SMART Pensions

Devino

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Back to the original post...

I work for BAE SYSTEMS (BAES) and like many companies at the moment there is a deficit in the company Pension fund. BAES did have a pension holiday a few years ago (and were told at the time it wouldn't affect our pensions!) But here were are with a pensin deficit. The company are now proposing a SMART pension scheme whereby the level of company and personal N.I. contributions are reduced with the savings being paid into the pension scheme to recover the deficit. We are being told that this will result in more money in our take home pay,and this is how it is being sold to us. The company have stated the following:

"Although SMART pensions could reduce the amount of statutory entitlement to Maternity, Paternity and adoption payments, BAES will ensure that employees are no worse off by adjusting the amount being paid by the company".

I love to hear Martin Lewis's comments on this as I'm, sure were not being told everything.

Thanks.

Pal

I think you are being told everything. This looks like a fairly simply salary sacrifice system that will save both the company and you National Insurance contributions. The downside is that your entitlement to some state benefits might reduce slightly. It shouldn't affect your pension benefits in any way.

Read the announcements you have been given and make sure you ask the pensions department if you don't understand.

Milarky

"Although SMART pensions could reduce the amount of statutory entitlement to Maternity, Paternity and adoption payments, BAES will ensure that employees are no worse off by adjusting the amount being paid by the company".

It would appear, on the face of it, that BAE have done some sums and concluded that they could 'save' money because the loss of certain benefits entailed by 'sacfricing' pay into the pension scheme [where they save about 23% of the payroll in N.I.] will be less than the 'cost' of providing those benefits to the state. In other words, the state makes a 'profit' out the NI of some workers [I'm assuming the types of earners employed by BAE] even if it make a 'loss' once NI received is spread across the whole population. They've spotted a loophole but if every company did this it would undermine the NI scheme and force the government to raise other taxes [the ones 'poor' people pay less of?] to compensate.

Pal

I think you may have misunderstood what is happening here. BAE have almost certainly not done any sums relating to state benefits - they are simply saying that if individual's earnings fall (because they are sacrificing salary to belong to the pension scheme instead of paying contributions), then that person's entitlement to some earnings related state benefits might be affected.

The only reason for this change is to reduce the company's and member's NI bills to allow more money to go to the pension fund instead of being paid to the Government as NI.

If every company did this, less NI would be paid to the Government, but in theory at least, this would be offset by the saving that the Government would make by paying out lower earnings-related state benefits.

MrChips

Pal is right, this is a practice being adopted by more and more companies, the one I work for included. It is basically just a tax loophole.

Instead of you getting a salary of say, £25,000 and paying 5% (say) contributions into the pension scheme before tax, the company reduce your salary to £23,750 (25,000 less 5%) and pay your contributions for you. The same money goes into the pension fund, so that doesn't suffer, and as your salary is lower you (and the company) pay less national insurance contributions so you are both better off.

There is the technicality that your state benefits will be lower as you are paying less national insurance but it sounds like BAES are going to cover the difference. It is a win-win situation for you. Go for it!

As regards your gripe about the contribution holiday, hindsight is a wonderful thing! When Schemes were in surplus nearly all of them took contribution holidays as it seemed that there was already way too much money in there - this wasn't helped by the Inland Revenue's stance of taxing Companies who have "too much" money in their scheme so in some cases companies were forced to stop paying (and increase the benefits if there was still to much money!). As long as BAES are committed to paying off the deficit in a reasonable time frame (say 10 years) then I think that is fair enough.

EdInvestor

There is the technicality that your state benefits will be lower as you are paying less national insurance...

Presumably BAE staff are being represented in this matter by trade unions? Perhaps they will be able to advise about the effect of the "technicality".

isasmurf

A lot of trade unions are encouraging companies to take up Smart Pensions. As has already being mentioned a lot of companies of already taken this up, the most high profile ones being Tesco, Sainsburys, Nationwide and BT.

It works because NICs are paid on Pension contributions, but Tax isn't. So by your company paying your Pension contributions for you and reducing your salary by the same amount of your old contributions you end up with more take home pay because you're paying less NICs.

It's worth pointing out that SMART Pensions aren't too everyone's benefit. Those on low pay, part-time employees may not benefit from such a scheme.

Amicus has a decent article on the pros and cons
Other places with info include Deloittes and there was an article in the Times last year.

Milarky

"Although SMART pensions could reduce the amount of statutory entitlement to Maternity, Paternity and adoption payments, BAES will ensure that employees are no worse off by adjusting the amount being paid by the company".

The way I read this they are referring to specific event-contingent benefits which are earnings related - that's the part they appear to be 'covering'.

More often mentioned is the loss of S2P for 'contracted-in' workers [see the Amicus link above]. BAE workers are contracted out of S2P through their DB scheme ,I assume, and earn above the £12,000pa threshold. These two things would ensure that they could lose no S2P-equivalent benefit due to the employer 'guarantee'] The paternity/maternity stuff they can quantify separately.

No, my point was slightly more subtle, and somewhat speculative, but I meant to suggest that the way N.I pays for things it is generally scewed towards flat rate or capped entitlements - such as basic rate pension and incapacity benefit rather than the earnings related items already mentioned. So the 'beneficiaries' of N.I contributions are spread more widely than are the 'contributors' [and let's not forget the employer pays more than their employees do in N.I] - some of whom make no actual payments anyway.

The major 'contributors' of N.I. [those with earnings and their employers] therefore pay disporportionately for the benefits funded by their contributions [i.e. N.I. works like a progressive tax] so that once paying N.I. is recognised as being as voluntary as paying income tax is [remember income tax secures no direct or tangible benefit for the payer - it is simply a citizens 'duty' to pay it], it must follow that foregoing N.I. benefits for N.I. savings is truely cost-effective.

Remember also, that 'national insurance' only works as a concept if everyone pays and everyone has to pay it. Thus N.I. is in danger of being undermined because it is being seen as the tax it truely is.

Devino

Thank you to all of you who have commented on my SMART pensions dilemma. As I am part-time and pregnant, there are some points that I need to go over with our pensions department before i commit - as you have mentioned not everyone will benefit from adopting a SMART pension.

Thanks again!

Pal

Does anyone really still see NI as anything other than the tax that it is?

derekoak

I think we are being too negative about Smart Pensions and salary Sacrifice.

I work for a business that is small enough to want to do its best for employees within the proviso that it does not cost the business more than the employees agreed wage.

We had to start a Stakeholder Pension scheme. The scheme was sold on the basis that the pension provider could reclaim the tax paid. So If you put a £1 from your net wage in your pocket into the pension pot it became £1.27, if you pay standard tax rate.
It is not surprising that stakeholder pensions have not persuaded everyone to save for their retirement.

We worked out that if our business accepted salary sacrifice equivalent to a reduction of net pay of £1 or multiples thereof. that is about £1.47. (£1.47 less employees National insurance of 11% =16.5p, less tax of 21% =30.5p total net£1). And if the business contributed the employers N.I that it had not paid on that £1.47 (Employers N.I. is about 12.5%) about18p and sent it all to the pension pot the Employee would benefit by £1.65.
That is 30% more than the Standard way of funding a Stakeholder Pension. The Employee gives up the £1 in his pocket as before and the Employer is not worse off except more Admin.

It is true that some benefits like maternity pay and Earnings Related State Pension will be slightly affected by a somewhat reduced gross pay. I think it is also true that it would be illegal for the Employer to pay less than the minimum wage because of Salary Sacrifice.

It is not true that Salary Sacrifice does not work for people on low incomes. Some will gain, some will loose, everyone should work out what a lower gross income will do in their circumstances.