“Low earners miss out on £85m pension tax relief” – and why!?

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“Millions of part-time workers are being denied valuable tax-breaks on their pension contributions as government officials knowingly all low them to save into schemes that will not pay them relief they are entitled”

So thundered the FT (26/09/15) and it’s a mark of the increased influence of workplace pensions , that Jo Cumbo’s story made it into the National News section of the paper. This is not just a pensions issue.


Another DC Governance failure

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The story should ring alarm bells for anyone involved in DC governance. Net pay schemes, which only grant tax relief to those who pay tax, account for the majority of the arrangements granted the NAPF’s Pension Quality Mark. The NAPF publish the list here.

Many of the PQM schemes are established as Group Personal Pensions – which do provide tax relief to contributors who don’t pay tax. The first question we should be asking is why the Trustees haven’t switched to the Relief At Source method. NEST and Peoples Pension are two Trust based DC plans that use RAS – why haven’t others followed suit?

Members of the NAPF have recently complained to my bosses that I have been criticising them for inaction. I make no apologies. They are belatedly admitting there is a problem

“The National Association of Pension Funds said most employers chose to operate their schemes on a “net pay” because -taken overall, the maximum amount of contributions was paid into members’ pensions as quickly as possible”.

This is short-hand for “so that our higher rate tax payers don’t have to wait a couple of months to get their tax back”.

But now it’s the FT asking the questions, they aren’t quite as belligerent as they add…

The current anomaly between ‘net pay’ and ‘relief at source’ is a very real, though a very recent problem for both savers and schemes. We have asked the government to conduct a thorough review of how this can best be resolved and avoided in the future”.

This can best be translated into everyday language as

“ok – we accept the game’s up; HMRC this is your problem – go away and think about it for a couple of years”

This is buck passing of the worst kind, the NAPF need to put their own house in order, trustees need to exert their fiduciary influence on their suppliers and members should get their tax relief without further ado.

Why is it all so hard?

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I spoke with Moreton Nilsson, CEO of NOW pensions about this earlier this month. He runs a trust based scheme under net-pay which – inadvertently -denies its low earners tax relief. Moreton acknowledges there is a problem and could only say it’s not so easy to fix”.

NOW uses a pension record keeping system known as Profund which is owned and administered by JLT. I am wondering whether JLT might explain what is so difficult about administering RAS.  JLT is also administering the Pensions Trust “SmarterPensions” , a scheme for charities and NGOs.

(Ironically JLT are quoted in the FT article bewailing “the huge numbers being automatically enrolled exacerbating the problem”. Considering JLT are making good money from these huge numbers, this is more than a bit rich).

NOW Trustees really are a collection of the great and the good. They include a former General Secretary of the TUC, a Conservative minister and a past Government Actuary.

SmarterPensions trust board is also packed with pension grandees. Both NOW and SmarterPensions qualify as “PQM ready” multi-employer schemes. The NAPF tells us

A PQM READY scheme is one which is able to accept multiple employers. We have already assessed the schemes as having good governance, low charges and clear member communications. If you choose one of them as your workplace pension scheme, then you only have to pass the contributions element of our assessment process to be awarded a Pension Quality Mark in your own right

Quite clearly, the problems created by the changing tax position of pension contributors earning less than £12k, have not been addressed by almost all occupational pension schemes and the PQM and PQM ready kite marks are proving themselves inadequate to protect low-earners. I speak as a


That means a friend of DC governance but no friend of  timidity and inaction.

A governance failure or a Government failure?

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If the governance failure surrounding the NAPF’s DC governance framework are not bad enough, what do we make of the Government’s own part in this? This blog has been high-lighting this issue ever since the proposals to increase the nil-rate band were first put forward by the Liberal Democrats in their 2010 election manifesto. In the intervening time, the nil rate band has increased to £10,600 and is shortly due to increase again to £11,000. It is now above the auto-enrolment threshold for eligible jobholders (£10,000) and is likely to stay that way.

What pressure has Government been putting on net-pay schemes to treat low-paid employers fairly?

Belatedly, Ros Altmann has started talking about this problem, the Pension Regulator’s auto-enrolment department is aware of it and TPAS know about it. But I know for sure that the first time TPAS became aware of the problem was when I brought it to the attention of their CEO.

This is a failure not just of governance but of Government.

What is to be done?

  1. As we have said in our submission to the consultation on the Green paper on tax relief , this cock-up is symptomatic of the problems around a complex system of pension taxation. Until we have a simple system that aligns pay, tax and pensions in a comprehensible way, we will continue to have these Governmental and Governance failures. I hope that the Government use November 25th to create a simple system and I don’t mind if we don’t see it implemented for a couple of years. We need a thorough, well thought through taxation system – built to last.
  2. In the meantime, net pay providers need to explain what they are doing to put right the inequalities. I hope that campaigning organisations like the NAPF put pressure on the Net-Pay schemes to make a statement of intent to switch to Relief at Source as soon as possible.
  3. Thirdly, we need to understand why moving to relief at source is so hard for pension administrators. Until recently, I heard from third party administrators that trustees would not let them move to Relief at Source as it denied them the ability to take refunds of contributions made to the pension pots of employees leaving within the first two years. This excuse is no longer valid, September 2015 is the last month when refunds can be collected. I note in passing that the principle use of the contribution refunds was to pay the administrators and advisors to the occupational pension scheme.  The conflict of interest has gone too!
  4. If there is no good reason why Trustees cannot operate their schemes under relief at source (and I can’t see one), then the Pension Regulator should intervene and make kick butt. I mean by this Andrew Warwick-Thompson’s DC team – but this is an issue for the Board and Lesley Titcombe (tPR’s CEO).

A disgrace to pensions

This situation is a disgrace. It brings pensions into disrepute and reinforces prejudices that the pension system is being manipulated by those with power and money at the expense of the poor and powerless.

That this is unfurling in front of Ros Altmann, a consumer champion, and now part of Government , makes this the more farcical.

This is not a problem which is hard to fix, it needs prioritisation.

If there is a positive coming our of this, it is that it is drawing people’s attention to pension governance , that not all pensions are the same and that the choice of workplace pension does matter.

For some time, http://www.pensionplaypen.com has been marking down net-pay schemes being used for low-earners and if you want to be sure you don’t choose a pension that denies your staff their due, make sure you use our choose a pension service

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About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to “Low earners miss out on £85m pension tax relief” – and why!?

  1. 2020group says:

    Reblogged this on 2020group and commented:
    Great read from The Pension PlayPen

  2. henry tapper says:

    Thanks 2020 group

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