The changing perception of traditional occupational pension schemes is prompting employers to consider offering staff alternative financial benefits to meet their savings needs, says Amanda Wilkinson
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- Employees’ savings needs are changing.
- More flexible savings benefits may be required instead of traditional occupational pension schemes.
- Alternative savings options include all-employee share schemes, individual savings accounts and self-invested personal pensions.
- Employers can offer several savings benefits alongside each other to maximise the savings on tax and national insurance available on these financial products.
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When it comes to their finances, the latest generation to enter the workplace – the millennials – often have priorities on their mind other than contributing to a pension, such as paying off student debts or saving for a deposit on a house. Therefore employers should think about shaping their financial benefits to meet the savings needs of younger workers, says Philip Smith, a principal at Buck Consultants. “In the early years, what you are marketing may not be a pension plan, but something else.”
Some staff from each generation may have a distrust of pensions, arising from negative headlines about under-funded defined benefit (DB) plans and plunging values of defined contribution (DC) pension pots. As a result, the suitability of the one-size-fits-all traditional occupational models that lock savings away until retirement have come into question.
Employers may therefore start to look for alternative savings vehicles they can offer instead of pensions. For example, they could provide access to a corporate individual savings account (Isa) or an all-employee share scheme, such as sharesave or a share incentive plan (Sip), giving employees access to short- and medium-term savings.
Employers planning to give staff savings allowances to be paid into Isas or share schemes instead of a pension, must bear in mind that the legislation that will bring in the 2012 pensions changes, will prevent organisations from offering staff inducements to opt out of a pension scheme. But there is nothing to stop employers giving staff the option of simply saving into a share scheme or Isa. Sharesave is a particularly attractive option for staff because, unlike a Sip, it is risk free, allowing members to choose to take their cash and a tax-free bonus if their options are underwater at the end of the savings period.
Not all employers are able to offer all-employee share schemes, but those that do may want to consider allowing staff to roll over shares from maturing plans into an Isa, so they benefit from continued tax-free growth. Although Isas and all-employee share schemes offer tax efficiencies, these are not as attractive as the tax relief on pension contributions – 20% for basic-rate taxpayers or 40% for higher earners, says Tom McPhail, head of pensions research at Hargreaves Lansdown.
He adds that employers are looking for alternatives to traditional occupational pensions because of continuing funding problems and increasing regulatory obligations. “There are well-established reasons why employers are drifting away from final salary and trust-based pensions,” says McPhail. As a result, some are turning to group self-invested personal pensions (Sipps), which give members greater investment choices, including stocks and shares, gilts and bonds, cash and commercial property.
Sipp members can also roll over shares from maturing employee share plans into their Sipp tax-efficiently. This can be done either directly or from an Isa, which is particularly beneficial if the member is in the 40% tax band and can benefit from tax relief at the higher rate. They can also sacrifice any bonus into the scheme, saving on tax and national insurance.
Some employers choose to run a Sipp alongside a traditional pension scheme, allowing additional voluntary contributions to be made, while others have a more integrated arrangement. BT, for example, which operated various trust-based DC schemes serving 20,000 members, is working with Standard Life to provide one scheme offering staff a range of investment options through what is effectively a group personal pension with a Sipp on top. Kevin O’Boyle, BT’s head of pensions, says: “Having the Sipp is partly for people who want to make very active investment decisions for their retirement, but it is also a vehicle for people to do company share rollovers.”
Although Sipps attract higher charges than some types of pension, Jamie Jenkins, head of employee wealth solutions at Standard Life, says Sipps have “become more mainstream and, for providers, can now be run more efficiently as a group scheme”. He adds that because more employers are now looking to offer staff a variety of savings devices, Standard Life is developing a wealth management tool that will enable staff to transfer funds between different financial benefits tax-efficiently.
But whatever savings options staff are offered, they will need guidance to decide what best meets their needs.