Employers who offer employees a Cash option i.e. cash in the form of salary supplements instead of pension contributions is not a new phenomenon. Employers have typically offered a cash option for the following reasons:
- Gives employees more flexibility in how they structure and take their own reward package to attract and retain staff.
The Danish Pensions Agency’s guidelines (tPR guidance) recognizes in this area that employers would like to offer their staff a flexible benefit package, where membership of a pension scheme is one of a number of elements offered, but also includes non-pensionable benefits or cash alternatives, such as a higher rate of pay.
- Allocation of non-pension rights to employees who are at risk of exceeding the tax deduction for tax-free pension savings.
This mainly includes employees who have reached their lifetime benefit, ie. the total amount a person can build up as a pension savings account without incurring a tax (currently the standard life benefit limit is £ 1,073,100). It also includes employees who are likely to exceed the annual compensation limit (currently £ 40,000), is the total amount an employee can contribute to retirement in a tax year while still benefiting from tax breaks.
Since the COVID-19 pandemic, we have seen an increase in the supply of cash options from employers in sectors hardest hit by the pandemic. The main purpose here is to temporarily supplement the income of employees whose salaries have had to be reduced as a result of the COVID-19 crisis, regardless of whether the employees have been fired or otherwise.
Auto sign-up and encouragement
Since 2012, employers in the UK (starting with the largest employers first) have been subject to the “auto-enrollment” scheme for compulsory staff retirement. Subject to an employee’s right to opt out, employers must automatically enroll staff who meet certain criteria (primarily in terms of age and remuneration) in a pension scheme that meets statutory minimum standards.
It is illegal for an employer to induce an employee to opt out of the employer’s automatic enrollment system.
Employees generally cannot make a claim against the employer for not complying with the automatic registration scheme. Instead, the pension supervisor (tPR) has the task of ensuring compliance with automatic registration. tPR may take enforcement action and impose fines. Certain acts or omissions on the part of an employer may also constitute criminal offenses – these include an “intentional” failure on the part of an employer to comply with some of the most important duties in connection with automatic registration.
The “sole or main purpose” test.
According to tPR’s guidelines, an incentive is any action taken by an employer whose “sole or main purpose” is to persuade or cause a person to opt out of the employer’s automatic enrollment scheme (without the employee then seeking to become an active member of another pension scheme). .
It does not matter whether the employer’s incentive successfully persuades the employee to opt out or not. Rather, it is the action that the employer has taken in order to get the employee to opt out that is the key here.
Clear cases of incitement – rewards and punishments
According to the tPR guidelines, the following are clear examples of encouragement:
- Where an employer tells staff that they must opt out or leave their pension scheme, and if they do, they will receive any of the following:
- an extended or renewed contract in the case of a short-term employee;
- a one-time payment;
- a higher wage level; and
- a promotion.
- Threaten employees by withholding a promotion or pay rise or threatening dismissal or dismissal unless they opt out or leave their retirement plan.
- Telling a prospective employee for an interview that they are more likely to get the job if they opt out of the employer’s retirement plan.
Less obvious cases
Less obvious examples include where an employer does not state its purpose or the employer puts forward a purpose other than to get workers to opt out or cease membership. Here, tPR will carefully consider the employer’s behavior to determine the true purpose behind the employer’s actions.
The following will be relevant (but not the only) determining factors in all cases investigated by tPR:
- whether the Cash Option notice contained the information necessary for workers to make a fair choice;
- whether the communication was worded in such a way that it directed workers to choose to opt out or cease membership, and whether workers felt that they were controlled in that way (here tPR will consider subtle points, such as how the communication is worded);
- whether the workers actually chose to opt out or cease membership; and
- whether the employer benefited from the workers making that choice.
Where the employer offers a defined contribution plan, an offer of a cash amount lower than that which is cost neutral for the employer (compared to the cost of a pension contribution) is likely to be an incentive. What is a reasonable amount of cash to offer can be particularly difficult to assess where the employer pays contributions that match what the employee chooses to pay, or if there is another differentiated / complex contribution structure in place. The tPR guidance also emphasizes that there may still be an incentive even if the employer did not achieve a financial gain.
Tips for employers
The terms of the cash option should:
- be in writing, clearly state the terms, such as the cash amount offered, the duration of the Cash Option and how often employees can change their mind (and switch to taking a pension contribution instead), and sent to all employees for whom an offer is made. This is important to avoid any confusion among employees and reduce the risk of claims / referrals to tPR later;
- make it clear that the employer may revoke or change the terms at any time;
- include a health warning to employees that a pension is an important benefit and by taking the cash option they may lose it; and
- recommends that employees take independent financial advice before making their decision.
HR employees or line managers who are tasked with explaining or answering any questions related to Cash Option to employees should be properly trained. All information provided to employees should be in writing (ideally with reference to the formal Cash Option terms) with oral communication kept to a minimum.
Any misinformation (which includes not providing sufficient information) to employees can give rise to complaints from employees – for example, not explaining to employees that the cash opportunity is temporary (ie getting them over until the COVID-19 crisis is over) in a disappointed workforce and claims / referral to tPR when the Cash Option is withdrawn.
Employees must opt out of the pension scheme to receive the cash. In any communication with employees, it is good practice (to avoid concerns about an incentive) not to go into detail about the logistics of opt-out, but if necessary to cross-reference / link through to generic material produced by the provider of the pension scheme at opt-out.
When an employee has unsubscribed after their date of joining, the employer is obliged to automatically re-register the employee every three years, after which the employee must unsubscribe again in order to continue to receive the cash. This must be made clear to the employees.
Concerns about discrimination / equal pay claims
Where the cash option is to be made available to certain categories of employees, care must be taken that there is no indirect discrimination (ie due to age or gender). There may also be a risk of an equal pay claim in these circumstances. If e.g. a female employee could show that she did not receive equal pay for a male employee (due to a difference created by the Cash Option), then she could raise a claim for the difference. To do this, the female employee must show that she performed work / work that is assessed as equivalent / work of the same value as the male employee. However, this can be difficult in practice to show.
Where the scheme is intended to be temporary from the start (as we have seen with Cash Options offered during the COVID-19 crisis), this should be made clear to employees to avoid disappointments / demands later. Any withdrawal of the option must also be handled with care.
Cash Opportunities – here to stay
We may have witnessed an increase in Cash Options under COVID-19, but Cash Options is here to stay, not only for employees who are above the limits of tax-free pension savings, but also as part of a broader offering that should enable employees to select and structure their own reward package. However, employers must structure them properly and communicate the terms to employees in such a way that they do not violate tPR’s guidance on incentives.
- Protection of individuals: The safety measures for workers, dated June 2021.↩
- High-paid, ie. those with taxable income in a tax year of more than £ 240,000, their annual allowance for that tax year is limited, so that for every £ 2 in income they have over £ 240,000, their annual allowance is reduced by £ 1. .↩