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Company pension schemes still a real benefit to employees

With the closure of appealing benefit schemes (1) and with the tax-breaks being reduced (2) it would be understandable to assume that the attractions to employees of company pension schemes are fading.

Far from it. The evidence from research shows that good company pension schemes are valued more highly as a benefit than private medical insurance, extra holidays or child care vouchers.

The recent reforms allow access to pension pots from the age of 55 and have the option to use the pots in other ways than just to buy an annuity. Those on company pension schemes know that they will have flexibility in how they use their pension savings in later life. With auto enrolment meaning that all qualifying employees will be members of occupational pension schemes by 2018 - unless they opt out - the numbers benefiting from company pension schemes are growing further.

After all, under auto-enrolment by 2019, a minimum of 4% of earnings that employees will be contributing to their pension pots will be topped up by 3% of earnings from the employer. It will also include 1% via the government through income tax relief on employee contributions.

For the employer, a company pension scheme may seem to be just another cost, bringing a reduction to profitability and no apparent benefits. But this is wide of the mark. A good pension scheme can help retain staff, which helps to reduce turnover and recruitment costs. Employees have also been found to appreciate the guidance about pensions and retirement planning that can come with the pension scheme itself. These intangible benefits arguably boost employee morale and could help productivity with employees becoming more committed.

Additionally putting more money into pension schemes may be a more efficient way of rewarding employees than simply paying them more. Higher pay attracts higher employer national insurance contributions.

So both employees and employers can be winners by offering a good pension scheme even in an age that is seeing the demise of the old ‘gold standard’ company final salary defined benefit schemes.

Martin Upton

Director

The True Potential Centre for the Public Understanding of Finance (True Potential PUFin)

Open University Business School

20th June 2017

Notes:

  1. Only 13% of defined benefit pension schemes remain open to new members in the UK.
  2. The tax-break reductions relate to the fall in the annual limit on contributions that attract tax relief and the lifetime limit on pension pots that can be accessed tax free.
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