Salary sacrifice can offer employers huge savings
7 April 2009

Written by Sophie Baker

Pension salary sacrifice can offer employers massive savings in under a year if their employee pension contributions top £500,000 per year, says Watson Wyatt.

The financial consultant said that companies who are looking for savings no should not be deterred by the implementation costs of salary sacrifice. “As long as the total value of employee contributions is high enough, the bottom line savings should come through within 12 months,” said Kim Honess, head of flexible benefits consulting at Watson Wyatt.

Watson Wyatt has looked at 50 pension salary sacrifice programmes that it has undertaken for employers over the last two years, finding that the number of employees involved has no effect on the point where salary sacrifice provides immediate savings; employee pension contribution has more of an effect.

“There is a certain critical mass at which implementing pension salary sacrifice is a no-brainer given the savings it delivers. Most schemes will be able to recover the set up costs fairly quickly. For schemes with over £0.5million in employee contributions – typically 300 to 400 employees – our experience is that the break-even point will come through before the end of the first year. For larger employers or with higher pension contribution rates, the payback period is even shorter, sometimes just a few months,” Honess added.

The salary sacrifice option is increasingly becoming a popular way of reducing pension costs. Employees’ salaries are reduced by the amount of their pension contributions, with the employer covering these contributions instead. This allows for a reduced level of National Insurance contributions for both employer and employee.