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If you read nothing else, read this …
Employers everywhere are looking to limit the future liabilities on their final salary schemes.
Offering cash to employees puts the onus on them to make responsible choices.
The value of the cash on offer depends on the individual circumstances of the employee, including their age and length of time they have been in the scheme.
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The decision by Royal Bank of Scotland (RBS) to close its defined benefit (DB) scheme to new entrants is not particularly unusual. Like employers everywhere, RBS is looking to reduce the future liabilities on its final salary scheme. However, the inducement of a 15% increase in salary to leave the scheme has raised a few eyebrows and the question of whether other employers will follow suit.
Tony Baily, a pensions consultant at Hewitt Associates, describes an increase of 15% of salary as being "very generous". But a big concern is what action employees offered cash over contributions to leave the final salary scheme will take and how much help or advice they might receive to make their decision.
Peter Tomkins, a partner at PricewaterhouseCoopers, feels that some staff at RBS would be "daft to take the cash". However, the value to individual members will vary depending on factors such as age, intended retirement date and the length of time a person has already been a member of the scheme.
Employee’s tax position Mike Smedley, director of pensions at accountancy firm KPMG, explains: "The cash has strong appeal [and] for a 24-year-old who has been working for the company for only three years, it could probably provide reasonable value. But for a 59-year-old who has [worked there for] a long time, it’s not good value at all."
Whether the cash or the contributions are worth more will also depend on an employee’s tax situation. For basic-rate taxpayers, paying into a pension is likely to prove less tax efficient than saving the money elsewhere. However, were an employee to become a higher-rate taxpayer later in their career, pension contributions might prove more tax efficient.
An increase of 15% of salary could look especially attractive to younger staff wanting to save towards a deposit on a house or with significant student or credit card debts. Some experts are concerned that given this sort of offer, some employees will make decisions without full understanding and use the money inappropriately.
An RBS spokeswoman said the company has conducted an extensive communications exercise to ensure employees are aware of the changes, the options open to them and the implications. She added that increased choice and flexibility for employees was behind the decision to offer the cash, allowing employees at different stages in their lives and careers to be able to make their own choices. However, she also said that it was too early to say how many staff have opted for cash rather than staying in the DB scheme.
The big question is whether other employers will follow RBS’s lead by offering employees the choice of opting out of the final salary scheme and taking a higher salary instead.
Smedley from KPMG thinks the likelihood of other companies following suit is limited. However, employers that do decide it is a good idea should carefully consider how to communicate the scheme to ensure staff make responsible decisions that can’t backfire on the company.