Pensions are never 'job done'

Amid rumours of National Insurance changes and the potential impact on employer pension contributions in the impending Government Budget, employers must consider how developments may affect the structure of their reward spend as well as the needs of their people.

One thing I’ve learnt from many years working with pensions is that you should never work on the basis that anything is ‘job done’. Just like a film where the villain isn’t defeated as easily as it first may seem, there’s often a twist to come.

With pensions, this can come from economic conditions but frequently it comes with legislation – stakeholder requirements, the Lifetime Allowance, auto-enrolment, the reduction of the Lifetime Allowance, Freedom and Choice (the ability to draw on funds as people wish), the removal of the Lifetime Allowance – the list goes on. 

Budget rumours and potential changes 

Unsurprisingly, with a budget statement coming, the rumour mill is churning again. I’m reluctant to fan those flames too much – rumours are often just that. It is however clear that the Government wants to cut costs and inevitably pensions will be in their sights one way or another. Currently employers pay no National Insurance (NI) on pension contributions they make to their employees, unlike salary where they pay 13.8% NI. If the Government was to remove this relief, they could generate savings in the region of £17 billion (Institute for Fiscal Studies) and in theory individuals aren’t affected. 
 
However, anything that impacts employers will ultimately affect employees. Unlike a rate increase (as we saw briefly in 2022) sectors where employers fund generous pension schemes, whether defined benefit or defined contribution, will be most affected by this. And these sectors often also have challenges with funding – it seems inevitable that this will have a knock-on effect on spending (including salary reviews) and potentially even organisational viability.

Real world pension contributions: a closer look

Consider an employer that employs 100 people on an average salary of £40,000.
 
If that employer contributes the auto-enrolment minimum of 3% of band earnings (£6,240 - £50,270) they might be spending £101,280 on pensions. NI relief to them is worth £13,977.
 
However, if that same employer offered access to, say, the Teachers Pension Scheme, they would be paying 28.68% of the total salaries. This organisation spends £1,147,200 on pensions and the NI relief is worth £158,314.
 
This is a huge difference, and it’s hard to see it doing anything else other than pushing employers in this situation away from significant pension contributions (which would require staff consultation) or reducing their spend elsewhere. And most often these will be employers in or connected to the public sector.

Any employer considering how to structure their reward spend should carefully consider on an ongoing basis the needs of their people and how to most effectively meet these as this situation evolves. Our analytical tools and consultancy drive better outcomes for both parties.

How we can help

As pension landscapes shift, ensuring that your reward strategies remain effective is essential for both organisational success and employee satisfaction.

Our expert consultancy and innovative analytical tools help employers navigate these changes with confidence. Whether you're reviewing pension schemes, managing risk, or exploring long-term financial strategies, we’re here to support you every step of the way.

Get in touch today to learn how we can help drive better outcomes for your business and your people.