The 2015 Scheme has important implications for members with salary sacrifice arrangements and those considering them in the future. Employers need to consider how staff with these arrangements are informed of the implications and ensure relevant policies and processes are in places.
A salary sacrifice arrangement is a contractual agreement between an employer and an employee, where the employee gives up some of their contractual entitlement to cash earnings in return for non-cash benefits. Examples of commonly used salary sacrifice arrangements are childcare vouchers, car hire schemes or cycle to work schemes.
Forgoing a cash benefit for a non-cash benefit reduces the amount of take home pay. Salary sacrifice arrangements can also lower the amount of tax and national insurance contributions deducted from the employee.
Impact of salary sacrifice on NHS Pension Scheme benefits
In a Career Average Revalued Earnings (CARE) pension scheme, like the 2015 Scheme, pension benefits are built up on a year by year basis. Any change to a members salary in each year (such as salary sacrifice), will have an impact on the individuals gross pensionable pay. Entering into a salary sacrifice arrangement that reduces gross pensionable pay will mean that reduced benefits are built up for that period.
Under the 1995/2008 Scheme, pension benefits are calculated on the salary on or near retirement. For members in salary sacrifice arrangements, there have been no central restrictions on members opting out of these arrangements as they approach retirement, which means pension benefits are based on pay without any salary sacrifice reduction. However, please note a large increase in a member’s pay prior to retirement may result in an employer charge under final pay control.
As there is a significant change in how salary sacrifice arrangements impact on pension benefits between the two types of schemes, we believe it is important for employers to ensure staff are aware.
Action for employers
This is an important issue and we encourage employers to consider this and the impact for members. As organisational salary sacrifice schemes are delivered at a local level, it is your responsibility to ensure that employees are fully aware of the implications to their pension contributions. It is important that members are aware of any pension implications before entering into a salary sacrifice arrangement whilst a member of the 2015 Scheme.
Your organisation is encouraged to take action to ensure that individuals are aware of the potential impact of the 2015 Scheme. You also need to consider how this message is communicated more widely through your policies and procedures and accompanying communication materials.
As an organisation you will also have an agreed approach to total reward for your staff, this does not change that position, but does ensure your employees are fully aware of any decisions they choose to make on salary sacrifice.
If you wish to read more about salary sacrifice arrangements please visit the NHS Pensions website. To find out more about the 2015 Scheme, visit our webpage.