Employers offering employees a Cash Option i.e. cash by way of a supplement to their salary in lieu of a pension contribution is not a new phenomenon. Employers have typically offered a Cash Option for the following reasons:

• Granting employees more flexibility over how to structure and take their own rewards package, in order to attract and retain staff.
  
  The Pensions Regulator's guidance¹ (tPR Guidance) in this area acknowledges that employers may like to offer their staff a flexible benefits package where membership of a pension scheme is one of a range of elements on offer, but also includes non-pensionable benefits or cash alternatives, such as a higher rate of pay.
  
  
• Granting a non-pension option for employees in danger of exceeding the tax allowance for tax-free pensions savings.
  
  This mainly includes employees who have reached their lifetime allowance i.e. the total amount a person can build up by way of pension savings without incurring a tax charge (currently the standard lifetime allowance limit is £1,073,100). It also includes employees likely to exceed the annual allowance limit (currently £40,000),²  being the total amount an employee can pay into a pension in a tax year whilst still benefiting from tax relief.

Since the COVID-19 pandemic, we are seeing a rise in Cash Option offerings from employers in sectors most affected by the pandemic. The main purpose here being temporarily to supplement income for employees whose pay has had to be reduced as a result of the COVID-19 crisis, whether because the employees were furloughed or otherwise.

Auto-enrolment and inducement

Since 2012, employers in the UK (starting with the largest employers first) have been subject to the "auto-enrolment" regime for compulsory pension provision for staff. Subject to the right of an employee to opt out, employers have to automatically enrol staff that meet certain criteria (principally as to age and remuneration) into a pension scheme that meets minimum statutory standards.

It is unlawful for an employer to induce an employee to opt out of the employer's auto-enrolment scheme.

Employees generally cannot make a claim against the employer for not complying with the auto-enrolment regime. Instead, the Pension Regulator (tPR) is tasked with ensuring compliance with auto-enrolment. tPR can take enforcement action and impose fines. Certain acts or omissions by an employer can amount to criminal offences too – these include a "wilful" failure by an employer to comply with some of the key duties relating to auto-enrolment.

The "sole or main purpose" test

As per tPR's Guidance, an inducement is any action taken by an employer, the "sole or main purpose" of which is to persuade or cause an individual to opt out of the employer's auto-enrolment scheme (without the employee then seeking to become an active member of another pension scheme).

It does not matter whether the employer's inducement successfully persuades the employee to opt out or not. Rather it is the action taken by the employer with a view to inducing the employee to opt out that is key here.

Clear instances of an inducement – rewards and punishing actions

According to the tPR Guidance, the following are clear examples of inducement:

• Where an employer tells staff that they should opt out of, or leave, their pension scheme, and if they do they will get any of the following:
  • an extended or renewed contract in the case of a short-term worker;
  • a one-off payment;
  • a higher salary level; and
  • a promotion.
• Threatening employees by withholding a promotion or a pay increase, or threatening redundancy or dismissal unless they opt out of, or leave, their pension scheme.
• Telling a prospective employee at an interview that they are more likely to get the job if they opt out of the employer's pension scheme.

Less clear-cut cases

Less clear-cut examples include where an employer does not state its purpose, or the employer puts forward a purpose other than inducing workers to opt out or cease membership. Here, tPR will carefully consider the employer's behaviour to establish the true purpose behind the employer's actions.

The following will be relevant (but not the sole) determinative factors in any case investigated by tPR:

• whether the Cash Option communication included the information necessary for workers to make a fair choice;
• whether the communication was worded in such a way as to steer workers to choose to opt out or cease membership and whether workers felt that they were being steered in that way (here tPR will consider subtle points such as how the communication is phrased);
• whether workers did actually choose to opt out or cease membership; and
• whether the employer stood to gain from workers making that choice.

Where the employer is offering a defined contribution scheme, an offer of a cash sum that is lower than what is cost-neutral to the employer (when compared to the cost of a pension contribution) is likely to amount to an inducement. What is a reasonable amount of cash to offer can be particularly tricky to gauge where the employer pays contributions that match what the employee chooses to pay or if there is another tiered/complex contribution structure in place. The tPR guidance also emphasises that there may still be an inducement even if the employer did not make a financial gain.

Tips for employers

The terms setting out the Cash Option should:

• be in writing, setting out clearly the terms such as the cash amount being 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 to whom the offer is made. This is important in order to avoid any confusion amongst employees and reduce the risk of claims/referrals to tPR later;
• make it clear that the employer can revoke or amend the terms at any time;
• contain a health warning to employees that a pension is an important benefit and by taking the Cash Option they could be losing out; and
• recommend that the employees take independent financial advice before making their decision.

HR staff or line managers tasked with explaining, or answering any questions in relation to the Cash Option to employees, should be properly trained. All information given to employees must be in writing (ideally referring back to the formal Cash Option terms) with verbal communications kept to a minimum.

Any misinformation (which includes not giving sufficient information) to employees could give rise to complaints from employees – for instance, not explaining to employees that the Cash Option is temporary (i.e. to tide them over until the COVID-19 crisis is over) could result in a disappointed workforce and claims/referral to tPR when the Cash Option is withdrawn.

Opting out

Employees must opt out of the pension scheme in order to receive the cash. In any communications with employees, it is good practice (to avoid concerns of an inducement) not to go into any detail about the logistics of opting out but, if needs be, cross-refer/link through to any generic material produced by the provider of the pension scheme on opting out.

Once an employee has opted out following their enrolment date, there is an obligation on the employer to auto-enrol the employee again every three years, at which point the employee will need to opt out again in order to continue receiving the cash. This should be made clear to employees.

Discrimination/equal pay claim concerns

Where the Cash Option is to be made available to certain categories of employees, care must be exercised that there is no indirect discrimination (i.e. on grounds of age or sex). There may also be a risk of an equal pay claim in these circumstances. If, for example, a female employee were able to show that she was not receiving equal pay to a male employee (because of a difference created by the Cash Option), then she could bring a claim for the difference. To do this, the female employee would need to show that she was carrying out like work/work rated as equivalent/work of equal value to the male employee. However, this may be difficult in practice to show.

Temporary arrangements

Where the arrangement is intended to be temporary from the outset (as we have seen with Cash Options offered during the COVID-19 crisis), this should be made clear to employees to avoid disappointment/claims later. Any withdrawal of the option will also then need to be sensitively managed.

Cash Options – here to stay

We may have witnessed a rise in Cash Options during COVID-19, but Cash Options are here to stay, not only for employees who are over the limits for tax-free pension savings, but also as part of a wider offering to enable employees to choose and structure their own rewards package. However, employers must structure them properly and communicate the terms to employees in such a way that they do not fall foul of the tPR's guidance on inducements.

1. Safeguarding individuals: The safeguards for workers, dated June 2021.↩
2. High earners, i.e. those with taxable income for a tax year of greater than £240,000, have their annual allowance for that tax year restricted, so that for every £2 of income they have over £240,000, their annual allowance is reduced by £1.↩