Last chance to adapt flex schemes for pensions auto-enrolment, says expert

Pensions expert Mark Baker of Pinsent Masons, the law firm behind Out-Law.com, said that employees on flexible schemes who opted for a lower pensions contribution as part of their annual renewal could end up with higher total pay following automatic enrolment due to the strict contribution levels that would then be in place.

With 1 January the most popular date for flex renewals, companies issuing communications to their employees over the next few weeks need to "act fast", Baker said.

"It's essential to make sure that the flex communications mention auto-enrolment, even if your staging date isn't until much later in 2013," he said. "The risk otherwise is that employees will flex their pension contributions down, find themselves auto-enrolled when the company reaches its staging date [the date is when auto-enrolment first applies to a particular employer] and end up with higher total pay as a result. The wording in the flex communications doesn't have to be complicated, but companies that haven't covered this do need to act fast."

There are three main types of benefit an employer may offer to employees: core benefits, voluntary benefits and flex schemes. As the name suggests, flex benefits are more flexible than the 'core' benefits which are given to every employee as standard such as pension or holiday pay. In a flex scheme, employees can choose how a proportion of their salary is paid or are given a benefits 'budget' to 'spend' by their employer. Depending on the nature of the benefits being offered, flexible arrangements will be reviewed annually.

The largest employers, such as banks and supermarkets, began automatically enrolling eligible workers into a suitable workplace pension scheme on 1 October this year. Smaller employers will follow in a staggered implementation programme, running until April 2017. By the end of 2013, all companies with 500 employees or more will have begun automatic enrolment. Once the process begins, employers will be legally obliged to make contributions towards the pensions of automatically enrolled workers who do not opt out of the scheme.

Baker said that employers with flexible benefit schemes would have to be careful not to word communications in a way that could encourage employees to opt out of a workplace pension scheme. This would be illegal under the automatic enrolment regime, he said.

"We expect that most flex schemes will be able to continue running without this becoming a serious danger," he said. "But even so, it's vital for companies to look at their flex communications and make sure it's clear that employees are being offered a balanced choice."