Pay shock at RBS in pensions shake-up

In a week in which the bank announced further job cuts, bringing the total of axed posts to 20,000, staff will be concerned at any further attack on their pay and benefits package.

From April 2012, all firms not already making a pension contribution on behalf of their staff will be obliged by law to pay a minimum additional 3 per cent of salary to fund a pension. Staff themselves will also have to contribute to bring it up to 8 per cent of their earnings.

Few large companies will be affected by the change, known as auto-enrolment, as most already make pension contributions of at least this amount.

HSBC, for example, pays 8 per cent of salary into its defined contribution scheme on behalf of its staff, who can contribute further. Their contributions are matched by the bank.

However, when Royal Bank of Scotland closed its final salary pension scheme to new recruits in October 2006, it did not introduce alternative pension arrangements.

Existing employees were given the option of staying in the final salary pension scheme or leaving it in return for a "15 per cent uplift" in their salary.

All new recruits would also receive a "15 per cent uplift" in their salary to compensate for their being barred from joining the final salary scheme. A statement at the time said this cash could be paid into a pension, used to make other investments or taken as cash.

In the event, new recruits were given a basic salary plus an additional pot of money, called a "value account", to spend on a menu of benefits such as medical insurance or car leasing. It could be used to save towards a pension or, if staff preferred, the money could be taken as cash after the deduction of tax.

Many young staff, struggling to get a foot on the housing ladder, are likely to have opted for the cash, and will be using their value account to subsidise their mortgage repayments. So the new system of auto-enrolment will cause a headache both for the group and the many thousands of staff recruited since 2006. The bank is adamant that the value account was never simply a pay rise, but was intended to be in lieu of a pension contribution.

Staff may not have seen it in this way. Those who opted to take the entire uplift as cash treated the value account as a straightforward salary enhancement which was part of their overall package.

From April 2012, RBS is planning to radically overhaul the way the value account operates. Rather than giving staff flexibility about how the cash is spent, it plans to deduct 8 per cent to meet its auto-enrolment obligation.

However, there is some debate about whether the bank is technically entitled to do so. Strictly speaking, where an employer is not already making a pension contribution on behalf of staff, they should invest a minimum 3 per cent of band earnings on their behalf.

One pension expert said: "At the very least there seems to be some doubt about whether the value account is strictly speaking an employer pension contribution. It will come down to the documentation given to new recruits."

Steve Bee, a partner at Paradigm Pensions, said: "Anyone who is not in a pension scheme will have to be auto-enrolled and the company pay a contribution, and that is the end of it.

"I'm not sure that any other benefits or accounts on offer have anything to do with it. If the employer isn't currently paying a contribution, he will have to find the money to do so.

"The problem with giving staff money to fund alternatives is that it is against the law. The new Pensions Act specifically prohibits offering staff money, which could be construed as a financial inducement not to join the scheme."

The problem is further compounded by the fact that RBS is now state-owned. If it were forced to pay an additional 3 per cent to staff, this bill would have to be funded by other taxpayers.

A spokesman for RBS said: "The bank was trying to offer staff flexibility and respect their ability to choose what to do with pension savings.

"For some, at different stages of their careers, it may make sense to take the cash and use it to buy a home. But it was never intended to be seen as a pay rise. It is part of their overall remuneration package, but pensions are part of that package."

The coalition is due to announce its scheme for introducing auto-enrolment later this month. Labour had planned that contributions would be phased in over a period of years. However, the new government has indicated it may wish to proceed at a faster pace.

If new RBS recruits do not currently select the pension scheme as an option from the range of benefits available then 2 per cent of total earnings is taken from the value account and paid into the bank's defined contribution scheme on their behalf. However, employees are able to reverse this and take the money as a pay rise.

Even where employees are making a 2 per cent contribution, this deduction will soar after auto-enrolment is introduced. However, if staff cannot afford the new contributions they will be able to opt out of the new government scheme as well.

A report from the Association of Consulting Actuaries last week warned that nearly half of employers were planning to cut the pension contributions of other staff to pay for the new pensions of employees not currently receiving a contribution.

Tom McPhail, of Hargreaves Lansdown, said: "It could be argued, at the very least, that this is a form of levelling down, in that RBS is potentially clawing back the pension contribution from other benefits."