If you read nothing else, read this...
- The coalition government has announced a wide range of new measures, policy reviews and consultations, affecting almost every employee benefit, since it came into power in May.
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The new coalition government has been busy in its first 100 days, and the benefits industry is feeling the effects, says Debbie Lovewell
The first 100 days in a new role can be a crucial time for proving your worth. The coalition Conservative/Liberal Democrat government has certainly aimed to make an impact during its first few months in power, announcing a wide range of new measures, policy reviews and consultations. In the reward arena, these moves impact on almost every employee benefit.
Among the main areas to come under the government's microscope are pay and pensions. Higher-earning staff are a particular target, although the coalition has sought to simplify measures aimed at this group announced by the previous government.
In June's emergency Budget, for example, Chancellor George Osborne outlined plans to seek an alternative to Labour's policy to restrict pensions tax relief for those earning over £150,000 a year. Tony Baily, principal consultant at Hewitt Associates, says: "The coalition government's latest proposals completely rewrite how it is going to rewrite pensions tax relief."
Rather than restricting pensions tax relief for this group, which would come into effect from April 2011, the coalition said it would seek an alternative way to procure the same £3.5bn revenue, and has proposed reducing the annual allowance from its current level of £255,000. Provisional analysis suggests an allowance of about £30,000 to £45,000 is required to achieve the same results.
The government also proposes reducing the lifetime allowance (LTA) from £1.8m to £1.5m, which could yield £100m to £200m by 2014-15, according to initial estimates. A consultation on these proposals is now closed and the government intends to begin drafting legislation in September.
Reduced annual allowance
Although the proposed change is typically regarded as a simpler measure, the reduced annual allowance could affect more staff. "The focus has moved away from being an issue for high earners," says Baily. "Although the government is going to raise the same [amount], other people will bear the pain."
Mick Calvert, head of financial planning at Towers Watson, adds: "For defined contribution [DC] pensions, it is easy as it is looking at contributions [made]. The problem is how to value defined benefit [DB] pensions."
Employees in DB schemes could be affected at a much lower salary level because of the way the annual expected DB pension is calculated. Under current rules, this is multiplied by 10 and compared to the annual allowance, says Calvert.
So if the annual pension is multiplied by a higher number, for example if the multiple is set at 15, an employee earning £60,000 a year who has been paying into a DB scheme for about 30 years could be affected by the tax change if they receive a pay rise of 5%. The details of the legislation are yet to be announced, but Hewitt Associates' Baily says: "If employers have a DB scheme, they should start to think about their member profile to see who may be affected and how they can amend their scheme to avoid paying additional tax. It will very much depend on their philosophy and approach to employees."
Rash Bhabra, head of corporate consulting at Towers Watson, says the change could prompt employers to take more of a total reward approach. For example, they could offer affected staff the option of receiving pension contributions up to the annual allowance, then get the rest of the year's payments in cash with the option to pay some of this into alternative savings vehicles such as corporate individual savings accounts (Isas) or share schemes.
Another alternative is to offer an employer-financed retirement benefit scheme or an employee benefits trust, but whether these will exist after April 2011 is subject to another government review.
Another measure that is having a significant impact on pensions is the ability to use the consumer price index (CPI) rather than retail price index (RPI) when calculating increases in pension payments. This could have a major impact on DB pension schemes. How the change, which is designed to reduce employers' liabilities, will affect pensions will depend on what is included in a scheme's rules. Many refer specifically to the RPI, which could make it difficult for employers to make the switch. It is not clear what will happen in these circumstances.
Where employers are not bound by such rules, they may find their pension liabilities increase if they have to use the higher of the two indexes. "The way in which the change is brought about could have unintended consequences," says Bhabra. "Schemes could end up having to give the bigger [increase]."
Auto-enrolment details reviewed
The government is also reviewing the details of auto-enrolling staff into a workplace pension scheme and introducing a simple savings vehicle as an alternative to occupational schemes - the national employment savings trust (Nest). The review is focusing on what the scope for auto-enrolment should be and whether Nest is the right vehicle.
Dave Robbins, senior consultant at Towers Watson, says: "The first question is the most important of these. It could exclude low earners and could also exclude those close to retirement. Either of these reforms would reduce the total amount of compulsory contributions employers would have to pay. There are very difficult issues to resolve."
Richard Wilson, senior policy adviser at the National Association of Pension Funds, says: "It is quite clear that auto-enrolment is going to happen and employers should continue to prepare for it in a general way."
Also impacting on pensions is the abolition of compulsory annuitisation at age 75. Towers Watson's Bhabra says: "That is very exciting. It potentially makes DC pensions much more attractive, especially for people with bigger pensions. If you start making pension schemes more flexible, they begin looking like medium-term savings plans. While, on the face of it, DC reform is good [for these type of scheme], we have a bit of a worry it might encourage employers to move away from longer-term savings [plans]." But pensions are not the only means the new government is using to raise extra revenue; it is also looking to a number of tax changes. For example, capital gains tax (CGT) rose to 28% for higher-rate taxpayers from May, although it remained at 18% for lower-rate taxpayers. This could affect the popularity of employee share schemes.
Carol Dempsey, reward partner at PricewaterhouseCoopers, says: "There was quite an incentive for employees to hold on to their shares from their employer when they had to pay quite a low CGT of 18%."
National insurance contributions (NICs) are also on the revenue-raising agenda. From April 2011, employees' NICs will rise from 11% to 12%, although previous plans to increase employers' NICs have been overturned, so these will remain at 12.8%.
VAT rise effect on company cars
Meanwhile, the rise in value-added tax (VAT) from 17.5% to 20% from 4 January 2011 could see employers bring forward orders for new company cars to avoid higher VAT bills, or even reconsider their car provision. Alastair Kendrick, director, employment tax services at Mazars, says: "I am seeing a lot of organisations looking at whether they still want to provide staff with a company car."
Other announcements that have an impact on benefits include the government's consultation on its plans to scrap the default retirement age (DRA) from October 2011. As it stands, the new plan will include a six-month transition period from the existing regulations, beginning in April 2011.
Removing the DRA could push employers to re-examine options such as offering flexible retirement, whereby staff can begin to take part of their pension while still working. Flexible working could also be used to enable employees to remain at work longer.
However, under age discrimination legislation, employers cannot use age as grounds for providing differing benefits to staff, and this could pose challenges, particularly when it comes to cost. Duncan Brown, director of reward at the Institute for Employment Studies (IES), says: "There are all the issues about the higher-cost premiums incurred."
Private medical insurance (PMI) and group risk perks are most likely to be affected here. The cost of PMI, along with health cash plans, could also be pushed up by the rise in insurance premium tax from 5% to 6% from 4 January 2011. However, other long-term insurances, such as protection benefits, will remain exempt from this tax as long as the policy is written on a long-term basis.
In the case of group income protection, removing the DRA could prompt employers to review their scheme, possibly moving to a more cost-effective limited-term plan that pays out for a pre-set number of years rather than until an employee would expect to retire.
Also affecting the group risk market is a new Welfare Reform Bill which builds on two Welfare Reform Acts passed by the Labour government. This is aimed at making the benefits system less complex, improving work incentives and reducing unnecessary administration of benefits.
Equality Act accepted in full
Pay has also come under the spotlight. The coalition government has confirmed it will accept the Equality Act 2010 in full, after it was passed in April this year under Labour. "If it stays as it is, all private and third-sector employers with 250-plus staff are to be encouraged to publicly communicate gender pay gaps," says the IES's Brown. "[From 2013], the government could compel them to disclose this information."
Remuneration in the financial services sector has also come under review. In July, the Financial Services Authority (FSA) published a consultation outlining proposed revisions to its remuneration code affecting pay in the financial services sector, aiming to end the practice of bankers receiving all their bonuses in cash.
In their current form, the FSA's proposals would require: at least 40% of an employee's remuneration to be deferred over three to five years; 50% of any variable remuneration to consist of shares, share-linked instruments or other non-cash elements; and at least 60% of variable remuneration to be deferred when this is a particularly high amount (suggested to be about £500,000). The FSA also proposes to extend the remuneration code to cover about 2,500 employers. The consultation is open until 8 October 2010, with the revised code effective from 1 January 2011.
With many proposals still under review, employers may want to wait for final details before acting. But given the timescales, getting a head start is wise. As Calvert at Towers Watson says: "The less time employers have to do it, the more complex it becomes."
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Changes due in April 2011 from Labour's pre-Budget report
- The national insurance (NI) primary threshold will increase and employee NI rates will increase by 1%.
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Public sector
The coalition government has announced several measures affecting public sector pay and pensions. Read more at: http://bit.ly/cjSdYv
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Retained changes due from 2012
- In 2012-13, the higher-rate threshold (the level at which 40% tax begins to be paid) will be frozen.
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Read more about tax and legislation
