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Salary sacrifice reaps savings for employers with large pension schemes

Employers can reap cost savings from pension salary sacrifice in under a year if the employee pension contributions are in excess of £500,000 per annum, according to Watson Wyatt.

The firm reviewed the 50 pension salary sacrifice programmes it has undertaken for employers in the past two years and found the tipping point where salary sacrifice provides almost immediate savings does not relate to the number of employees involved but to the value of employee pension contributions.

Salary sacrifice involves employees’ salaries being reduced by the amount of their pension contributions and those contributions instead being paid directly by the employer. The lower level of pay means national insurance contributions are reduced both.

Head of flexible benefits consulting Kim Honess says: “There is a certain critical mass at which implementing pension salary sacrifice is a no-brainer given the savings it delivers. Most schemes will be able to recover the set up costs fairly quickly. For schemes with over £500,000m in employee contributions – typically 300 to 400 employees – our experience is that the break-even point will come through before the end of the first year. For larger employers or with higher pension contribution rates, the pay back period is even shorter, sometimes just a few months.”

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