Employers are swapping pension contributions for cash paid directly to employees, which they must use to save into an ISA or other savings vehicle.

To avoid breaching the auto-enrolment policy, employers offering the incentive pay the government’s set minimum contribution but give employees the option to have contributions above the minimum paid as cash.

Willis Towers Watson senior consultant Richard Sweetman said: “It is a compliment to pensions rather than dislodging them entirely and there are auto-enrolment anti-avoidance type provisions in place.”

“The organisations that have done it so far typically continue to pay pension contributions that satisfy the auto-enrolment provisions and then any excess is then available for diversion or allocation to another savings arrangement,” he said.

It is generally the schemes that already have good DC provisions in place, such as a matching type structure, that offer the incentive, Sweetman said.

“The way it usually works is the employer will continue to pay the core contribution, and if the employee commits to paying the matching element, then the employer will pay the matching element, but that part doesn’t necessarily need to go into the pension.”

He said employers specify that the diverted contribution has to be paid into a savings vehicle, however, he noted that once a payment has been made into an ISA, it is “out of the employer’s control”.

It is offered as a way to retain staff, particularly younger employers who are not as engaged with saving into a pension. Although the trend has so far been a “slow burner” it could increase as a survey by the firm found half of employers anticipate allowing employees to swap pension contributions for cash. Sweetman said in the last 18 months they have consulted on “half a dozen” exercises and interest has “picked up”.

In addition, seventy per cent of employers are considering offering a LISA or Workplace ISA (WISA) within the next five years. Employers are also keen to examine WISAs as an option to all employers rather than just those eligible to save into a LISA.

However, Sweetman highlighted that the diverted cash payments are not subject to pensions tax relief. He said if you do the maths, under the current pension tax regime, “pensions always work out better”.

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