Pensions salary sacrifice is still going strong, but what will forthcoming reforms mean for plans, asks Katrina McKeever
To read the full Employee Benefits Voluntary Benefits and Salary Sacrifice 2008 supplement, Click here
Pension contributions offered through salary sacrifice remains a popular benefit, particularly as employers look for ways to make savings during troubled economic times. According to the Employee Benefits/Axa Pensions Survey 2008, just under half (48%) of employers now have a pensions salary sacrifice arrangement in place, compared with 29% last year.
But setting up a salary sacrifice arrangement can be time-consuming, administration-heavy and involve significant upfront costs. Stephen Delo, president of the Pensions Management Institute, says: “It has become more do-able because there is more technology available these days and there are substantial savings to be made, but employers have got to be prepared to pay the cost of implementation, which can be significant. They also need to deal with members’ contracts and the collateral impact on other benefits, such as life cover and health benefits. It is quite tricky to do, so there has to be a sizeable saving to make it worthwhile.”
Under the terms of a salary sacrifice arrangement, staff agree to give up part of their salary in return for their employer’s agreement to provide them with a non-cash benefit in the form of pension contributions. As the contribution is made from employees’ gross salary, staff save on tax and class 1A national insurance contributions (NICs). Employers, meanwhile, can save up to 12.8% on the NICs due on the portion of employees’ gross salary that has been sacrificed.
Many employers are considering implementing a salary sacrifice arrangement to help fund their increased obligations under pensions reform due in 2012. Under the plans, employers will be required to automatically enrol staff into either a qualifying workplace pension scheme or personal account, as well as make a minimum 3% contribution on employees’ qualifying earnings, while staff will be required to contribute 4%. However, there has been some speculation over whether salary sacrifice arrangements can be used to help fund contributions when the new legislation comes into effect.
With such tax and NI savings up for grabs, Delo believes that unless tax laws change, the popularity of pensions salary sacrifice arrangements will last for at least the next few years. But there are only three years left before the pension reforms come into effect and with so many details of the proposed legislation still to be clarified, employers could be forgiven for putting any changes to their pension schemes on hold until the government reveals the small print.
However, the prospect of making savings, even if only for a short period, means that many employers are keen to implement salary sacrifice arrangements around pensions.
Paul Brown, senior consultant at Watson Wyatt, says implementing salary sacrifice was the most popular priority among its clients for the next two years, according to his firm’s internal Pension Plan Design Survey 2008.
Nevertheless, Brown believes the definition of the 4% employee contribution could put a spanner in the works as the proposed legislation on pensions reform currently stands. “Where an employee is sacrificing right now, the rules don’t consider that sacrifice as coming from the employee,” he explains. “[The 4%] has to be a straight employee contribution.”
Where employees decide to pay more than 4%, then he says a salary sacrifice arrangement could be applied to the balance, helping staff to boost their pensions pot with any savings made. Employers would still be free to use their NI savings to fund their 3%.
Big savings with salary sacrifice
Whatever happens in the future, employers appear happy to continue offering pensions through salary sacrifice for now because, in many cases, the savings can be too big to ignore. For example, a group of 12 universities that switched to pensions salary sacrifice, under guidance from Watson Wyatt, made a total annual saving of £7m across their combined 39,000 employees.
Until the new legislation comes into effect, salary sacrifice arrangements can help to put employees on a more even footing with workers who may traditionally have accepted jobs with organisations that offer a lower salary but have good employer pensions provision, such as those in the public sector.
Graham Farquhar, head of global employment tax services at Ernst & Young, believes employers will continue to promote salary sacrifice arrangements for as long as they can and that if the forthcoming legislation means any changes must be made they will be minimal. He adds it may not be in the government’s best interest to limit or block salary sacrifice, as in many cases, employers pump the savings back into their pension scheme, driving retirement saving.
“Personal accounts are about the government saying ’employees aren’t saving enough for retirement’,” says Farquhar. “At the moment, what salary sacrifice is doing in most cases is swelling the pension funds for the individual as the savings go into the pension pot.”