Inducements to flex out of pensions may breach Pensions Act 2008

Employers that offer pension contributions through a flexible benefits plan could fall foul of the Pensions Act 2008 if they offer inducements for staff to ‘flex’ out of the pension scheme.

Employers could be in breach of the legislation if they offer an inducement for the sole or main purpose of encouraging an employee to opt out of, or cease being an active member, of a qualifying pension scheme or the personal accounts scheme, under section 54 of the Pensions Act.

An employer that offers a flex package that allows staff to opt for perks, such as a cash allowance, company car or holiday, as an alternative to the basic 3% employer pension contribution required under the new legislation, could be considered to be in breach of the Act, according to the Department for Work and Pensions’ (DWP) guidance.

It states that while employers are free to offer alternative benefits in addition to the 3% pension contribution, they may breach their duty not to offer an inducement if the rewards are offered in such a way that they are “mutually exclusive” to the minimum employer contribution.

Lesley Harrold, a pensions lawyer at Norton Rose, said: “The DWP has said that inducements caught by this provision would include offers of higher salaries and one-off payments. However, there is nothing in the legislation that prevents an employer offering its employees a flexible benefits package which includes as a core benefit the minimum required contribution levels to a money purchase scheme.”

Employers may wish to ring fence pension contributions within the flex scheme.