Veteran pension campaigner Ros Altmann has urged government to further delay planned changes to salary sacrifice, as current proposals risk damaging pension outcomes in the UK.
Her comments come as a Lords Committee described the legislation as premature and ill-conceived, with current proposals containing a number of unanswered questions as to how these rules will work in practice.
Baroness Altmann, a peer in the House of Lords, says these latest proposals are an example of Government’s ‘push-me, pull-you’ pension policy which seeks to improve pension outcomes and UK investment, but will make them worse.
She adds that current plans are to limit salary sacrifice contributions from 2029, but this need to be pushed back further until the Government provides a clearer view on how these new rules will operate in order to avoid unintended negative consequences.
Altmann says: “The Government justifies the policy by claiming it is about high earners but it hits basic rate taxpayers too, with ministers saying a quarter of basic-rate taxpaying workers in salary sacrifice pension schemes, will be caught.”
She adds: “Moderate earners losing 8 per cent relief on their contributions could suffer lower take-home pay and/or their employers deciding to abandon salary sacrifice altogether, so they end up with lower pensions as a result of this policy.
“They could lose out more than higher earners, who face less of a hit in percentage terms than basic rate taxpayers.”
Altmann says there are a number of “gaping holes” in the legislation that need to be filled, and which the Government has failed to provide answer to so far. These includes questions around whether employers will be able to increase pension contributions safely. She says: “We have not yet clarified what is actually caught by the Bill in terms of how a salary sacrifice optional remuneration arrangement will be assessed.
“For example, if an employer increases workers’ pension contributions, just because perhaps they feel they want to provide more for their staff than current minimal levels (something the Government and the pensions industry has been urging for a long time) HMRC may decide to consider this salary sacrifice, even if it is not. The result is that employers will be reluctant to increase their contributions at all, just in case they are caught. This will damage pension adequacy.”
She says there are further issues around employees with multiple jobs and how contributions might be tracked if they use salary sacrifice with different employers. Similarly compilations are likely to arise when workers change jobs part-way through the tax year.
“How will a new employer pension scheme know what level of salary sacrificed contributions was made in the previous employment?” she asks. Altmann adds that the Lords Committee also raised the issue of how losing salary sacrificed pension contributions could affect student loan costs, but the Government did not seem to know the answer to this question.
She adds that these proposals will create additional costs for employers. “It is not just pension contribution costs that will rise. Employers will have to pay more for administration costs, changing payroll software, revising pension scheme rules, renegotiating contracts of employment (changing salary sacrifice arrangements is a change to employment contracts), time taken to answer staff queries for those who do not understand the changes or why their take-home pay falls.
“Smaller and medium-sized employers could be severely hit by these factors. Again the government has not done any modelling on potential costs and how this will affect businesses of different sizes.”
She adds it is not clear who is responsible for compliance, or for reporting to HMRC or protecting employees’ privacy on this issue.
Altmann adds: “So many unknowns seem to be skirted over and there is no reliable modelling of likely impacts. It is also not clear how many employers are currently using salary sacrifice pay minimum auto-enrolment contributions.
“We have no modelling to quantify how their higher costs might affect future pay rises and staffing levels. The amounts of money may seem rather small but they impact across the pension and employment landscape. As an economist, I have long recognised that it tends to be marginal changes, however small, that often drive behaviour.”
“There could be a case to even out the relative generosity of pension incentives, but this is definitely not the way to do it. To remedy some of the inequalities in pension provision, one would need to improve the incentives for basic rate taxpayers, not reduce them. Worsening lower or middle earners’ incentives can only worsen their pension outcomes.
“This Bill highlights major inconsistencies in current pension policy, particularly in the private sector. Stated policy objectives of helping worker achieve better pension outcomes and encouraging more pension fund investment in UK assets, will actually be undermined by these reforms.”