The Pension Minister is threatening to require employers who run net pay pension schemes that disadvantage staff to compensate those low-paid individuals who lose out on tax relief.
The majority of the tax relief foregone is on contributions to Government schemes so this is likely to go down as well with the Treasury as a burnt Christmas sausage. But the Minister is absolutely right. If no one else will stand up for the 180,000 people who the DWP estimate are missing out, Ros must.
I don’t see any sanctions that can hurt these employers other than the negative PR of being named and shamed. A list of employers who are culprits would not be that long, especially if you took the principal mastertrusts involved as entities (rather than publish the participating employers – who don’t have much say in the matter).
The principal master trust – or more rightly- multi-employer scheme – that creates this problem is the Local Government Pension Scheme (LGPS) together with the Teachers Scheme, the Pensions Trust, The Social Housing Pension Scheme and other defined benefit arrangements in which lowly paid people find themselves, often as part of TUPE arrangements.
Second in the queue are the super large occupational schemes run by companies because they say they are better at doing the job than insurance companies. Ironically, many of these schemes actually sub-contract investment administration to insurance companies but they retain the administration of contributions and member accounts. Almost universally, these large occupational schemes are run as net pay. Many include those auto-enrolled – (typically in DC sections) and a high proportion of those auto-enrolled in 2012-13 will be in large schemes.
Third in the queue will be the mastertrusts set up specifically to meet the demands of the new legislation. Most important of these is NOW pensions, but almost every scheme other than NEST and People’s Pension runs on net-pay.
The problem is bigger than the DWP figures suggest.
My understanding is that the DWP estimate of 180,000 caught in the net-pay net is an under-estimate. It is based on Government numbers of those who have joined voluntarily or through auto-enrolment net pay schemes and are now paying no tax. It is assumed these are people who earn from £10-11k pa. But in practice, anyone with a salary below £11k (including all those on zero hour contracts, is in jeapordy, provided their employer uses a net pay scheme for auto-enrolment,
This is because assessment for auto-enrolment is based on the earnings in the current pay period (which could be weekly, monthly or fortnightly). One spike in earnings over the pro-rated threshold for that period bumps the employee into a pension scheme. That pension scheme could operate under net-pay or it could be relief at source.
The Pension Minister could require employers to set up a relief at source scheme for all employees earning under a certain level (let’s say those with pro-rated earnings under £11k). This would become the auto-enrolment scheme for low earners. Ideally it would take the contributions of those currently paying into a net pay scheme and earning under £11k- though this is going to be disruptive. The disruption isn’t helped because NEST cannot (till 2017) take the already accumulated pension pot as a transfer.
Payroll software (and middleware) should be required to postpone employees spiking into auto-enrolment by default. I understand that some software (Ceridian) already has this built into it. This means of preventing accidental enrolment would further reduce the problem. For employers who are happy that they are enrolling staff into a relief at source scheme (a GPP,NEST or People’s pension) then the option not to pospone could be chosen as the default.
Those schemes that offer either relief at source or net-pay as an option, should have relief at source as the default with net-pay as an option. There are only two of these that I know of (People’s Pension and SuperTrust). I would be happy to learn of othersR
For employers who are setting up new schemes, better information should be available and warnings given where a pre-assessment flags there are non-eligibles and entitled workers who might be caught in the net-pay net.
Current net-pay schemes should be encouraged to switch to relief at source for their administration. We understand that many employers are reluctant to do this because their is a high upfront cost in changing the administration of their systems or the systems of third parties.
If employers operating net pay schemes are not prepared to foot the bill, they should adopt one of the four previous remedies. Either they should set up a new relief at source scheme, make sure their postponement facility is properly working, switch net pay to relief at source (where applicable) and they could make sure that new schemes set up are set up with due regard to the workforce.
Salary sacrifice is not the answer
Large employers who run sophisticated salary sacrifice arrangements (that include those in the “at-risk” group, have already sorted this problem but I do not suggest taking more into salary sacrifice is an answer. For smaller employers without complex and robust systems, salary sacrifice is fraught with risk and will save little (above its fixed costs), for larger companies there are wider public policies at play (relating to the current review of salary sacrifice announced in the Autumn Statement). With the sword of Damacles hanging over the head of salary sacrifice, we suggest it is not the solution to the net-pay problem!
Compensation as a last resort
I don’t like the idea of compensation by employers. It is not right that large employers, which have borne the brunt of auto-enrolment, should be effectively fined for a problem that has risen accidentally – mainly because of the emerging gap between the AE earnings threshold and the income tax nil-rate band.
But if employers (and master-trusts) refuse to address the problem, then I see grounds for compensation, not least that it heads off the threat of class action from ambulance chasing lawyers acting on behalf of the impacted members.
It shouldn’t come to that.
I was alarmed, in reading Jo Cumbo’s most recent article on this that the “Government” are playing down the problem.
The government said this week it was committed to keeping the net pay issue “under close review”, particularly in light of the outcome of the Treasury’s recent consultation on pensions tax relief.
Whatever the outcome of the recent consultation, it will not impact what is going on this tax year and I hope that it won’t impact next year either. This sounds to me like civil servants at odds with their own pension minister who is saying precisely the opposite.
Keeping net pay under close review means more than waiting till 2018-19 (the earliest I would reckon a major tax reform could be implemented). After all, the DWP themselves estimated that it would be a three year job to set the detailed rules for the defined ambition agenda.
The DWP should crack the whip now. They have in Charlotte Clark and Lesley Titcomb, two admirable whip-crackers. I hope that both will be listening to the sage words of the Minister and not allowing them to listen to the Sir Humphries who spoke to the FT.
Naming and Shaming the answer
As I said earlier, the list of employers who operate net pay arrangements is quite short and they are all in the Pension Regulator’s database. They can be surveyed and confirmation received at tPR that one of the remedies mentioned above is in place. Those who do not respond or who refuse to take action should be NAMED and SHAMED.
It’s not good enough that employers who use “trusts” to run their pension scheme, cannot be trusted to act in their low paid employees best interests. It is no use blaming the Government, if you didn’t know about political risk then you should have don- it should be on your risk register and if you don’t want to take it you should not be running your own scheme.
As for master trusts, I’d make it a condition of the Mastertrust Assurance Framework, that schemes audit the tax position of their members and ensure that they are getting everyone tax-relief one way or another.
I have written about a sensible way of getting round the problem by switching to relief at source using Real Time Information from the Treasury and a retrospective sweep.
No more excuses
The occupational pension scheme industry has been slow to pick up on this. The PLSA, and their DC acolyte PQM have been pretty well silent. TPR and DWP have continued pumping out literature to employers that makes no mention of the problem and implies that the Government incentive is available to all who enrol. The major consultancies (Towers Watson excepted) have been quiet (conflicted as they are also TPAs?).
We’ve had enough excuses from the usual suspects. This farrago is going on too long. It is now time for firm action to be taken and that has to come from the top. Ros Altmann is standing up for the people who have no voice and we should be right behind her.
Cracking piece, Henry.
I fully agree with your comments. What worries me is the number / volume of commentators who either fail to see this is a real issue, or pretend its not…
Setting aside the debate as to what tax relief actually is: is it actually a top up incentive to save or simply a refund of tax deducted? Research from the Pru a couple of years ago estimated that (coincidentally, I’m sure) 180,000 higher rate taxpayers were failing to claim the additional £230m due to them under relief at source. Clearly their lot would have been improved by being in a net pay scheme. So the current dual system fails on more than one front…
Sounds like you should have a chat with Michael Johnson Robin!
Thanks Henry. I don’t think Remedy Three works as schemes (including master trusts) can only use one method of accepting contributions. For example, the Peoples Pension is Net Relief at Source with no option for net pay.
I think you are wrong Marvin, the People’s Pension has an option for net pay unless they’ve taken it away very recently and not told me about it!