Boosting LGPS pension pots
01 April 2019
This article was featured in the April 2019 issue of the magazine.
Amanda Venables, senior manager employee benefits, at PSTAX, reveals and explains the rise in popularity of SCAVCs in local government
The local government pension scheme (LGPS) is a valuable part of the pay and reward package for employees working in local government or for other employers participating in the scheme.
A key feature of the scheme is the flexibility to boost an employee’s pension by paying additional voluntary contributions (AVCs). Where an employee opts to pay AVCs, the employer can also contribute to the employee’s AVC fund, which is known as a shared cost additional voluntary contribution (SCAVC). This can be provided through a salary sacrifice arrangement – rather than under a standard AVC arrangement – thus enabling the employer and the employee to save National Insurance contributions (NICs) in addition to the income tax savings already available. This type of arrangement was set out in our article in the February 2018 issue (see http://bit.ly/2tJBtEE), which gives more details of how the arrangement works.
As a result of the legislation known as ‘optional remuneration arrangements’, introduced in April 2017, certain benefits provided through salary sacrifice that were previously exempt from an income tax and class 1 NICs charge are now treated as taxable. However, pensions (including SCAVCs) are not affected by this legislation thus making it a very attractive proposition for employees and employers alike.
The implementation of a salary sacrifice SCAVC scheme is growing in interest as an effective way to help members of the LGPS increase their pension benefits at retirement. In addition, employers are recognising the significant employer NICs savings that can be achieved.
However, as with any change to an employee’s remuneration package, there are several important points to consider and some of the key ones are set out below:
Prior to implementation, employers must consider the discretions policy and if it needs to be amended to confirm that the employer will pay SCAVCs.
It is essential that the provision of the benefit is structured correctly to ensure compliance with the relevant legislation, salary sacrifice guidance and the LGPS regulations. It is also important that all implications of moving from a standard AVC to a SCAVC arrangement are fully communicated and understood by employees, such as the effect on the administration terms of a SCAVC plan and when the benefits can be taken.
Employers can choose to implement the SCAVC whereby current AVC members would be invited to automatically transfer across to a SCAVC arrangement but with an opt-out right. This option is most likely to realise immediate savings for the employer. However, if selecting this option, certain conditions must be met to ensure the employee’s employment contract is effectively varied.
Where an employee and their employer contribute, it is important that the employer informs their local administering authority of this and whether the employer contribution is paid under a salary sacrifice arrangement or not. If a member with a SCAVC leaves the LGPS with an entitlement to a refund, the administering authority will need to know this information in order to calculate the refund correctly.
Although employer and employee LGPS contributions can continue to be paid on the pre-salary sacrifice level of pay, this is only accepted as long as the employer has specified in the employee’s contract of employment that the contribution the employer makes to SCAVC will be a pensionable emolument.
This arrangement, which is growing in popularity, enables local authorities and other public bodies within the LGPS to achieve significant savings and for employees to boost their pension pots.
...significant savings and for employees to boost their pension pots
An employee with a £250 per month standard AVC currently enjoys an annual £600 income tax saving (at basic rate tax). However, under a SCAVC, the employee would make an additional annual saving of £360 in NICs (based on a 12% rate), effectively an addition to take-home pay. Alternatively, it can be reinvested into additional SCAVCs on which further income tax and NICs savings will accrue. This could result in around £530 more in the ‘pot’ – equivalent to a 17.6% increase in the AVC investment, without any cost to the employee.
Employers will enjoy savings on NICs (13.8%) and apprenticeship levy (0.5%) on the total amount of salary sacrifice which can be substantial in large organisations. For example, Portsmouth City Unitary Council with 4,000 LGPS members launched their SCAVC scheme in August 2017 and now has 500 participants, sacrificing £1.6m per year. Its employer NICs and apprenticeship levy savings amount to £200,000 annually, equivalent to £400 per member.
Provided that due care and attention is given to the specific considerations regarding the rules around salary sacrifice and the LGPS rules, this arrangement should prove to be a big success for all concerned. Therefore, it is advisable to seek professional advice to assist with the design and communication of this benefit.