PENSIONS
The UK has ‘solved’ its retirement funding crisis by introducing automatic enrolment (AE). Tim Kelsey FCIPPAIPA, global payroll consultant at Kelsey’s Payroll Services scans the world to see how other nations have tackled the same issue When I’m 64
T he UK’s approach to pensions savings has been an unmitigated policy success. While you might quibble over what sort of retirement is possible with compulsory savings set at only 8% of salary, the retention rates on AE scheme membership have been impressive. The politician’s hunch was that offering an opt- out option which required people to read letters and fill in forms meant that a Great British characteristic (inertia) would win the day, so although the freedom to opt-out exists, a minority of employees exercise it. But how do other countries deal with the issue of retirement saving, and how much work does that create for payroll?
in class 1 NI contributions (NICs) and the state pension bill is £100.5 billion (the total contributory benefits bill comes to £106.5 billion). So, the lion’s share of that 12% employee / 13.8% employer NICs goes to fund pensions. The German system requires a contribution of 9.3% from the employee with a matching contribution from the How do other countries deal with the issue of retirement saving, and how much work does that create for payroll? employer on annual income up to €84,600. If you worked for 40 years earning a salary more than €84,600 per year, the German system would pay a state pension worth €3,294 per month – compared to the current maximum UK pension of around £778 per month. With such a generous state pension, it might be argued there is little need for additional provision. But Germany allows employees to fund additional pensions using one of five different schemes. All the styles of pension saving qualify for relief from both income tax and social insurance contributions. They’re described as being a salary sacrifice arrangement, but unlike the UK, employee contributions qualify for relief from both charges in their
own right, rather than having to be provided by the employer as an additional employer contribution. Maximum relief available is set at 8% of the annual social security ceiling – so 8% of €84,600 allows for an employee contribution of €6,768, significantly less than the UK.
The Republic of Ireland
Germany
Our nearest neighbours, the Republic of Ireland, award a variable tax relief based on a percentage of annual earnings, which rises with age. Those aged under 30 may contribute up to15% of gross income and receive income tax relief, whereas those aged 60 + may contribute up to 40%. Employers are obliged to allow access to some form of pension savings but don’t have to contribute to the plan. If employers choose to use a retirement annuity contract or personal retirement savings account (the closest Irish equivalent to a group personal pension), then employers are obliged to provide paid time off each year to allow the employee to consult their financial adviser regarding their pension portfolio. This is one good reason for employers choosing to use an approved occupational pension scheme run by the company instead. Another key difference is the attitude towards the concept of salary sacrifice,
Let’s start in Germany. The Germans invented the concept of social insurance back in the 1880s, and still run separate insurance schemes for the different life risks of retirement, sickness, healthcare, unemployment and work accidents. By contrast, it’s quite difficult to quantify just what proportion of someone’s National Insurance (NI) bill goes towards their state pension. A look at the government’s accounts for the Great Britain NI fund show that approximately £107 billion is gathered
| Professional in Payroll, Pensions and Reward | April 2022 | Issue 79 26
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