In its latest guidance, the Pensions Regulator (TPR) has offered some insight on how salary exchange, or in old money, salary sacrifice, fits in with automatic enrolment. So what does the guidance say and how could it work in practice?
The problem is that automatic enrolment means that eligible jobholders will be put in a pension scheme whether they like it or not, although they can, of course, opt out afterwards. But salary exchange is predicated on a change to the contract of employment, so workers must be given the choice as to whether to enter into a salary exchange arrangement or not.
This doesn’t mean that employers can’t enrol, as opposed to automatically enrol, workers into a pension scheme on a salary sacrifice basis before the automatic enrolment date. This can be achieved via the terms and conditions of employment, as long as the worker is given the choice.
This is not a particularly new way of doing things. Many employers already use this process for new starts and have been doing so for several years. But there are two considerations to take into account if this process is to work with automatic enrolment. Firstly, the enrolment must happen before the automatic enrolment date, and secondly, the scheme into which workers are being enrolled must be a qualifying scheme, in that the contribution rate must be at least at the minimum level required for automatic enrolment schemes.
But there are some issues with this process. For example, it means employers will have to track three different types of opt out – opt out of enrolment; opt out of salary exchange; and opt out under the automatic enrolment rules. And it could mean that some workers who wouldn’t have to be automatically enrolled would be enrolled. For example, the employer may not know if the worker will be an eligible jobholder at the deferral date. And if they are enrolled before the deferral date, the employer could end up paying pension contributions for workers where they don’t have to.
To get around these issues, employers could just give workers the choice – this could be via negative affirmation – to be automatically enrolled on a salary exchange basis or not, assuming they are eligible jobholders. But this raises other issues. It is not yet clear whether this model is entirely suitable, as there is a lot of information being delivered to the jobholder, which could lead to confusion.
And if jobholders opt out, the employer will have to unravel the salary exchange arrangement as well as handling the opt out.
So instead of operating salary exchange ahead of the auto-enrolment date, employers could choose to wait a bit. Doing this means that many of the issues above would simply go away, making it somewhat easier in practical terms. Employers could issue the information required under automatic enrolment, along with a document that says that salary exchange will be used at a future date unless the worker says otherwise; negative affirmation.
Instead of operating salary exchange ahead of the autoenrolment date, employers could choose to wait a bit. Doing this means that many of the issues above would simply go away
The future date will be a date after the end of the automatic enrolment opt out window. This means that employers won’t have to track three sets of opt out rules, and any automatic enrolment opt outs should happen before any salary exchange takes place. As a result it is less likely that employers will have to process both the opt out and the unravelling of the salary exchange arrangement.
However there are still some issues with this approach, as there is a lot of information being delivered – and this could lead to confusion.
Alternatively, to overcome all these issues, employers could choose to introduce salary exchange to everyone who has been automatically enrolled some time after the automatic enrolment opt out window has ended – perhaps a month or so later. But this might mean fewer people signing up, and it is a less streamlined process since two separate communication exercises would be needed, leading to additional costs.
In practical terms, no matter which process is used, it will make life far easier if employers align both the automatic enrolment and salary exchange processes with payroll.
Advisers will need to ensure that they take all of these factors into account to make it as easy as possible for employers who want to operate salary exchange with automatic enrolment. And they’ll need to make sure any solution remains compliant with both the automatic enrolment and the salary exchange rules.