This article forms part of AgeWage’s response to the Government’s call for evidence on the administration of pensions tax-relief . Here we look at the steps pension provider can and are taking to make consumers aware of the problems of overpaying pensions.
AgeWage is a company set up to help consumers better understand the pension policies they have established. It regards the consumers of pensions in this context as any person or organization who makes use of the generous incentives offered by the Treasury to improve retirement incomes. “Consumers” therefore include employers setting up workplace pensions under auto-enrolment and previously under voluntary arrangements- whether these be employer based contract schemes or trust based arrangements.
The consultation asks how
pensions providers currently engage with employers around the differences between net pay and RAS for their employees. It asks whether the method of tax relief a scheme operates is a relevant factor in the employer’s decision (either directly, e.g. when considering employees’ financial positions, or indirectly, e.g. through an impact on provider fees).
There is a potential for complicity between employers , their pension providers and indeed the Government that results in letting sleeping dogs lie.
The outsourcing of everything to workplace pensions looks extremely attractive to employers and it’s one of the main reasons that master trusts have prospered out of its staging.
Since the principal purchasing decision taken by the employer has already been taken , the commercial question is now about keeping participating employers in both trust and contract based schemes compliant and comfortable that the workplace pension is giving staff value for money.
We have seen many services offered to employers regarding compliance – principally around the correct payment of contributions; however we have seen no evidence of audit facilities provided by administrators to tell employers how many staff are impacted and how great that impact is. It is strange that as consultants invent ever more elaborate constructs to measure value for money, they miss the importance on reporting on members overpaying their pension contributions by up to 25%.
Consequently , value for money reports from the trustees of net pay DC schemes (which are typically advised on by such consultants) rarely make mention of the net pay anomaly.
Perhaps it is not so surprising when one considers the impact of increasing member awareness. Without such an awareness, members continue to make contributions. No significant difference in opt-outs has been reported between low-earners in RAS and net-pay schemes suggesting that members are oblivious to the value they are getting for what they are paying.
In short, the net pay anomaly , like most aspects of pensions, remains a mystery to consumers and most providers seem happy to keep things that way.
There are exceptions. Legal & General now offer two versions for participating employers in its master trust. One version is net pay, the other RAS and employers (like Tesco) can use both. It is possible to do the same by running two arrangements within People’s Pension. These providers are making employers aware of the capacity to manage the net pay anomaly but that still requires employers to identify who is at risk of over-payment.
Meanwhile the third party (and occasional in-house) administrators of occupational schemes have not re-engineered their systems to enable a RAS alternative. NOW pensions, which uses JLT’s Profund system and JLT/Mercer’s administration team, has found no alternative to net pay and has felt impelled to offer members a top-up. In view of the lack of awareness reported above, it is not surprising that NOW’s munificence is reported to have had a low take-up.
Employers who have contracted to these administrators have little alternative under auto-enrolment than to continue to require members to overpay. There are very few employers who can do a Tesco.
Problems with previous communications
A typical advertisement about who pays what
Employers may not be overly keen to consider the consequences of employee’s overpaying as it presents them with an issue they can do nothing about and a liability that is not of their making but for which they may become liable if promoted.
Indeed, if the employer has promoted the 4+3+1 solution (see above) as the Government suggested, the employer may be feeling more than a little aggrieved that this is not what it can always deliver.
Letting sleeping dogs lie is not a long-term solution
Government need only turn to the WASPI problem, to see that not communicating a pension problem can store problems for the future.
The inability of providers and employers to find a solution to their net pay problem should not be their problem. In our view , this is a problem that is created by Government policy and needs to be sorted by a Government solution.
Does AgeWage deliver different scores for a non taxpayer in two AE minimum schemes that are identical except that one is RAS and one is net pay?
I’m sorry Henry but you are falling into the quasi get-out-of jail excuse regarding advertising the processes of Auto Enrolment (AE) to staff. Your illustration above shows exactly what ALL the Gov departments (Treasury, DWP, tPR, HMRC were quoting to the public right back prior to launch on 1 October 2012.
The figures and text quoted were issued to employers, providers and admin system designers as COMPULSORY text in the communications to be issued to employees. It is not the fault of providers nor indeed the employers that employees have been misled or cheated out of their tax incentive. Each made their choice of tax system based on the Government’s information and instuctions. TPR Employer Guides gave the prescriptive letter templates employer had to use – there was no ‘suggestion’, the Guides spelt out the letter templates.
The problem of tax relief differences didn’t appear until George Osborn split the income trigger point away from the LEL, without proper research into the effect of his Pension Freedoms, by which time providers had already designed their systems and thousands of employers had chosen schemes based on information when ther was a status quo of tax relief systems.
The solution now lies with HMRC creating a new tax code, for those assessed to join via AE but earn less than the LEL, which would allow relief to be added at source and offset within the employer’s normal RTI submission. Payroll systems can be altered much more cheaply than any redical change of the UK tax relief system; the code can be allocated (superseding the employee’s general personal code) when earnings in a payroll period are below the LEL with the relief added to the payment to the provider deducted from the monthly tax paid to HMRC.