Ministers must reconsider the rules around salary exchange for pensions to the benefit of low-paid workers, Royal London has said.

Royal London has partnered with IFA firm Radcliffe & Co to call for changes to the rules around pensions salary exchange for the benefit of low-paid workers who are currently losing out.

Under the current salary exchange system, an agreement is made between the employer and employee whereby pension contributions are allocated directly from the employer. With this arrangement, contributions directly from the employer to the savings pot reduces the total National Insurance Contributions bill, which can benefit both the worker and firm. Comparatively, normal circumstances involve any wages paid to be subject to both employer and employee NICs.

In a salary sacrifice arrangement, however, employees sacrifice a proportion of their salary in order to allow the employer to make a pension contribution on their behalf.

Nonetheless, Royal London and Radcliffe & Co have brought to light an anomaly in this arrangement that excludes lower-paid workers.

Royal London explained that if a worker is paid at the national living wage of £7.50 per hour (for over 25s), it is illegal for the employer to offer a salary sacrifice arrangement for pensions as it would take the employee’s pay below the national living wage, despite it benefiting the worker.

As a result of this, Royal London director of policy Steve Webb has written to the secretary of state for Business, Energy and Industrial Strategy Greg Clark seeking a review of the current rules.

The total number of workers affected by the National Living Wage is largely increasing, with estimates from HM Treasury that around 2.9 million workers will be on this wage rate by 2020.

Webb said: “Given that the Treasury has specifically decided that employer pension contributions should continue to benefit from salary sacrifice arrangements, it seems unfair that lower-paid workers are currently missing out. National Living Wage legislation was designed to benefit lower-paid workers and it is doubtful whether the interaction with salary sacrifice was seriously considered when the legislation was drawn up. Having written to the government about this issue I hope that they will change the rules and allow lower-paid workers to share in the benefits of these arrangements.”

A Radcliffe independent financial adviser Marc Cumberlege added: “This is not just a theoretical issue. I have come across employers who want to deliver high quality pension provision to their staff in a cost-effective way and risk falling foul of minimum wage legislation if they do so. Salary exchange arrangements can be mutually beneficial to workers and employers alike and should be available to all.”

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