Government plans to reform tax relief could result in more employers following the NHS and tempting staff with deals that lead them to give up pension contributions in favour of high salaries.
Last week it was revealed the Oxleas NHS Foundation Trust in South-east London is giving newly-qualified band five nurses the choice of being paid money that would go into the NHS scheme.
The NHS Pension Board and Royal College of Nursing expressed alarm but the trust defended its arrangement, which has been in place since January.
The trust says it makes “no direct savings” in the deal and The Pensions Regulator “concluded the choice we are offering is lawful”.
But Tisa policy director Adrian Boulding warns potential changes to the tax relief system could encourage other employers to follow the NHS.
Chancellor George Osborne is due to announce radical reforms to tax relief in the Budget next month.
Boulding says: “One possibility is he will cut employers’ National Insurance relief, in which case expect to see a whole load more of this kind of behaviour.
“Today, if you’re an employer and you put £100 into a pension it only costs £100, but if NI relief is cut the employer has to pay an extra 13.8 per cent on it.”
Willis Towers Watson senior consultant David Robbins says the regulator has limited power to stop firms offering inducements. He says: “I’ve got a bit of sympathy with TPR here – they can only enforce the laws Parliament has passed.
“It’s not in anyone’s interest for TPR to take action in a case it would lose a legal challenge to. That sends out a message that people can do exercises like this. It would be counterproductive and a waste of tax and levy payers’ money.
“However, the regulator’s guidance is contradictory in places. In its guidance on inducements they give two examples that conflict. For that, TPR can rightly be criticised.”
A TPR spokesman says: “Our published guidance sets out our view of what constitutes inducement. The guidance specifies an employer is in breach where their sole or main purpose is to induce workers to leave the pension scheme.
“We investigate each case on a case-by-case basis. Some cases may be less clear-cut than others but in fact do not constitute inducement –for example, where employers offer a flexible benefits package and give staff a genuinely free and fair choice as to whether they choose to stay in a scheme or take alternative benefits. Where the employer has no vested interest in the individual’s decision, it would not constitute inducement.”
Automatic enrolment is a significant cost to employers, and it would be understandable if some were tempted to quietly encourage their workers to opt out. That is why section 54 of the 2008 Pensions Act says firms may not take any action “for the sole or main purpose” of inducing a worker to give up membership of a relevant scheme.
By and large, that legislation seems to have worked and until now there have been few reports of inappropriate inducements. The worry about the actions of this NHS trust, which seem to have been allowed on a technicality, is that they could set a very dangerous precedent.
While policing larger unionised employers like NHS Trusts is relatively easy, policing thousands of small firms will not be. So it is vital regulators put the situation beyond doubt and make sure no employer is tempted to incentivise an employee to opt out of their workplace pension scheme.
The whole idea of automatic enrolment is millions of people will benefit from saving in a pension and this should be the default position. Without having to take any action, auto enrolled workers start to build up pension rights and can look forward to a better retirement. But this idea would be fatally undermined if employers start offering cash today on condition that workers opt out of their pension.
Cash today is always likely to be more attractive than cash in retirement, but if this catches on, especially among younger workers, all the progress made under auto enrolment could be undermined.
Steve Webb is director of policy at Royal London