Pension provision for employees is mandatory in the UK, and adequate pension saving is crucial for individuals, employers and society. It is in everyone's interests that as we get old we can afford to stop work and to live comfortably! Sadly, the reality of 2020, however, is that with employment costs rising and the Covid-19 pandemic taking its toll on most sectors, many employers have no choice but to limit costs wherever possible. For some employers, reducing pension costs could be an option.
Options for all employers to consider
- Use salary sacrifice
A popular first step for employers is to pay employee's pension contributions via a 'salary sacrifice' arrangement which creates a tax saving for both the employer and employee. Salary sacrifice has effect to increase the employer contributions, in return for the employee accepting a corresponding reduction in salary. The benefit of doing this is that there is a National Insurance contribution saving for the employer and employee.
Employers can offer salary sacrifice on an 'opt-out' basis but there are some traps to watch out for. In particular, an employee's revised take-home pay should not fall below the National Minimum or National Living Wage. Particular care should be taken, therefore, if a salary sacrifice arrangement is used as standard for lower paid workers, such as seasonal farm workers.
- Postpone auto-enrolment
With temporary or seasonal workers in mind, another cost-saving tip is to make use of the postponement provisions in the auto-enrolment legislation. Ordinarily, an employee who meets the criteria must be enrolled in a pension scheme with effect from the date he or she commences work. However, it is possible to postpone enrolment for up to three months, which means that it may not in fact be necessary to make any pension provision for temporary workers or during a new employee's probation period, for example.
- Consider reducing contributions
Next, you could consider whether you are contributing more to the pension scheme than you are legally bound to. There are minimum contribution levels imposed by law and your employment contracts may also contain provisions on contribution amounts. We believe that employers should be encouraged to provide more by way of pension provision than the statutory minimum, and that the employers that do should be supported to maintain that level of benefit. But if cost savings are required in order to protect jobs, this may be an avenue worth exploring.
- Review your advisers
Pensions are highly regulated and as a result employers and scheme providers are required to appoint, and pay for, multiple advisers and service providers – from administrators and accountants, to actuaries and lawyers. Reviewing your advisers at regular intervals, checking that you are receiving value for money, and considering putting the work out to tender can be a very effective way of reducing your costs.
Further options for employers with final salary pensions
If you make pension provision for your employees via a final salary (defined benefit) arrangement, your employment costs will be considerably higher than if you offer employees a defined contribution arrangement. The opportunities for reducing costs are, therefore, greater. We mentioned above the possibility of reducing your contributions to the scheme. In order to achieve this in respect of a final salary scheme, you would likely need to increase employee contributions – although not ideal, employees may willingly accept an increase if it means they continue to build up final salary benefits.
- Consider closing your scheme
In recent years, many employers have also gone one step further and stopped employees from building up further final salary benefits. Closing a scheme to accrual is a big project, with many different issues to consider and parties to involve, but the potential cost savings are very significant, and it may be that such a move is right for your business now.
- Pool resources
But there are also other options, whether your staff still accrue final salary benefits or you have only legacy final salary pension costs. You may wish to consider pooling resources as a means of de-risking and reducing costs. The market for this sort of product, whether you are looking to pool scheme administration services only or to consolidate much more widely, has developed considerably in recent months, and there are a number of different options out there to be explored.
- Secure the liabilities elsewhere
Finally, you could look to secure some or all of your liabilities with an insurance company, in order to remove investment, longevity, interest rate and more risks from your balance sheet. This can be done through securing the future payment of some benefits under an insurance policy, while the scheme remains responsible for actually making those payments (known as a buy-in), or through effectively transferring full responsibility for a group of pension scheme members to an insurance company (known as a buy-out). The upfront cost of purchasing an insurance policy of this nature can be high, but it is generally considered that insuring benefits can significantly reduce your future overall pension costs.
Whether you have been thinking for a while about reducing pension costs, or are new to the idea, and whatever the size and nature of the pension scheme you operate, if you would like any further information or advice from us, or just to have an informal chat about how we might be able to help, please do not hesitate to get in touch. We have a team of dedicated pension specialists, who would be very happy to help you.