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17 February 2006
Introduction of Smart Pensions (Salary Sacrifice) EWS
Following receipt of a booklet entitled 'Your guide to Smart Pensions' a number of members have contacted Head Office seeking clarification on managements proposals. Initially members were under the impression that EWS were closing access to the Railways Pension Scheme and, following those suggestions, I wrote to management seeking clarification and a meeting to discuss the matter. However, it subsequently transpired that the issue was in fact Smart Pensions which is effectively a salary sacrifice arrangement.
Members will be aware that the booklet indicates there has been consultation with the Unions, but to my knowledge no consultation has taken place.
A salary sacrifice scheme is an arrangement whereby employees give up an element of their pay for other considerations; such as pension contributions, childcare vouchers, computers or bicycles. Such schemes have been introduced by other employers.
Effectively the proposed arrangement will mean the EWS paying employees' pension contributions in return for a reduction in salary of the same amount. The employee is therefore no worse off as they would not originally have received the amount in question; ie it goes straight to the pension fund. The employer is not better off as it would have had to pay the amount concerned to the employee; it is just paid direct to the pension fund instead of to the individual.
There is a saving to both employees and employer and this is achieved through paying lower National Insurance contributions because the employee's salary is lower. An employee's National Insurance contributions will be lower by 9.4% on the amount of his pension contributions; likewise the employer will not pay 9.3% on the same amount (there are different levels for employers and employees).
Where the employer makes greater savings is for individuals earning more than the Upper Earnings Limit - £645 per week - as the National Insurance rate for such amounts is 12.8% (the employee rate is only 1%). By not paying employees the value of their pension contributions, the employer effectively brings earnings which would exceed £645 back below the limit and in doing so saves 12.8% on the amount concerned. The amount is obviously variable on an individual basis depending on earnings and contributions to the fund.
Members would be worse off if the reduced pay level was subsequently used to calculate pension benefits. However, the Railways Pension Scheme rules for the EWS Section were changed in December to enable the fund to deem the 'Headline Salary' (the amount before sacrifice) as the salary to be used for benefits. Pension benefits are therefore protected.
However, the Smart pensions booklet raises other issues of concern, namely:
∑ It is opt-out rather than opt-in arrangement.
∑ Reference is made in more than one place to members not opting-out agreeing to changes to their terms and conditions without being specific as to the exact changes in question.
∑ There is no indication as to how the scheme impacts on pay rates for additional hours worked, sick pay, in the event redundancy or leaving employment arising from ill-health.
In addition requests for opt-out forms are apparently being ignored.
It is difficult to give a definitive view on this matter at this point in time as we have not been consulted and EWS had not replied to our earlier letter. Nevertheless I hope the above explanation will assist in understanding the matter. In the meantime members would be best advised to request an opt-out form but to take no action until receiving further guidance from Head Office.