Mike Sullivan: How will the high-earners tax changes affect reward strategy?

The changes to the pensions tax regime announced on 14 October are likely to have a significant impact on employers’ reward strategies. Apart from the more obvious changes affecting high earners directly, there is also potential for there to be an indirect influence on workplace pensions provision.

The government may have been optimistic in estimating that the changes will increase tax revenue by £4 billion a year. If it fails to do so, what other measures may follow? Increasing the factor used to assess defined benefit (DB) accrual against the annual allowance from 10 to 16 will be another nail in the coffin of the remaining DB schemes with active membership. Long service and pay increases may cause some moderate earners’ annual accrual to exceed £50,000. Additional benefits arising from ill-health retirement or redundancy could result in heavy tax penalties.

The changes are not as tough as they might have been, but there is concern employers may lose interest in providing schemes for employees beyond any statutory requirement.

On the other hand, the restrictions may encourage employers to take a wider view of their remuneration and benefit packages for all employees – not just executives – and focus more on saving generally rather than just thinking of pensions as the savings vehicle offered through the workplace – for example, focusing also on shares and individual savings accounts (Isas). A wider choice could be of long-term benefit to many employees who currently choose not to join a workplace pension, or who join but pay a low level of contribution.

Mike Sullivan is president of the Pensions Management Institute and head of employee benefits and pensions at Veolia Environnement UK