'Jam today' pension offer could undermine auto-enrolment

Automatic enrolment has been one of the great success stories for UK pension provision.

Conceived as a response to decreasing levels of workplace pension coverage, its implementation has demonstrated the benefits of evidence-based policy, political consensus and careful planning. Since its launch in October 2012, auto-enrolment has surpassed all but the most optimistic expectations. It has proved popular with the public and the numbers of opt-outs has been encouragingly low. However, in February this year the auto-enrolment project finally met its first real challenge – and it came from a somewhat unlikely source.

Oxleas NHS Foundation Trust placed a recruitment advertisement on its website for Band 5 nurses. These are newly-qualified professionals who are low to medium earners. In the majority of cases, they will also be young adults. As part of their remuneration package, new NHS employees are eligible to join the 2015 NHS Pension Scheme, which is the principal scheme used by the NHS for the purposes of auto-enrolment.

It is a 'Career Average' scheme in which a member accrues 1/54th of his or her salary each year as pension. Each year's accrual is added to a 'running total' which is revalued to retirement at a rate which protects its value in real terms. In an era where defined benefit pension provision has all but disappeared outside the public sector, the scheme is a valuable benefit that should be prized by any new recruit.

A disincentive

The problem was that Oxleas offered potential recruits a perceived incentive not to join it. The recruitment advertisement promised that new recruits who elected not to join the NHS scheme would be given additional salary of between £2,586 and £3,278: the amount that Oxleas would be required to pay as an employer contribution to the NHS Scheme. Those who opted for the additional cash would still be subject to auto-enrolment, but would instead be enrolled into the National Employment Savings Trust (NEST).

It must be emphasised that Oxleas has done nothing illegal. Although it is an offence for an employer to 'induce' workers to leave an auto-enrolment scheme, this is not what Oxleas has done. It has offered potential recruits a choice between two different auto-enrolment schemes and so complies fully with its employer duties under the 2008 Pensions Act.

It is also worth considering why Oxleas has made this offer. It prefers to recruit its own permanent staff rather than use agency staff. As an employer, it has to compete with agencies, who can afford to pay higher salaries rather than meet the cost of providing other employee benefits.

However, this case does present serious issues for the Government to address. Although Oxleas has acted within the law, some argue that its conduct undermines the fundamental objectives of auto-enrolment.

By opting for NEST, new young recruits would enjoy higher salaries while still being given membership of a pension scheme. However, NEST is a defined contribution arrangement and currently the total contribution made for members would be just 2% of earnings over £5,824 per annum. Many argue that this represents a poor long-term alternative to the security of a career average scheme. However, it is hardly difficult to see that some people are likely to be enticed by the promise of 'jam today' in the form of an enhanced salary.

Dangerous precedent

It is right to question if this conduct is appropriate for any employer – and this case could set a dangerous precedent. It also creates a situation in which a Government agency is undermining the policy objectives of the Department for Work and Pensions.

Government should promote a workplace pensions culture in which employers are encouraged to provide the best for their employees rather than seek to comply with the minimum required of them by law. Oxleas' sense of competition with agencies may have led to a race to the bottom which might, ultimately, be to the detriment of their employees.

Tim Middleton is Technical Consultant at the Pensions Management Institute

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