Can a DC plan be “in deficit”?

Yesterday, I fired off a message to the Pensions Regulator to put a stop on Whitbread’s sale of Costa to Coke, till restitution is made of the money owing to the low earners auto-enrolled into its net pay workplace pension.

I won’t go over the mechanics again, but will make these observations

  • In the context of the sale price and the deficit contributions made to plug the £369m deficit to the DB plan, this will be “small change”
  • Many senior executives will compare the amounts outstanding to their own finances and consider them “de minimus”.
  • What is de minimus for someone on £100,000, is not de minimus for someone on £10,000 per annum

The last time I specifically mentioned a scheme for its DC practices it was House of Fraser, who back at the start of auto-enrolment were offering an “active member discount” to their staff which was paid for by higher charges by those who left. That practice was subsequently banned, I hope that the DWP will get round to banning net pay schemes from being used as workplace pensions unless the Government incentive is made up by the employer (where it cannot be retrieved from HMRC).

DC plans can be in deficit – just like DB plans; why do DB plans get all the love?

But what about the good employers that pay more than AE minima?

This was precisely the argument put forward by House of Fraser and their advisers. HOF paid AE minima on the whole of the salaries of employees and this indeed advantaged the low-paid. Nonetheless they had to change their workplace pension’s charging structure. The argument is straightforward, if your practices are obscure and staff do not understand how things work, then you are not treating your staff fairly. Indeed you are using your knowledge to the advantage of the employer and to the disadvantage of your staff.

Whatever the contribution that an employer makes to staff, should be openly displayed and if staff are told that they will get the Government incentive – as Government tells them, then it is incumbent on the employer to make sure that incentive arrives. That means for all staff entitled to it – not just those paying tax. The Government incentive is an incentive to save – it is tax-band related but it is not tax-relief.

Those who claim that those who pay no tax- get no tax relief are right, but they are not right to deny those who pay no tax (and are auto-enrolled) the Government incentive. This applies whatever the defined contribution on offer.

If employers want to reduce the generosity of voluntary payments above the minima in order to meet the cost of paying the incentive to staff, they should be able to do so (provided this does not take them below the minimum contribution level). What employers should be banned from doing is advertising a headline rate that looks attractive , but delivering well below the implied contribution, that is what net-pay schemes are doing, it is not transparent, it is dishonest and it should not continue.

Why pick on Whitbread?

Whitbread are selling to Coca Cola, not just a great business (Costa) but the services of a valued workforce. When the sale agreement is completed, Whitbread’s obligations to pay and pay pensions to their staff, will cease. Whitbread will effectively walk away from its workforce having underpaid the pension promise. They will leave individual members of staff with a DC deficit – not all, but all who contributed to its pension without getting the incentive.

There are many employers who will argue that in offering a workplace pension on a net-pay basis, they are just following the pack. They would be right, not only do most of the single-employer occupational DC plans work on “net-pay, many of the multi-employer ones do. I’m grateful to Financial Adviser for this table  that focusses on occupational pension schemes. Shamefully the list includes insurers, consultants as well as old fashioned multi-employer master trusts like the Pensions Trust.


One of the providers mentioned above – NOW pensions – has made some effort to restitute low earners, the rest (saying no) have not. Smart has said it intends to move to Relief at Source soon.

Here is the Pensions Regulator with its current statement on the issue. Frankly this is a cop-out and is failing to protect low paid members of AE workplace pensions.

net pay 2

TPR has a statutory objective to protect all members, not just those lucky enough to be in DB schemes.

A problem that’s not going away.

As most of us know, minimal contributions to auto-enrolment went up last April and will go up again this April coming, Employee contributions will quadruple in the space of two years and so will the net-pay problem. The Government needs to act now – before the problem becomes so large it becomes insurmountable.

But even today, there are many – including the low paid at Costa (and Whitbread in general) who will find their retirements diminished because they did not get the pension contributions they were promised.

I will close this blog with a comment on another FT Adviser article, the author – Ros Altmann. It’s from Michael France.

This annoys me the most.
“Officials have even told me these workers are only losing small sums, so it does not really matter.”

If you’re living on the poverty line a few pounds a month can be the difference between eating and not eating.

Also, they will be losing these “small sums” for decades if things stay the same. A “small sum” every month really adds up over the years. Saving an extra £10 per month for 20 years with interest of just 1% would lead to savings of over £2,600. Adjusting that for any reasonable rate of inflation is still a substantial figure

That is why Whitbread should not be allowed to walk away from any deficit in its defined contributions. No employer should be using NET PAY for auto-enrolment unless they can demonstrate they are making up the incentive to all staff.

net pay 2




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 Can a DC plan be “in deficit”?

  1. Bryn Davies says:

    I agree with all this. But I think you should also highlight the failure of the Government to sort this out.

  2. Ros Altmann says:

    Brilliant blog Henry you are absolutely right. Let’s end this injustice now. Why derail newly building confidence in pensions for the sake of small sums? And surely the actual pension schemes have responsibility too? I am amazed at the prevalence of this unjust treatment of low earners.

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