Former Pensions Minister Ros Altmann has said that net pay schemes could be a future scandal and urged employers to look at the issue.

Speaking at a conference in London, today, Altmann urged employers with low earners to look into the issues of net pay schemes. “A net pay administration scheme is not suitable for workers who earn under £11,500 in my view. Unless somebody makes up the 25 per cent government bonus that they cannot get, you are forcing these lowest paid workers to pay far more for their pensions.”

She said that it is not something that has been widely recognised across the industry but “it could be a future scandal”.

“If and when low earners discover that they have been denied that 25 per cent bonus, that extra money, and they had to pay it themselves even though they were low earners, and they were denied it because of their employers choice in pension scheme administration, who will they blame, what will they say, I do think we need to think about that.”

The issue affects those who earn over the £10,000 needed to trigger auto-enrolment but below the £11,500 income tax threshold, who are enrolled in a net-pay pension scheme rather than a relief at source scheme.

For those earning over the income-tax threshold, the same amount of tax relief is given regardless of the type of scheme. However, due to the way the contributions are deducted in net-pay schemes, those earning below the threshold do not receive the relief.

In a net-pay scheme, contributions are deducted from pay before any tax is applied, whereas with a relief at source scheme, the employee receives basic rate tax relief at source when they pay their net pension contribution.

Later on in the day, The Pensions Regulator non-executive chair Mark Boyle was asked by a member of the audience whether the regulator would take action on net pay schemes, but he said it is an initiative that has to come from within government.

However, in April this year in a response to a written question put to the government by Altmann, Baroness Neville-Rolfe answered: “The government appreciates the impacts on low paid workers whose employers use a net pay arrangement pension scheme. However, it has not been possible to identify any straightforward or proportionate means to align the effects of the net pay and relief at source mechanisms more closely for this population.”

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