British Energy switches savings to reduce its funding deficit

British Energy is using savings gained when staff salary sacrifice their pension contributions to reduce the £385m funding deficit on its defined benefit (DB) pension schemes. Almost 90% of pension scheme members have decided to make pension contributions through salary sacrifice following a communication campaign by the electricity producer explaining how the initiative works. Employees are able to sacrifice 5% of salary to their pension, thus saving tax and national insurance on that amount.

British Energy uses the sacrificed salary to make further employer contributions. Because employer contributions to pensions do not attract employers’ NI, British Energy makes a saving by paying a lower wage. Graeme Robertson, group pensions manager for British Energy, said employees benefit in net take-home pay through NI savings, while the firm uses its NI savings to assist in reducing the deficit, which was £385m as at 31 March 2004, according to an independent actuarial valuation .

"It’s a more efficient way of funding the pension scheme, with the savings on contributions. It’s a benefit we’ve been looking at for some time," he added. Pension and other benefits will continue to be based on employees’ original salary. Non-sacrificed salary used to make contributions through payroll will continue to be subject to national insurance (NI) deductions.

British Energy held roadshows to explain to the staff how the salary sacrifice scheme works and as a consequence, many pension scheme members decided to alter their employment contracts. The group is also making additional annual payments of around £19m each year, rising to more than £50m in 2009 to reduce the pension deficit.

Employees at British Energy can invest up to 15% of their annual earnings each year in the pension scheme, and the firm employs around 5,200 staff. The company has also introduced childcare vouchers through salary sacrifice.