Providing workplace pensions: an employer’s responsibilities
At the moment, employers are not obliged to provide employees with a pension scheme, although many are required, according to the size of the workforce, to give workers access to a scheme that is run by a pensions provider.
There are concerns about the ability of many people to save enough for their retirements, and pension provision is a constant news topic.
Such concerns mean that workplace pensions, in the private sector, can have a fundamental role to play in creating a remuneration package designed to attract good staff and to retain their loyalty.
Basically, there are two types of workplace pension: defined benefit and defined contribution.
The first, which includes final salary schemes, guarantees employees a set retirement income depending on the level of their earnings as they near the end of their working lives and the length of time they have been members of the scheme.
The second, which includes money purchase, personal, stakeholder and executive schemes, offers no fixed retirement income but depends on the level of contribution, the performance of the investment fund on the stock markets and the level of annuity rates when the scheme member reaches retirement age.
Defined benefit schemes
Defined benefit schemes are run by a trust whose job it is to manage the contributions made to the fund by both the employer and the employee.
However, employers also have a number of legal obligations they must observe.
Employers must inform the Pensions Regulator if they believe there are any problems with the scheme; they must make sure that contributions made by employees are paid into the fund within 19 days following the end of the month in which the contributions were deducted from the employees' wages along with the contributions made by the employer; they must firewall the assets of the pension fund from the assets of the business; and they must keep scheme members up to date with any changes that affect the fund.
Defined contribution schemes
One of the main differences between defined benefit and defined contribution schemes is that, in the case of the latter, most of the risk for the final value of the pension rests with the employee rather than the employer.
In other words, the employer won't have to produce extra funds to make good any shortfall in the return delivered by the pension fund investment.
Both employers and employees can make contributions into defined contribution (DC) schemes.
Many DC schemes are run by a trust.
Some employers may choose a pensions provider to handle the scheme in the shape of a group personal pension. This means that employees make contributions to an individual personal pension which is added to those of other employees for the pensions provider to manage as a group. Employees are allowed to contribute up to 100 per cent of their earnings and still receive tax relief. However, there is a limit on the amount that is open to tax relief: this is £245,000 for 2009/10 and £255,000 for 2010/11, a threshold that will stay in place until 2015/16.
The contributions made by employers can also attract relief as expenses, but you will need to talk to us about whether those contributions meet the criteria for expenses.
Although it is the duty of the pension provider to register the DC scheme, employers must make sure that contributions made by employees are paid into the fund within 19 days following the end of the month in which the contributions were deducted from the employees' wages along with the contributions made by the employer.
Employees must be provided with information about the scheme.
A key requirement of DC schemes is that members are offered what is known as the Open Market Option as they approach retirement. The Open Market Option allows scheme members to switch their funds to another provider when they retire if that provider can offer a better value annuity. Scheme members must be made aware of this option in the lead up to their retirement.
Stakeholder pensions enable employees on lower incomes to save for their retirements and are a type of money-purchase scheme.
Under the law, an employer must provide their staff with access to a stakeholder pension if they have five or more employees on the payroll but do not offer another appropriate pension scheme that they can all join.
Once an employer has recruited their fifth employee, they have three months in which to select a stakeholder pension scheme. The scheme must be chosen from the pensions regulator's list of registered stakeholder pension providers. Information can be found on the pensions regulator's website. Most banks and financial services companies offer stakeholder pension schemes.
The employer must consult with staff members on the chosen scheme. After consultation, the employer must specify the scheme which employees will then be able to join.
A stakeholder pension can be an occupational scheme open to all employees within a year of their starting work or a personal scheme open to all employees except those aged under 18.
Contributions to the scheme must amount to at least 3 per cent of an employee's salary, and employees should be allowed to make their contributions through their pay.
Members of staff must be given information on how to contact the stakeholder pension provider, and the provider must be allowed to access to all the employees at their place of work.
The employer will have to add a contribution deduction facility to the company payroll for those employees who opt to join the proposed scheme. The employer will need to keep a properly maintained record of deductions and to pass those deductions on to the pension provider.
Employees are under no requirement to sign up to a scheme that has been arranged by their employer.
An employer does not have to offer access to a stakeholder pension if they employ fewer than five people, or if they provide an occupational scheme which all employees can join within a year of their employment.
Other exemptions include, among others, employees who have not been in continuous employment with the business for three consecutive months; employees who are aged under 18 or are within five years of the scheme's pensionable age; employees who choose not to join the firm's occupational pension scheme; and employees who earn less than the National Insurance lower earnings limit.
This is only an outline of the responsibilities an employer holds with regard to providing access to a stakeholder pension. If you would like more details, you should contact us.
It is important also to be aware that major changes to the pension system will be phased in from 2012.