Auto-enrolment and flexible benefits

Introduction

Employers may want to operate automatic enrolment as part of a flexible benefits package. In doing so, they will need to ensure that the way in which they offer a range of benefits does not inadvertently cause them to fall foul of the auto-enrolment requirements.

In this newsletter, the second in a series looking at tricky auto-enrolment issues for employers, we examine the impact of the new rules on flexible benefit arrangements.1

Key points

Flexible benefits packages can be offered to staff in the new world of auto-enrolment, provided that employers meet the underlying obligations of the new regime.
However, flexible benefits packages must not be structured in such a way that would amount to an inducement to opt out of pension saving.

The auto-enrolment duty

Starting in October 2012, employers will be required to enrol their “eligible jobholders” into a qualifying pension scheme and pay contributions. (An eligible jobholder is a person who works in the UK, who is between the ages of 22 and SPA and who earns more than £8,105.) The duty will apply to the largest employers first, with those employing 120,000 or more persons in their PAYE scheme on the starting blocks in October 2012.

Unless an employer chooses to postpone auto-enrolment, the new duty will take effect from a jobholder’s “automatic enrolment date” (AED). This is the first date on which a worker meets all the criteria to be an eligible jobholder and the point from which contributions are due and must be calculated.

Opt-outs and inducements

Jobholders have a statutory right to opt out of the pension arrangement into which they are automatically enrolled and to receive a refund of their contributions. As an employer must not induce a jobholder to opt out of auto-enrolment, any flexible benefits package must be designed in such a way that it is not seen as encouraging anyone to opt out.2

Flexible benefits and auto-enrolment

Flexible benefits packages allow employees some freedom of choice over the total pay and benefits they receive. Typically, such packages allow employees to choose their level of pension saving alongside or instead of other benefits, such as healthcare, life assurance or cash.

Auto-enrolment is not intended to restrict employers from offering flexible benefits packages. When auto-enrolment applies to an employer, it will be able to continue to offer a range of benefits to its staff, provided the underlying employer duties of auto-enrolment are met.

One of the main issues for employers using flexible benefits packages will be to ensure that the sole or main purpose for offering such a package is not to induce individuals to opt out of a qualifying scheme. As TPR explains,3 in practice, this will generally mean that an eligible jobholder (or non-eligible jobholder who has opted-in to pension saving) first needs to be enrolled into the employer’s chosen auto-enrolment scheme (from their AED), with contributions paid at or above the relevant minimum contribution level for the scheme to be qualifying.

Once enrolled, the jobholder will be able to opt for a lower level of contributions, in exchange for alternative benefits, in accordance with the terms of the employer’s flexible benefits package and the scheme rules.

Practical considerations

For employers who do not offer a flexible benefits package, an active choice (freely expressed) by a jobholder to opt out of auto-enrolment and continue pension saving at a different level (or not at all) is relatively clear cut. By contrast, in its guidance on inducements,4 TPR gives a number of examples of “less clear cut” cases, which include flexible benefits packages.

In one such example,5 an employer operates a flexible benefits package in which the pension scheme is one of a range of benefits on offer. The employer automatically enrols all its eligible jobholders into a pension scheme, but some choose to opt out in favour of a non-pensionable benefit or cash alternative, while others choose to make pension contributions at a lower rate (for example, into a non-qualifying scheme or section of a scheme). According to TPR, the employer must be able to demonstrate that, in offering such a package, their sole or main purpose is not to induce individuals to leave the qualifying scheme or section of the scheme.

The key for employers offering flexible benefits packages will therefore be to consider the range of benefits on offer, looking in particular at how the flexible benefits package is structured and the way in which the alternative benefit elements are presented or offered to the jobholder.

Coming soon!

Our next Newsletter on tricky auto-enrolment issues will focus on automatic enrolment and members with enhanced or fixed protection.

1 Please see our first newsletter in this series: “Auto-enrolment and Salary Sacrifice” (August 2012)
2 Such conduct is prohibited under the Pensions Act 2008
3 TPR Detailed Guidance No. 4: Pension schemes under the new employer duties
4 TPR Detailed Guidance No.8: Safeguarding individuals (section 4)
5 As above, example 3