MSE news: Savers failed by employers on pensions

Former_MSE_Guy

This is the discussion thread for the following MSE News Story, specifically to discuss the views expressed in the article:

"Millions of workers could be wasting hundreds of pounds a year each if they pay into a company pension, as employers are failing to help them save efficiently.

Rather than simply paying their contributions from their standard wage, many employees will benefit by using what is known as a salary sacrifice scheme, says financial adviser firm Hargreaves Lansdown (HL) ..."

Read the full story:
Savers failed by employers on pensions

dunstonh

You may wish to add a risk warning in the downsides section that the employer could choose to stop the employer contributions into the pension scheme and leave you on a lower income making you worse off than had stayed on a higher income. (recent example of that posted on these forums in the last few weeks).

Debt_Free_Chick

"Those on a final salary pension are unlikely to benefit from this arrangement"

I'm not sure why you think this is the case. The benefit - and the only benefit - is the NIC saving. That saving is the same whether you're in a final salary scheme or a money purchase scheme. Interestingly, salary sacrifice was first used in the 1970s, when schemes were almost exclusively final salary. It's only become more popular in recent times as HMRC have clarified their view of SS and, in particular, removed the need for the local Inspector of Taxes to approve each and every SS arrangement.

"If salary sacrifice is best for you, discuss it with your employer as there's no additional cost for them, just some admin hassle"

You are very, very much mistaken with this point and I wonder if you sought the views of anyone working in HR/Pensions to check this out?

The implementation costs are substantial and - depending on the number employees who take up SS - can amount to the whole employer NIC saving in the first year.

Employers will not simply "put SS in place". They will - quite rightly - undertake due diligence and take advice - and in very many organisations, it will need Board approval, possibly at several different stages.

As SS is a change to terms and conditions of employment, legal advice is needed - and is not cheap. Careful, accurate and compliant communications are needed - more advice. Payroll systems and processes need to be re-engineered - more advice.

I'm about to put SS in with my employer. The budget? £80-100k!!!!!! And that excludes my time as well as the time spent by our own legal, tax and IT people. If an employer does not have in-house expertise, the costs are even higher! (Interestingly, the budget was pretty much the same when I put SS in with my previous employer, 8 years ago).

I don't want to criticise this point in the article, just to point out an inaccuracy; but employees need to be realistic about expecting employers to simply put SS in place. It's not a quick, cheap fix and many employers will be reluctant to go to all the trouble of putting it in - especially if the majority of staff are low-paid.

Finally, on the subject of other benefits being reduced, as a result of the reduction in salary ..... on the whole, this doesn't happen. Arguably, it shouldn't happen as very many other elements of pay and benefits are salary-related - overtime & pay rises, for example but also death in service benefits. I've not come across an employer who doesn't use "reference salary" to ensure that employees get all their ancillary employment benefits based on their full salary i.e. their "full" salary, ignoring the SS.

Regards

LongTermLurker

Thanks for pointing that out DFC - many people, like me, might automatically think our employers were just being awkward if they said they weren't going to bother, without understanding the costs involved.

I would say that probably in all companies, a change to pensions would need Board approval. Not in itself costly, but certainly process-intensive.

However, is SS really a change to Ts & Cs? Surely it's only ever an option, not mandatory.

the employer could choose to stop the employer contributions into the pension scheme and leave you on a lower income making you worse off than had stayed on a higher income. (recent example of that posted on these forums in the last few weeks).

That would surely mean a change to contract?

bristol_pilot

SS schemes work best for employers where most of the employees are highly paid and pay a high proportion of salary into a pension scheme e.g. there is an ageing workforce. This is because employers NI contributions are uncapped. However, the benefit to employees is greatest where the workforce is lower-paid because if earnings are above the NI cap then NI savings for the employee are minimal. So SS may or may not be worthwhile, depending on the organisation - it's certainly not a 'no brainer'.

bristol_pilot

Salary sacrifice is normally only available on money purchase pension schemes where your contributions go into a fund which is invested and (hopefully) grows. Those on a final salary pension are unlikely to benefit from this arrangement as it is not usually available

Completely wrong and potentially misleading. Many final salary schemes use SS. What is true of course is that HL doesn't stand to make any money out of them.

LongTermLurker

bristol_pilot wrote: »

Salary sacrifice is normally only available on money purchase pension schemes where your contributions go into a fund which is invested and (hopefully) grows. Those on a final salary pension are unlikely to benefit from this arrangement as it is not usually available

Completely wrong and potentially misleading. Many final salary schemes use SS. What is true of course is that HL doesn't stand to make any money out of them.

I've never been part of a final salary scheme, so I guess my understanding is flawed - I thought the idea of final salary schemes were that you paid an agreed %age of your salary to your company scheme and after, say 30 years, you got 30/60 of your final salary, ie £20k pa if you'd left on a £40k salary.

If that's the case, then how would a bigger employee contribution generate a larger pot? Or do you mean that your contribution would be reduced each month by the NI saving, rather than being augmented by it?

bristol_pilot

Regardless of whether the pension scheme is final salary or contribution-based, the SS saving for both employer and employee comes entirely from reduced NI contributions. Neither of these savings in themselves increases the size of the pension. All that happens is that the employee has a little more take-home pay and the employer has a lower payroll bill.

To increase the size of the pension, the employer or employee or both could choose to pay some or all of the saving into the pension. For contribution-based pensions this would be paid into the pension 'pot' in the usual way. For final salary schemes it could be though added years purchases or AVCs, depending on what the particular scheme offers.

But the main purpose of SS is to reduce liability to NI for both employer and employee - the schemes themselves do not increase the size of the pension.

My Company's final salary scheme recently introduced SS for all employees. The employer NI saving (which was very substantial as most staff are high-paid) was partly pocketed by the employer and partly used to award everyone a higher yearly pay rise than they otherwise would have got (or so it was claimed). The employee NI saving went into our takehome pay; some of us no doubt paid this little extra into our AVCs to boost our pensions and others spent it on beer etc. :beer:

LongTermLurker

Thanks for the explanation. Yes, that's where I got confused - thinking about it, I set my contribution higher so that the extra pay-packet money was offset against the contribution. As you say, it didn't automatically add to the contribution.