Pension salary sacrifice option ignored by employers

Many employers are not taking advantage of salary sacrifice in the defined contribution (DC) pension schemes they offer – despite the looming prospect of auto-enrolment.

Research by consultancy Mercer among 345 UK companies that offer DC schemes, found 40% have implemented salary sacrifice, up from 13% in 2007.

Mercer principal and DC expert Steve Charlton said: “Despite the large increase, most companies are still not taking advantage of what could be a significant cost saving for their DC plans.” He told Personnel Today that salary sacrifice could save employers 22% of their DC contribution costs.

He added that payroll systems were not an issue as “most can handle salary sacrifice”. But he said employers who may auto-enrol employees who are paid at or near the minimum wage should be very careful about using salary sacrifice for such staff as it could leave them worse off. “There are pitfalls that employers need to investigate.”

The research also found that 50% of respondents believe that the introduction of Personal Accounts (PAs) in 2012 will lead to increased costs. Yet 23% of those polled had yet to consider the impact of PAs on their business.

Charlton commented: “The introduction of PAs will have a considerable impact on company remuneration budgets, and the only way to avoid a shock is to start thinking about how to measure and mitigate the risk now.”

The research also revealed that 95% of respondents offer voluntary DC plan membership to employees and that 53% had set a target take-up rate of more than 90%. But only 29% of them have achieved this.

Forty-one per cent of the plans surveyed have a take-up rate of less than 60%.

Another Mercer poll, of employers in 33 countries, which included 452 European and UK respondents and 621 US respondents, found the three most common reasons for UK respondents establishing a DC plan were: to reduce volatility in the cost of providing a retirement plan; to encourage employee responsibility; and to reduce the overall cost of providing a retirement plan.

For US respondents, it was: to remain competitive in terms of attracting and retaining employees; to encourage employee responsibility; and to provide adequate benefits on retirement.

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