How does pensions auto-enrolment fit with flexible benefits?

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  • Under auto-enrolment, the main purpose for offering flex must not be to induce staff to opt out of a scheme.
  • The communication and design of a flex scheme and the contribution structure of a pension scheme will be key to determining what is acceptable.
  • An employee who is automatically enrolled into a pension scheme cannot be required to commit to a salary sacrifice by the auto-enrolment date.
  • Good communications and efficient administration will minimise conflicts between flex and auto-enrolment.

Auto-enrolment poses extra problems for employers operating flexible benefits or salary sacrifice schemes, says Peta Hodge

Pensions auto-enrolment will throw up challenges for almost all employers, but particularly for those operating flexible benefits schemes.

The main problem is that, under auto-enrolment rules, an employer must not induce staff to opt out of a pension scheme and the minimum contribution levels, which will be phased in to reach a maximum by October 2018.

This could be a problem for employers operating flexible benefits plans which allow staff to trade pensions against other benefits.

Mark Futcher, partner with Barnett Waddingham, says: ” This is a grey area and it will be interesting to see case studies emerge.”

But Jonathan Wood, consultant with Jelf Employee Benefits, says: “The flex system may make the fiscal cost of auto-enrolment more visible to a worker, but I do not think it can be considered an inducement to do something every worker has a right to do [opt out].”

Futcher believes the communication and design of the flex scheme and, possibly, the contribution structure of the pension scheme, will be key to determining what is acceptable.

“If the communications overtly promote the option to ‘flex down’ below the minimum requirements, or even to forgo pension provision entirely, The Pensions Regulator (TPR) is unlikely to find this acceptable,” he says. “TPR may take the same stance if the design of the flex scheme allows staff to take flexed-down pension provision as additional salary.”

Good staff engagement

Jason Cannon, senior corporate pensions adviser at Lorica Employee Benefits, hopes good staff engagement and education will avoid the perception of inducement. “To avoid it entirely, [employers] could remove the pension provision from flex,” he says.

Futcher hopes TPR will issue broader guidelines. Currently, it does not intend auto-enrolment to restrict flex, but employers must be sure that, in offering such a package, their sole or main purpose is not to induce staff to opt out of a qualifying pension scheme.

Employers using salary sacrifice arrangements also have several factors to consider.

TPR has said an employee who is auto-enrolled into a pension cannot be required to commit to a salary sacrifice arrangement by the auto-enrolment date, but an employer can put pensions salary sacrifice in place ahead of this date or use postponement of up to three months to allow time to make arrangements.

Wood adds: “Employers can’t compel employees to enrol into salary sacrifice; it is done on an optional basis. It seems the current approach is not dissimilar to how salary sacrifice will operate post-auto-enrolment.”

In April, HM Revenue and Customs changed its guidance to ensure staff in salary sacrifice arrangements will not lose out when auto-enrolment kicks in. The change, urged by Friends Life, means staff auto-enrolled via salary sacrifice will not be held to the arrangement if they opt out of the pension and will be entitled to a refund of the salary sacrificed.

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Futcher says the administrative issues of this are again more onerous for employers with flex schemes, but efficient administration may avoid the need for refunds.

Read also A flexible approach to auto-enrolment