Income tax rate changes have seen some employers urged to increase pension contributions. But some may not need to, while others should have an eye to the other financial obligations faced by cash-strapped employees grappling with the credit crunch
Too often employers focus on pension scheme membership and contribution levels while ignoring the other financial burdens – mortgages, debt, and saving – of staff.
It is my belief that employers which emphasise pensions in a vacuum of financial education are being poor corporate citizens. They could unknowingly encourage bad financial decisions for particular individuals, for example encouraging them to contribute more to a pension instead of decreasing a debt. So this is a strong call to action for employers to make sure that holistic financial education and products are offered to all staff.
A savings culture was sadly lacking during the recent boom years and now we are facing the fallout from the credit crunch. The majority of staff are going to need all the help they can get as they grapple with mortgages, debt, declining share values and potentially low, if any, salary increases.
Novel thinking on integrated financial benefits should become the order of the day. Occupational savings plans could include the full range of short, medium and long terms savings plus ways to pay off debt. Over the years we have seen employers such as HSA and Logica offer mortgage savings options to staff. Each scheme varies slightly, but in principle staff could save towards a mortgage deposit with the employer offering a matching contribution. The money must be used as a mortgage deposit, otherwise the employee loses the employer’s contribution. Once the savings period has come to an end, deductions transfer to pensions savings. This type of scheme plays to the interests of many staff, and instils a savings habit.
Who’s to say that a student debt repayment scheme couldn’t be added to this concept, so the employee moves from paying off a student debt, then saves for a mortgage, then starts saving for a pension or an ISA.
Of course in circumstances where it is the right decision for staff to increase pension contributions then it is worth looking at them to commit to future increases in contributions. The Save More Tomorrow [SMarT] scheme that was pioneered in the US has increased savings rates in US occupational pensions from 3.5 per cent to 13.6 per cent in just over three years. Recently UK employers have implemented such a scheme for their workforces. Yes, all this effort could be undermined if the investment and default options in the scheme are poor – but that is a topic for another day.
Debi O’Donovan is editorial director of Employee Benefits magazine
It is clear that Gordon Brown is now reflecting ruefully on his decision to remove the 10p income tax band to pay for the headline grabbing reduction in basic rate tax in April 2007.
The first change to the basic rate since the start of the decade also allowed the pensions world to demonstrate how it had changed since 2000 in the way it helped clients to deal with the changes.
It was disappointing to see that certain elements solely regarded this as an opportunity to scare people into raising their contribution levels. It is more important to view matters from a client perspective and establish what clients need to know to help them respond appropriately.
Our preparatory work for our client communications has revealed some clear changes to the landscape over the last 10 years: contract based pension schemes are core to the reward programme for an increasing number of employers; many employers now offer salary sacrifice or flex mechanisms to pay pension contributions; the intermediary’s role is to update on National Insurance as well as Income Tax changes; employers are making pension contributions much more promptly and payroll bureaux now understand the difference between trust and contract schemes!
We decided that our corporate clients would benefit from a simple communication providing an overview of the changes with a checklist of action points. We split our clients into two categories – those who make payments via salary sacrifice/ flex and those who continue to use the net pay arrangement.
Our salary sacrifice/flex clients were pleased to see that they had no action to take with regard to payroll and also to see the positive impact that the National Insurance changes had for some of their employees. For our remaining clients we distilled the checklist to three main actions; make March payment before 4 April 2008, adjust processes for April 2008 and communicate with your employees.
I predict we will soon see non-pension corporate savings portals becoming mainstream. But for most HR departments it is a bit of a leap at present. But if we project forward another 10 years will the tax system be undergoing another major change? And what will have happened to that Gordon Brown?
Glen Campbell is pensions and & investment director at PIFC Consulting