UK employers review pension strategy ahead of salary sacrifice changes

As you may remember, last year in the Autumn Budget the Chancellor fundamentally changed the value of salary sacrifice for pensions. In one of the headline announcements on budget day, Rachel Reeves said she was cutting back the National Insurance savings employers currently rely on. From 2029 the NIC advantage on salary sacrifice will be capped at £2,000 a year making the whole arrangement more complicated to run and, for many employers, more expensive. A few days ago, this came one step closer as the legislation that will bring that change into effect received Royal Assent.

Whilst this may seem a long way off, new research by Standard Life suggests this is already influencing employer behaviour, with many firms now reviewing whether salary sacrifice remains worth the cost and complexity. Nearly four in ten employers offering salary sacrifice say they are now less likely to provide it in future, while more than one in ten say they have already decided to withdraw schemes altogether.

For HR teams, this matters because salary sacrifice has become deeply embedded in workplace pension strategy. Many employers have built contribution structures, payroll systems and reward frameworks around the assumption that full NIC savings would continue indefinitely. In many organisations, pension arrangements have evolved over time, leaving different groups of employees on different contribution structures, with employment contracts, salary sacrifice agreements, pension scheme rules and family leave policies not always properly aligned. 

And it seems many employees still do not fully understand how salary sacrifice works, despite it being widely used across UK workplaces. Research by benefits consultancy Barnett Waddingham, reported by Personnel Today, shows almost two-thirds of employees are unaware that the new cap will apply from 2029. That creates an additional challenge for HR because schemes are becoming more complicated at the very moment employers may need to rethink how they operate and how they are explained to staff.

So, this is becoming more than a technical pensions issue. It is increasingly a question of cost, administration, communication and legal risk. Pensions expert Tom Barton is helping a number of his clients to review their arrangements and earlier he joined me by phone from Leeds to discuss it:

Tom Barton: “The big thing, and this has been all over the press, is that National Insurance contributions, you don't get the same savings now on National Insurance contributions that you once did under a salary sacrifice arrangement. I won't go into the technical - it's just been chopped up a bit, so you don't get the full benefit that you once did. It's being split so that it's a bit more complicated, basically, and that complication, as well as the lack of the full NICs benefit, means that it's worth thinking about whether it is still worth it. So, is it still worth it from a sort of overall budget point of view because employers will have structured their pensions contribution budget on the basis of the full NICs benefit, and is it worth it in terms of whether you can administer this? It's a more complicated thing to actually pull off, and contributions are complicated enough with the payroll systems and the interaction between pension schemes, pension providers, etcetera, so can you really administer it so that you're confident you'll be paying the right contributions and getting the right tax associated with it? So, it's a really good opportunity to think those things through and think, could we do something better? I think it's also a really big opportunity because at the moment, we work with a lot of employers who've inherited different contribution structures, different pension schemes, lots of differences between different cohorts of people within their organisation. You just think, is this now the time because you’re going to have to make some changes - it seems very likely you'll make some changes - but is it worth being a bit more strategic in thinking if we're making changes anyway, let's put some changes in place that actually suit us, and suit our workforce.”

Joe Glavina: “So looking at this on a practical level, Tom, what do you want HR professionals to do now to get ahead on this?”

Tom Barton: “Well, on a practical level, I think it's looking at the overall budgets, what you actually pay, and then probably drilling down a bit and thinking, well, what do we pay between different groups of workers? Have we got that right? And actually, from my legal point of view, in particular, it's not just the Budget, it's what's been written down and agreed because what we see a lot of is the employment contracts and associated literature will say pension contributions are X percent based on certain components of pay. You'll see a sort of similar but slightly different variation on that theme written down in, say, the salary sacrifice documentation. You might see a similar-ish, but not quite the same, version of that in the pension scheme documentation and what we often see in particular is actually that that then really doesn't join up with what's written down in family leave policies. So, you might be carrying risk and misalignment already as an employer and so if you're thinking more strategically about your pensions contributions as a result of the NICs change, I suppose what I'm saying is think about what you've actually committed to already, and is that right? Are you actually delivering on what you've committed to already, or is it too confusing to quite tell? Like I say, we often find misalignment between all these different legal documents, and it can be hard to actually say what is actually definitely correct in terms of the contributions being paid.”

Joe Glavina: “Finally, Tom, what are the risks employers face if they don’t respond to the changes or they otherwise mis-manage it?”

Tom Barton: “So if, for example, you're committed to paying one thing, say, under employment contracts but another thing under, say, the terms of the pension scheme, one way or another you're probably underpaying because one thing will be different. Underpayments that build up over time, especially across a decent population of people, can start to mount up into quite significant figures and if you detect this, well: (a) you've got employment contract type claims, but (b) you might also be under-cooking things from an auto enrolment compliance perspective, and in breach of statute There are some quite hefty penalties attached to that and, indeed, there's a criminal sanction too for just ignoring it. So, these are things which it's really, really important to get on board with. Now, it might also be the case that you are overpaying which doesn't sound quite so problematic but, technically, what you might be doing as a result of overpayments is over deducting from people's salary, which can be an unlawful deduction of wages claim as well. So quite a serious mix of potential legal implications. Quite what the bill is, quite what, say, the back payment of contributions bill is, that will just depend, but you can certainly find that it raises the heckles of the unions, for example, and different cohorts of people, if the contributions need to change and things need to develop from there. So, it's very much a case of managing cost and risk and labour relations at the same time.”

Tom and the Pensions Team are currently helping a number of clients to conduct that pensions review that Tom talked about. If you would like help with that then please do contact Tom - his details are there on the screen for you. Alternatively, of course, you can contact your usual Pinsent Masons adviser.