A loophole in the Pensions Act could save a typical FT-SE 100 company around #6m a year, a leading actuary has claimed.
Under the terms of the Act, which takes effect next April, a large business with a final salary pension scheme could let employees switch to contracting out of the state earnings related pension scheme (SERPS) on a money purchase basis. Because benefit will be partly based on an age-related national insurance rebate paid by the Government, companies would have to pay less into the employees’ pension scheme.
Martin Slack, senior partner at actuaries Lane Clark & Peacock, said contributions made by companies could well decrease by 1%-1.5% of payroll and amount to #200 per employee.
He added: ‘Administrative costs will reduce the net saving to about u150, and the precise amount of the reduction will depend on the age and salary of employees. But, undoubtedly, we are talking about a massive figure.’
Slack said the opportunity was probably the only cost saving element in the Act.
‘Although a few employers have looked at this, most seem reluctant to make the change,’ he added.
Slack explained that the administrative implications of change could prove an obstacle. ‘There has to be a real commitment to meet the cost in changing from final salary to money purchase schemes,’ he said. ‘But this does show that the small print in the Act can produce substantial year-on-year savings that will flow straight through to the bottom line for large companies.’