EDITOR'S NOTE
By Peter Maher
Globally, the economic picture is improving. The US is making great strides towards recovery, creating jobs and showing a moderate and sustained gross domestic product growth trajectory, with third quarter growth projected at 2% annually. That said the devastation caused by Hurricane Sandy (cost circa $45bn) could have a significant short-term impact.
Yet Europe continues to suffer amid growing concerns that the respite from the eurozone debt crisis is coming to an end. With poor growth prospects, Spain is a particular worry with fears that the country will need bailing out. Let's hope the US economy continues its recovery and can provide a guiding light for the rest of the world's struggling markets.
At home, many of the changes announced in the Chancellor's Budget mean that the balance between spending and taxes will stay the same. As the UK economy continues to struggle despite improved third quarter projections, the focus will be on pushing for growth and clamping down on tax avoidance. Mr Osborne made renewed efforts to hang an 'open for business' sign outside Britain's shop door. By lowering corporation tax to 24% from April, and to 22% by 2014, he aims to boost the UK's global competitiveness.
I do hope you find this issue of the Employee benefits review interesting reading.
SALARY SACRIFICE – WHY WAIT?
By Chris Murray
Much has been written on the subject of salary sacrifice for pension contributions for a good reason – in most situations, the concept is a 'no brainer'.
Many people have seen a fall in their disposable income over the last two to three years. As such the attraction of saving national insurance (NI) on pension contributions that they are paying personally will far outweigh the potential impact on certain earnings-related state benefits, most of which may never become payable.
A cynical view perhaps? Maybe, but governments in general seem intent on chipping away at benefits for those in work. We have had technical changes to the state earnings-related pension scheme and its MKII version, the 'state second pension' (S2P), restrictions on exempt childcare vouchers for higher-rate taxpayers and reduced access to incapacity benefits, etc. Perhaps a 'bird in the hand' might not be such a bad idea?
How can salary sacrifice help? Quite simply, because once salary has been reduced, the payment of income tax and NI on that element of income is no longer an issue.
If you haven't received it as income, then as the law stands today you won't pay tax or NI on it. Yes, the law could change in the future but is that a reason for higher-rate taxpayers not to put themselves in the best position in the meantime?
Salary sacrifice for pension contributions would allow higher rate taxpayers to save 2% NI contributions and where they have personal pensions (group or otherwise), to obtain full tax relief immediately.
Those paying the basic rate of income tax can usually save personal NI contributions of 12% of the amount sacrificed which most people would see as a welcome boost to their take-home pay. Of course there are potential risks for basic rate taxpayers to the extent that some state benefits (e.g. maternity pay, job seekers allowance and the S2P) depend on a minimum level of earnings either as a threshold for eligibility or simply because their value depends on the amount of a person's earnings between lower and upper limits.
S2P is one that people in work are more likely to focus on, in view of the reason for sacrificing salary in the first place. While it still exists, S2P treats those on earnings between £5,564 and £14,700 as if they were actually earning £14,700, which means that a lower earner sacrificing salary within this range is not likely to experience any reduction at all in S2P. In a few years, the plan is to combine S2P with the basic state pension into a single flat rate pension of around £140 per week in today's terms, so the risk here will eventually fall away.
It's not only employees who stand to gain from salary sacrifice for pension contributions, employers will also enjoy a saving on their NI contributions of 13.8% of the amount sacrificed. This kind of saving can often fund the entire exercise of introducing and communicating a pension scheme in the first year alone. Thereafter, an ongoing saving can be achieved. In many cases, employers will share their NI savings with staff by increasing contributions to the pension scheme.
HMRC recognises that salary sacrifice is a contractual arrangement between an employee and his or her employer. Provided this represents a bona fide change in employment terms, the resulting saving in NI contributions that this generates for the parties is not of concern to HMRC.
Arrangements to sacrifice salary for pension contributions need to be set up correctly in order to satisfy HMRC, although its approval of such an arrangement is not actually required. Indeed, it is not possible to obtain comment from HMRC until after a scheme has been put in place.
The successful introduction of a salary sacrifice for pension contributions scheme is down to effective communication. It's no good expecting written announcements to make this happen; an employer also needs to line up presentations for staff so that they can understand the benefits and any potential downside. The opportunity to ask questions (and even to have one-to-one meetings) means that people will be put in a position where they can make an informed decision about a subject that at first sight can look 'too good to be true'.
WORKPLACE PENSIONS ARE HERE
By Julia Ridger
Since 1 October 2012 workplace pension schemes have to be put in place by the largest employers in the UK.
Staging dates
Since our last issue the staging dates for employers with less than 250 employees as at 1 April 2012 have been amended. Following industry pressure and accounting for the current economic climate, the Government has taken the decision to amend the staging dates for these employers to those identified in the following table, although at this point they are still indicative and under further consultation.
Employers do not have to wait until their staging date to opt into the new legislation; they can implement qualifying workplace pension schemes (QWPS) now if they so wish.
Categorising the workforce
It is important for employers to understand how the legislation defines different categories of workers. They need to understand the complexities involved in determining their workforce in order to identify for whom they will have to pay pension contributions.
Workers are defined as those who work under a contract of employment (an employee) or have a contract to perform work or services personally and are not undertaking the work as part of their own business. Workers are then subdivided into 'eligible jobholders', 'non-eligible jobholders' and 'entitled workers'.
Eligible jobholders
Eligible jobholders are those workers aged between 22 and state pension age (SPA), working in the UK and earning above the current earnings trigger for automatic enrolment of £8,105 in the 2012/13 tax year. These individuals must be automatically enrolled in to a QWPS and employers will need to pay pension contributions for them.
Non-eligible jobholders
Non-eligible jobholders are those workers aged between 16 and 22 or SPA and 74, working in the UK and earning above £8,105, or those workers aged between 16 and 74, working in the UK and earning above £5,564 (the lower earnings level for qualifying earnings in the 2012/13 tax year) but below £8,105.
These individuals have the right to opt in to a QWPS. If they do employers will need to deduct their personal contributions from them and make pension contributions on their behalf.
Entitled workers
Entitled workers are those workers aged between 16 and 74, working in the UK and earning below £5,564. These individuals have the right to join a QWPS and employers will need to deduct their personal contributions from them although they will not need to make contributions on their behalf.
For each category of worker mentioned, different reporting and communication requirements will have to be implemented. In addition, during an employee's lifetime they may move between one definition of worker and another, so this will have to be closely monitored. As and when a worker moves into another category, the employer will be required to issue the relevant communication to that individual. A large part of the legislation relates to record keeping so keeping track of the workforce and into which category they fall at any point in time will be imperative.
Multi-tiered solutions
We believe that many employers will look to implement a multi-tiered pension solution, which may incorporate the National Employment Savings Trust (NEST) or a competitor as well as their existing pension providers.
NEST was introduced under the auto-enrolment legislation as a default option for those employers not wishing to offer employees anything more that the most basic of pension arrangements.
However, as there are currently restrictions in place within NEST, including its inability to accept transfers in or out and the imposition of a maximum contribution limit, other options may be preferable.
The People's Pension from B&CE, and the NOW Pension Scheme, supported by ATP, the providers of the Danish National Pension, are potentially viable alternatives.
INTERNATIONAL RETIREMENT BENEFIT SCHEMES
By Peter Maher
We look at section 615 schemes, which provide retirement benefits for employees of UK companies working abroad.
Section 615 trust schemes are UK-based retirement benefits schemes established under trust law for the purpose of providing bona fide retirement benefits for employees of UK companies working overseas. They are not approved pension schemes, so they do not attract exactly the same tax status as approved schemes – but this does not make them any less attractive. They do however have to be established for the sole purpose of providing superannuation benefits. Section 615 schemes can be set up easily and both the employer and employee can contribute. The level of contributions is not capped and it is possible for employees to contribute through salary sacrifice which may mitigate tax and social security in the country they are working in. Money invested grows tax free, is outside the employee's estate for inheritance tax and beneficiaries can be nominated. The sponsoring employer should obtain a corporation tax deduction.
Who is eligible?
The scheme is for individuals of any nationality who are carrying out duties outside the UK for a UK company or associated company elsewhere in the world, irrespective of domicile or residency. They are not only for expatriates but also for individuals resident in their own country – with the exception of UK and US residents. However, UK residents with a separate and distinct contract for overseas duties can be included.
How does it work?
A section 615 trust will generally be established in the name of the employing company, similar to an individual pension arrangement in the UK for UK-resident employees.
Employer contributions
Provided certain conditions are met, the UK employer will obtain a corporation tax deduction for contributions made to the trust.
Qualifying companies
A non-UK company may make contributions into a scheme, but only if the company is associated with the UK employer (essentially common ownership between companies or a holding company or subsidiary relationship).
Investment strategy
Rather like a self-invested personal pension, individuals can choose their own investment strategy. There is a wide range of options, such as insurance policies, direct equity holdings, fixed interest securities, collective investment schemes, money funds, property and cash deposits.
Drawdown
The biggest attraction to a section 615 scheme comes on drawdown of the pension. Benefits can be taken as one tax-free lump sum by UK residents from age 55, or earlier if the employee leaves the company, but must be taken by the age of 75.
INCENTIVE EXERCISES - EMPLOYEES LOOK TO STABILISE SCHEMES
By Julia Ridger
With the ongoing unstable economic climate and the growing volatility of defined benefit pension liabilities, many sponsoring employers are looking at ways to manage and reduce their pension scheme liabilities through 'de-risking'.
Two concepts which are coming to the fore are enhanced transfer value exercises (ETVs) and pension increase exchange exercises (PIEs).
Both are classed as incentive exercises. While many may have heard of, and subsequently undertaken, an ETV in relation to their pension scheme, a PIE exercise may not have been considered yet by the sponsor as a mechanism to look to reduce the pension scheme liability.
With ETV exercises, the organisation effectively encourages their deferred members to transfer benefits to another pension arrangement, by offering a higher than normal transfer value. In doing so the employer crystallises its liability albeit for an immediate cash injection.
PIE exercises are generally targeted at pensioner members or active members at the point of retirement. The member is given the choice of giving up, usually non-statutory, pension increases, in exchange for a higher initial pension. Take-up is influenced by the member's views on their own life expectancy, lifestyle and future inflation rates, as well as whether they have income from other sources.
The aim in both exercises is to produce a winning position for the employer, trustee and member, while the other defining feature is that it always remains the member's decision as to whether they accept the incentive being offered.
After a period of stagnation, incentive exercises and advice surrounding such projects have developed significantly over the last few years.
The critical stance taken by the Pensions Regulator within its previous guidance on the area of 'de-risking' had led to employers being reluctant to press ahead with ETVs or PIEs. This had arisen as a result of poor practice on these exercises in the past which had discredited these projects.
However, the Pensions Regulator's acceptance that incentive exercises are here to stay has led it to issue a statement supporting the Code of Good Practice for Incentive Exercises, removing any doubt about its position.
Together the Code and the statement provide a firm framework for employers to manage defined benefit pension liabilities in a fair and transparent way that trustees can be comfortable with. Employers can now press ahead with implementing incentive exercises, provided they follow the Code of Good Practice.
At Smith & Williamson we have experience of advising individual members during the ETV exercise with the support of the sponsoring employer. We have also advised and assisted both the sponsor and trustees on all incentive exercises, implemented project management plans and worked with leading pensions lawyers to deliver the project in line with the Code. Please feel free to contact us if you wish to discuss implementing incentive exercises as a de-risking strategy.
STEERING A NEW COURSE - ALL CHANGE FOR INDEPENDENT FINANCIAL ADVICE
By Ken Burfitt
The end of 2012 will see possibly the most significant change that the market for independent financial advice has experienced during the last 20 years.
As businesses prepare for auto-enrolment there is another government initiative which is expected to have a significant impact on the cost of delivering pension plans to your employees. It starts at the end of 2012, and is already leading to major changes in the design of pension (and other investment products) being offered through independent financial advisers (IFAs).
What new regime I hear you ask?
The retail distribution review (RDR) was principally focused on improving the professionalism of the IFA market. Its findings, which are being enacted from the end of 2012, should lead to a cultural shift in the way that people access financial advice in the UK. It will certainly lead to a change in the way most people and businesses pay for their advice.
Two of the changes in particular will have a notable impact on the market. They are new minimum exam qualifications for advisers and the outlawing of up-front commissions.
A number of financial advisers are expected to struggle to meet the new qualification criteria, and as a result may cease to trade.
Many IFA firms are/have been heavily dependent on commissions generated by insurers. It is not surprising then that the most visible change to be felt by most people will be as a direct result of the outlawing of most types of upfront commission payments from the end of 2012.
The option for a financial adviser to introduce new business to product providers (largely insurers) and be paid a large lump of commission upfront for advising on the sale will soon become illegal.
Gone will be the days of supposedly 'free' financial advice (the cost of which was actually paid for through commissions from product providers via products carrying high ongoing charges). The removal of the perception of 'commission bias' as a result of up-front commissions was one of the key objectives of the RDR.
We expect that the new (largely-fee based) system from January 2013 will see a number of advisory businesses closing or changing their business model significantly as they struggle to maintain cash flow while making the transition to fees.
As you would expect, product providers are also busy updating their products to compete in the new market.
New is not always better (or cheaper), the challenge is therefore to get the best outcome from the two regimes currently available. During the transition between the old and new structures, you have a brief window of opportunity to benefit from our detailed knowledge of the market.
By way of an example, a benchmarking exercise we conducted for a group personal pension client recently resulted in a reduction in member costs of around 30%, an improvement in the quality of default investments and the delivery of a structured support and communication package to employees as well as a significant NI contribution saving for the employer.
Those who are in expensive plans where their current advisers have been taking large, up-front commissions have the most to gain from talking to our specialists. Many group personal pension and stakeholder plans started since 2001 will fall into this category.
Now is the time to ask us to benchmark your current group arrangements against the market so that you can understand the pricing of the plans and, with our help, negotiate effectively. As a part of this service, our specialist employee benefits consultants can look at alternative structures, products, communication and pricing to ensure that the arrangements are fit for purpose and that they remain competitive as we head towards auto-enrolment.
At the same time as we analyse your pension plans, we can advise on wider cost reduction strategies such as salary exchange (potentially saving a significant amount of employer NIC) and look at other ways to reduce the cost of your insured benefits (such as death in service and income protection).
DIVIDED OPINIONS
By Ian Luck
Ian Luck discusses the differing attitudes towards active member discounts.
I have been working in the world of pensions long enough to know that there is often more than one solution to a problem, but rarely have I seen a topic that divides opinions quite like that of active member discounts (AMDs). Providers, employers, advisers and the Government all have strong views which often seem to be at polar opposites.
AMDs have been introduced by providers over the last few years as a way of extracting the very best terms for the pension arrangements that they establish. Providers rely upon pension schemes staying on their books for many years, perhaps as long as 18 years, before they become profitable, yet it is an extremely competitive market place. Therefore, providers have been steadily reducing the charges levied under the schemes as much as possible to try to ensure that the schemes are not attracted elsewhere.
Providers calculate the charges that they need to levy on a scheme based upon a number of factors. Typically this would be quoted as a single annual management charge for every member, regardless of whether those members are still employed by the sponsoring company or whether they have left for pastures new.
For many companies this is incongruous; employees who have left the company, perhaps even acrimoniously, enjoy the benefit of the same pension charges established for the current, loyal, workforce. For example, a flat annual management charge (AMC) of 0.60% might be available for all members. The alternative offered by some providers is to offer a higher AMC for members that are no longer working for the company, for example 0.95%, with a discount for staff still employed taking the charge they pay down to say, 0.45%. It is clear that the leavers are subsidising the active members in this case, but given that the active members are producing an increasing income for the provider through the ongoing contributions, it could be argued that under the level charge the actives are subsidising the leavers. It is usually possible for leavers to retain the lower terms if they continue to make a contribution into the plan, albeit even at a minimal level, thereby somewhat proving the point about the cross-subsidies.
While offered by many providers, there are some who are vehemently opposed to using AMDs, saying that it is disingenuous. Indeed the Pension Regulator has stated that it does not think AMDs are fair and the initial indications from Steve Webb, the pensions minister, were also unfavourable.
However, rather than elect to legislate against the use of AMDs he plans to tackle the underlying problem – the number of small pots of pension money for deferred members. If the Government can make it easier for members to move their pension benefits, the number of small pots (the administration of which is currently costing providers) will reduce, the market will find its own workable level and perhaps the divide might be breached.
Q&A: RELEVANT LIFE PLANS
By Martyn Cross
Directors and employees are eligible for a little known but highly tax efficient staff benefit provided by their employer. Life cover can be provided by what are known as 'relevant life plans'.
What is a relevant life plan?
A relevant life plan is an individual 'death in service' life policy. It is designed to pay a lump sum death benefit if the person covered dies or is diagnosed with a terminal illness during their employment. Relevant life plans are similar to most other types of life cover but attract various tax reliefs which greatly reduce the cost of providing this cover.
What are the tax reliefs?
- Employer contributions to a relevant life plan are usually a corporation tax deductible expense.
- The premiums paid by the employer in respect of the relevant life plan are not a benefit in kind for the employee and therefore the employee suffers no income tax liability in respect of the premiums paid. Neither the employer nor the employee suffer any NI contribution liability in respect of the premiums.
- Because a relevant life plan is not a registered pension scheme any contributions made do not count towards the annual allowance for pension purposes. This means that full pension contributions can be made and the provision of relevant life plans will not interfere with any pension protections such as primary, enhanced or fixed protection an individual may have.
- Upon death the benefits of a relevant life plan are usually paid under a discretionary trust to the dependents of the individual covered. This will help in reducing any impact of inheritance tax on the payment of the death benefit.
Who would benefit from a relevant life plan?
Any director or employee can be covered under a relevant life plan. Insurers will usually cover a multiple of between 10 and 25 times an individual's employment package. This would include salary, bonuses, benefits and dividends payable from the employer. Because of the tax relief available the cost of providing the life cover is usually substantially cheaper than conventional life policies.
Who cannot benefit from the scheme?
The benefits of relevant life plans are written on the lives of individual employees. It is not possible to offer joint life policies on spouses or partners.
As this is a policy that is provided to employees, the self-employed, partners or equity members of limited liability partnerships are not eligible.
PROCUREMENT AND YOUR BUSINESS
By Jenny Powell, JDP Procurement Services
Procurement is the end-to-end activity of purchasing goods, services and works, both at a transactional and a strategic level. All businesses undertake procurement at varying levels. It can range from contracting for an entire service, to purchasing small assets such as office equipment. The procurement process does not end at the commissioning or contract award stage, but spans the entire lifecycle of the product or service from requirement definition and design through to contract and supplier management, and disposal of any redundant assets.
Effective procurement supports a business' strategy and objectives, helping it to deliver high quality services which meet the current and future needs of its business and clients. With today's tough market place, the effective deployment of strategic procurement services within your business can increase your profitability and competitive edge.
Smith & Williamson strategically partners with JDP Procurement Services (JDP), a privately-owned business with extensive experience of providing key procurement services to clients predominantly within the professional services sector.
JDP provides a range of services from operational and strategic spend management, to business process re-engineering and new business development, all of which are designed to increase your profitability and competitive advantage. For some clients this can simply mean ensuring compliance to, or renegotiation of, commercial terms; for others it means significant supplier rationalisation or wholesale outsource.
Specialist market knowledge, risk management and commercial best practice are combined with a passion to deliver fast, tangible and sustainable long-term results for clients.
JDP provides best in class procurement services focusing on four core strengths to achieve outstanding results:
- market knowledge
- outstanding procurement expertise
- vast cross-sector experience
- commercial creativity and innovation.
An abundance of experience means that JDP can swiftly identify opportunities for service, quality and cost improvement without wasting your time and money familiarising ourselves with areas of expenditure.
We have taken the time to compile a wealth of benchmarking data across all business services areas, enabling us to quickly assess both financial and service performance against your peers, identifying potential areas to achieve competitive advantage.
We have a proven track record of combining these assets to introduce innovative commercial and operational solutions to deliver impressive benefits.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
