The Pensions Ombudsman (PO) has recently given his determination in a case relating to a “pension allowance” salary enhancement and the question of auto-enrolment. The PO found that an employer should, before deducting its mandatory 1% employer auto-enrolment contribution from a 15% pension allowance paid to an employee as a salary enhancement, offer the employee the alternative of opting out of auto-enrolment to continue receiving the full 15% as cash.

The PO partially upheld a complaint by a member who submitted that his employer should have paid the mandatory 1% contribution in addition to a 15% pension allowance. Despite the PO finding that the member's contract of employment, both before and after a “TUPE” transfer, did not provide for this, the PO nonetheless held that the employer had failed to explain the effect of auto-enrolment on the member's unusual contractual position and should have offered him the choice to opt out. The PO also held that these options did not constitute "undue coercion" not to be auto-enrolled under the relevant legislation.

There has not been much discussion of the case among pension professionals, although the point has been made that the PO may have applied an incorrect test, referring to “coercion” rather than “inducements” as contained in the legislation. Nonetheless, time will tell as to whether any future cases adopt this as a point of reference for employers on influencing opt outs.