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Helping to cut the costs of a successful regime

30 June 2017

The doom-mongers never spared much energy in predicting that the government’s pension automatic enrolment regime would be a disaster. But the initial feedback suggests they could not have been more wrong.

Even those attempting to express well-balanced opinions were talking about take-up rates in the region of 30% to 50%. But average take-up rates with our clients have been in excess of 80%. Re-enrolment has also proved a positive story, with over 80% of employees who opted out at the original staging date electing to enrol this time.

But, unfortunately, every silver lining has its own cloud! The large scheme sizes have resulted in employers incurring significant costs – even at the current minimum contribution rates of 1% for employers and 1% for employees.

Furthermore, these costs will take a further leap forward in April 2018, when the minimum contribution levels increase to 2% for employers and 3% for employees, and again in April 2019, when employers will be required to make a minimum contribution of 3% and employees of 5%.

Nevertheless, to-date many employers have missed a trick by not reducing their costs through the use of salary sacrifice, which can produce tax and NI savings when employees give up entitlement to a proportion of salary in exchange for receiving certain benefits from their employer.The approach, when used in conjunction with automatic enrolment, can save employers 13.8% in NI on employees’ pension contributions. 

Many employers probably overlooked the opportunity to use salary sacrifice when automatic enrolling originally because they didn’t envisage take-up rates being so high and therefore failed to pay sufficient consideration to reducing costs.

Others were undoubtedly wary of rumours that the government intended to clamp down on salary sacrifice as part of its well-publicised efforts to tackle tax avoidance and tax evasion. Such fears had certainly been prevalent for a good couple of years before they were laid to rest in the 2016 Autumn Statement.

Instead of tackling salary sacrifice per se, Chancellor Philip Hammond simply announced measures that amounted to the removal of preferential tax treatment of a number of benefits. But pensions contributions and up to £500 of employer-funded regulated pensions advice at retirement were specifically exempted from these changes – along with Childcare Voucher schemes (including Workplace Nursery schemes), Cycle to Work schemes and ultra-low emission car schemes.

Now that the question marks hanging over salary sacrifice have finally been dispelled, how many employers who assess the situation rationally can conclude that they can afford to go without the NI savings on offer?

If an employer has a 30-strong workforce with an average salary of £30,000, and employer and employee contributions were 1% each at staging, then the total employee pension contribution is £9,000 – meaning that the employer has to pay £1,242 NI per annum on it. When employee pension contributions are stepped up to 3% next April then the employer’s NI bill will rocket to £3,726 per annum.

But such outlays can be eradicated simply by introducing a tried and tested approach that has been given the green light by the Chancellor of the Exchequer. So there has never been a better time for Chase de Vere to conduct a review of your automatic enrolment arrangements.

Such a review could also point to other inefficiencies in working practices and highlight how to use budget and resources more effectively. For example, if you are with a pension provider that is delivering unacceptably poor service then it could be time to switch.

Regulatory issues can also be resolved, which is increasingly important now that The Pensions Regulator has started inspecting employers. In particular the Pensions Regulator recently undertook a range of unannounced audits with employers in the Greater Manchester area. We believe this type of enforcement is likely to be replicated around the UK. 

If you would like to learn more about the benefits of salary sacrifice or about what Chase de Vere may be able to achieve by reviewing your automatic enrolment arrangements then please do not hesitate to contact Chase de Vere on 0345 300 6256 or complete this simple form and we’ll call you.