape headache that many employers feel they could do without at the moment. Nevertheless, many also see the need for some action to address the looming pension crisis.

Even though auto-enrolment doesn't affect the self-employed or those who choose to opt out, these exceptions won't stop the legislation broadly achieving its aim of greatly increasing pension savings. However, it's worth understanding where these exceptions apply - and the latest case to throw light on one of them is with regards to flexible benefits.

The Oxleas NHS Foundation Trust has recently offered nurses the option of a higher salary, in return for opting out of the NHS pension scheme. The trust claims this is necessary to recruit nurses as they are in competition with agencies that can offer higher salaries, as a result of choosing not to offer the same pension benefits.

Many, including the pensions minister,
Ros Altman, expressed concern about the NHS Trust's offer and at first glance, it would appear that the offer is a clear breach of the auto-enrolment rules regarding 'inducement'. The Pensions Regulator's own guidance sets out the following:

'An inducement is any action taken by the employer, the sole or main purpose of which is to attempt to induce:

  • A jobholder to opt out without becoming an active member of a qualifying scheme with effect from the date on which they originally became an active member (i.e. their automatic enrolment date or enrolment date); and

  • A jobholder or an entitled worker to cease active membership of a pension scheme without becoming an active member of another scheme with effect from the day after the original membership ceased.'

The Pensions Regulator helpfully gives the following 'clear cut' example of inducement in their guidance:

'The employer tells their jobholders/entitled workers that if they opt out of, or leave, their pension scheme, they will receive any of the following:

  • An extended or renewed contract in the case of a short term worker;

  • A one-off payment;

  • A higher salary level; and

  • A promotion.'

However, the guidance appears not to be very clear cut after all. It goes on to explain:

'The intention of the legislation is to encourage pension saving at a minimum level, not to restrict flexible benefits packages that employers wish to offer their workers. The individual retains the right to choose the makeup of their flexible benefits [provided that] their sole or main purpose is not to induce individuals to leave the qualifying scheme or section of the scheme.'

Of course there are some sensible and legitimate reasons that an employee might want to swap their pension benefits for a higher salary - for example
to facilitate a debt repayment or when saving for
a house.

However, auto-enrolment was not introduced
to give those employees a pay rise.

As the prime purpose of auto-enrolment was to address the pension crisis, employers should probably exercise caution when faced with ambiguous regulations and guidance. Particular caution should be taken with final salary schemes where the true value of the pension is debatable.

Perhaps employers should insist on membership of a 'qualifying earnings' defined contribution pension scheme, as a minimum part of any flexible package. It's also worth remembering that employers don't have to offer a flexible benefits package. Perhaps the simplest and cheapest solution is not to offer any alternative to pension scheme membership.

Scott Gallacher is a director at Rowley Turton

He writes the regular IFA comment in Private Client Adviser

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