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Personal sacrifice

Will private pensions be allowed an advantage over personal accounts

If a tax break seems too good to be true then it probably is and my bet is that salary sacrifice will be the next big break to feel a squeeze.

Salary sacrifice has become popular in recent years, which is not surprising when you consider the big savings in National Insurance it offers employers but I cannot see it surviving intact, at least for pensions, after 2012 if personal accounts come in on time.

If salary sacrifice for pensions is restricted, I would not put money on the flex benefits which rely so much on it surviving either.

Salary sacrifice is fine in a voluntary pension environment. Every employer who has the decency to set up some form of provision for the dotage of its workers deserves a little encouragement for putting his hand in his pocket and salary sacrifice fits the bill nicely. In fact, it is one solution that can be such a good deal that it should be more widespread. But when pensions become compulsory or at least auto-enrolment does, the argument will shift markedly.

I simply cannot see the Government running a tax system that allows private sector pensions to have a tax advantage over its own pension scheme. That is what it will get if it allows definedcontribution pensions set up on a salary-sacrifice basis to earn employers exemption from personal accounts.

If salary sacrifice remains untouched, we could easily get a situation where the up to 10 million workers who are expected to go into personal accounts opt instead for private sector arrangements on a salarysacrifice basis. Rather than pay 5 per cent of an employee’s gross salary into pensions, bosses and workers will cut deals to reduce headline salary and split the difference on the huge amounts of NI that will be saved.

Employers faced with paying 3 per cent of payroll into their staff pensions will leap at the chance of slashing their NI bill to soften the blow. If chargeable NI payroll for 10 million workers was slashed by 5 per cent overnight, then the Revenue would feel one hell of a cash shortage, which is why I cannot see it letting it happen. Some estimate the Revenue already loses £1bn a year through existing salary-sacrifice arrangements. If even five million new employees opt for a notional 5 per cent pay cut, it would really feel the pain.

There will have to be some very complex rules developed to determine what is and what is not an exempt scheme for the purposes of personal accounts. This kind of exercise presented surmountable challenges when stakeholder came in but the new situation is far more complex.

The Government’s policy objective is that workers should pay 5 per cent of net salary into a state-sponsored pension scheme, not that they should receive a work-based pension of at least 8 per cent of earnings. There will be exemptions where employers pay all the pension bill, such as non-contributory civil service pensions but how these exemptions are decided is yet to be discussed, let alone determined.

What is clear is that companies like Royal Bank of Scotland, which last year took the laissez-faire attitude of getting rid of pensions altogether in return for a 15 per cent uplift in salary, will find themselves having to put pension arrangements back in come 2012.

RBS’s approach could be said to be the purest expression of flex benefits – give staff the cash to do what they want with. But the personal accounts agenda is diametrically opposed to flex benefits. Its philosophy is take cash off staff so they cannot do anything at all with it until they are old.

Most people like the idea of being forced to save and will be grateful years down the line.

If the Government decides it means what it says about making workers pay their share towards their pensions, where does that leave existing DC and DB arrangements that rely on salary sacrifice? I would not bet on them maintaining their tax breaks in the future. I would expect them to take this opportunity to close salary sacrifice, either altogether, or at least for the first 5 per cent of employees’ contributions.

We knew this was going to be complicated and we have not seen the half of it yet.

John Greenwood is editor of Corporate Adviser


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