Extend salary exchange for pensions to low-paid

08 November 2017

Employees on low wages should be allowed to share in the benefits of a salary exchange for pensions, according to Royal London and Radcliffe & Co.

Professional Pensions has reported that Royal London's director of policy Steve Webb wrote a letter to the secretary of state for business energy & industrial strategy MP Greg Clark last month, calling for changes to be made to salary exchange rules, even if it takes low-paid earners' wages below the minimum level.

A salary exchange arrangement allows a worker and employer to come to an agreement, whereby pension contributions are made wholly by an employer, rather than split between the employer and employee.

The letter apparently explained how under normal circumstances, any money paid in wages is subject to employer and employee National Insurance Contributions (NICs), even if it is then paid by the worker into a pension scheme. It was argued if pension contributions were to go directly from the firm into the pension, rather than via the worker, it would reduce the total NICs bill, to the potential benefit of both the worker and the firm.

Steve Webb is reported to have said that he hopes the government will change the rules and allow lower-paid workers to share in the benefits of these arrangements. He also said that there is already an exemption for salary exchange type arrangements whereby a worker gets free accommodation as part of their job and that their ‘headline' wage can be below the minimum wage level as long as the value of the free accommodation would take them over the minimum.

A similar approach should apply to pensions, and the Low Pay Commission should review the current rules in the interest of lower-paid workers and their long-term retirement prospects, he added. "Given the Treasury has specifically decided that employer pension contributions should continue to benefit from salary sacrifice arrangements, it seems unfair that lower-paid workers are currently missing out."

Read the full article from Professional Pensions.