The employee in Beveridge received a basic salary plus a 15% "value account" to spend on pension and other benefits, with any unused amount paid back to him as cash. When his employment was transferred to a new employer under a TUPE transfer in 2010, the new employer offered him the choice of joining a defined contribution scheme with the difference between the 15% allowance and his contributions being paid to him in cash; or taking the full pension allowance in cash. He chose the latter and, after receiving the allowance, paid a 2.5% employee contribution to his new employer's DC plan.
In 2013 the new employer told him they had to pay a 1% auto-enrolment contribution and that they would take this from his pension allowance. The Pensions Ombudsman partially upheld the employee's complaint about this. Whilst he could not expect his employer to pay additional sums towards his pension when they had agreed to pay a 15% allowance direct to him (subject to any part he wanted paid into his pension), the new employer should have offered him the alternative of opting out of auto-enrolment and continuing to receive the full 15% as cash.
The Ombudsman directed the employer to offer the employee the two options and, if he chose to opt out, to reimburse the 1% payments taken from his allowance, with interest.
Comment & Actions
- The Ombudsman caused a few raised eyebrows by commenting that offering the employee the option of opting out "does not constitute undue coercion not to be auto-enrolled". The law on inducements refers to an employer taking any step that has the "sole or main purpose" of inducing a worker to opt out of their scheme, a rather broader prohibition than "undue coercion" might suggest. Flexible benefit packages are included in the "less clear-cut" potential examples of inducement in the Pension Regulator's guidance note, which goes on to say that an important consideration is whether staff are given a free and fully informed choice. However, the guidance also says, more generally, that the fact that an employer stood to make a direct financial gain from members choosing to opt out is a strong indicator that the employer intended to achieve that outcome; this would not have been the case in Beveridge.
- The facts behind this claim are not common. The historic pension allowance arose out of the arrangements made by the previous employer for existing employees back in 2006 when it closed its final salary pension scheme to new joiners, before the complainant in this case started work. When the new employer took over the business in 2010 it could not have foreseen the auto-enrolment changes and the problems they would cause. Nevertheless, they should have recognised his individual situation and communicated with him, rather than using standard auto-enrolment notices.
- The case is a reminder that the contribution arrangements of employees inherited on a change of ownership need to be checked and their impact on auto-enrolment going forward assessed.