Managing pension policy successfully represents a big challenge for many employers, but particularly those in the manufacturing sector
The Pension Protection Fund (“PPF”), now in its eleventh year, reports that the costs of securing pensions far exceeds this with a funding deficit for UK private sector employers of £220 billion. Traditionally the manufacturing sector has been one of the largest industry groups exposed to such liabilities. Even those manufacturers who do not operate salary-related pension schemes for staff have still to manage pension policy dictated by detailed and complicated regulation and an ever-increasing tax burden.
This is our guide to the key do’s and don’ts of employer pension policy.
DO
Review pension policy regularly. Many employers are using a range of devices to reduce their exposure to defined benefit funding deficits. For many, the full buy out to remove all defined benefit pension liabilities from the business balance sheet is a tempting prospect. However, the cost of securing a buy out can be uneconomic in many cases. Employers have looked to other approaches to seek to reduce pension liabilities including negotiating pension salary caps with staff. Other collateral agreements are also being widely pursued designed to reduce the burden of increasing pension costs. A run of recent court cases has demonstrated the limits of such agreements but also made clear that, if approached with care, such arrangements can prove an effective tool for better managing ongoing pension liabilities.
DON’T
Ignore the tax position. Even those employers who are not exposed to defined benefit pensions are now grappling with an increasing tax burden on staff pensions. This represents a generational shift in government pension policy. Since the 1920s tax relief has been available almost universally to promote occupational pension saving. In recent years, however, this position has changed and tax charges can now apply on even quite modest levels of pension saving. Whilst this is a tax burden to be borne by employees (and directors), nevertheless many employers in practice feel compelled to engage with this issue. Operating a pension plan which results in unexpected tax bills for staff and directors is not a good way to motivate the workforce. In the past, allowing access to an employer-sponsored pension plan was almost universally a positive benefit for staff. Now employers need to consider carefully whether the pension plan is the right approach for all.
DO
Be aware of pension tax protections. The Life Time Allowance represents the total cash value of pension rights which can be maintained tax-free. The Annual Allowance also limits the build up of pension benefits. Members of pension plans have in the past been able to register and protect higher levels of pension saving. In return the individual will usually have to opt out of any further ongoing pension provision. For staff and directors in this position, it is important to get the right advice to ensure that the protection registered in the past is properly maintained. Putting the member in a tax registered pension plan (perhaps via life insurance arrangements or an auto enrolment arrangement) will usually invalidate the tax protection. As stated, whilst the burden of this falls on the individual, nevertheless all employers will want to avoid a catastrophic loss of tax protection on the part of what in most cases will be very senior staff.
DON'T
Forget that non-tax registered pension plans can still represent an efficient way of providing benefits, particularly life insurance, without endangering any tax protections. When tax rules changed (in April 2006) HMRC indicated that a new type of life insurance plan would be permitted (known to them as an ‘excepted life policy’). This would operate outside of the tax registered pension regime. Initially the idea of an unregistered plan attracted little interest but the increasing restrictions on tax relief and the number of staff now affected by this has meant a proliferation of new unregistered pension arrangements of one type or another.
Published: 9 November 2017
Focus on Manufacturing - Edition 6
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