After the ruck created by articles in the FT and the Daily Express, I’ve heard several pension experts tell me that if we did not have employer contributions, all the issues around net-pay and relief at source would go away.
This is of course what happens in Australia where pension contributions are part of a blessed social contract between providers, Government, employers and employee representatives.
And many large occupational schemes have adopted salary sacrifice as part of a flex-program that enables employees to exchange salary for rights to pension in future years. These arrangements are not just efficient, they reduce the salary on which national insurance is levied – so they are most efficient to employers.
I don’t want to get into moral arguments about the legitimacy of salary sacrifice, not least because I make my contributions by requesting lower salary in return for higher pension contributions from my employer. It would be hypocritical of me to condemn what I personally benefit from.
But I don’t think that salary sacrifice is a panacea for the mass market and for three reasons;
- It is much harder and more perilous to administer than people think. You are altering people’s contracts of employment and could be sacrificing people below the minimum wage, any change of contract involving less notional salary is going to set alarm bells ringing with some staff and this stuff needs good communications. The Government write well about this here
- The political future of salary sacrifice is open to question. We are about to conclude a consultation on how pensions are taxed. One of the key considerations is that pensions are taxed simply and fairly, I see salary sacrifice as a sophistication in the pension system that may not survive this process.
- Salary sacrifice under auto-enrolment may be a complexity too far for payroll. We are looking to standardise and simplify the operation of auto-enrolment for 1.8m employers. The options to choose contribution tiers,defer and phase create enough complexity as it is, for many payrolls, salary sacrifice elicits the response “don’t even think about it!”
For organisations that have introduced salary sacrifice, there are immediate benefits and these should be enjoyed by the employer. Hopefully, those who voluntarily agree to contribute by exchanging salary for pension, can share in the savings they create for the employer, as well as for themselves. There is a marginal reduction in state pension rights for those on certain pay bands but for the moment, salary sacrifice is a perfectly acceptable way of organising pensions as part of deferred pay.
But please let’s not pretend that salary sacrifice is anything other than what it is – an arbitrage against the national insurance fund with a very limited shelf-life and limited application.
The fundamental problems of our pension taxation system are being exposed as the tide of auto-enrolment rolls out. The issues for low paid part-timers highlighted in previous blogs cannot be solved by salary sacrifice. They are real issues in themselves and the reaction of the press is a reflection of the reaction of everyday people to the pension system.
I described the super-subtle solutions being put forward by some of my fellow consultants as pension sophistry.
A sophism is a specious argument for displaying ingenuity in reasoning or for deceiving someone
I think most people are worried by complicated arrangements which is why the certainty and simplicity of ISA taxation.
I don’t think that salary sacrifice is the answer, in fact I think it another part of the problem. We need radically simple solutions to pension taxation which do not give space to the pension sophists , nor create gaps through which rights to tax-relief can fall.
Though I , as a consultant, might benefit in the short-term from the complexity of the current system, I cannot see that complexity strangle the confidence in pensions that I see emerging. It is not in my – or anybody else’s – long-term interest, for pension taxation to be this complicated. It is certainly not in the nation’s interest for so much time and money to be wasted with sticking-plaster solutions to intractable problems.
The debate over net-pay and relief at source demonstrates once more that we need a radical change in the way pension taxation works.