For the vast majority of employers, the days when it was possible to ignore pension provision are numbered. By October 8, 2001, all employers should have carried out an audit of their pension provision. Failure to comply with the new requirements could result in a fine from Opra. The safest approach for any employer is to seek pension specialist advice from an IFA.
With pension advice likely to be in great demand over the coming year, the sooner the process starts the better.
The first step in the audit involves an employee headcount. Under the stakeholder regulations, any employer with five or more employees will have new obligations. For this purpose, all employees count, including part-timers, and, to be on the safe side, even controlling directors.
Despite certain incorrect industry reports, even those earning below the lower earnings' limit (LEL) must be included in the headcount.
An employer with fewer than five employees, but with expansion plans, should be made aware that the stakeholder obligations bite within three months of employing the fifth employee.
Unless exempt on grounds of having four or fewer employees, the employer must proceed to stage two.
The first question here is does the employer offer an existing form of pension? If so, he may be exempt from offering stakeholder but only if the scheme meets certain criteria.
These criteria differ, depending on whether the scheme is occupational or group personal pension (GPP).
I suspect few employers would feel comfortable assessing whether they are exempt, without help from an IFA.
Occupational scheme criteria
The employer must offer all “relevant employees” membership of an occupational scheme. If they offered employees membership at some earlier time, but some employees did not join, there is no need to re-offer membership to these employees.
Relevant employees are those aged 18 or over with at least five years to go to the scheme's normal retirement age (NRA). Here, those earning below the LEL can also be excluded. The scheme can have a waiting period of not more than 12 months.
The conditions here are slightly different. All employees aged 18 or above and earning above the LEL must be offered the opportunity to join the GPP. There is no upper age as under GPPs there is no NRA. Here, the waiting period cannot exceed three months.
Importantly, the employer must formally offer (within the contract of employment or in some other demonstrable manner) to pay at least 3 per cent of basic salary on behalf of each employee who chooses to join.
The employer can make his contribution conditional on the employee also contributing up to 3 per cent.
For employees who are already GPP members prior to October 8, 2001, the emp loyer can continue to req uire higher employee contributions provided he is at least matching these.
Joiners after October 8, 2001 cannot be required to pay above 3 per cent. To avoid doubt, there is no need for the GPP to have a stakeholder-style charging structure or to comply with the 1 per cent limit. This creates more flexibility.
If the employer is offering a scheme which fails on one or more detail, then the IFA can advise on how to change the scheme design or eligibility requirements to obtain stakeholder exemption. If an employer does not want to make such adjustments, then he will have to offer a stakeholder scheme in parallel to the existing scheme.
If an employer offers no pension provision to employees, then he will need advice on what to put in place. Some employers will not be prepared to make any employer contribution in which case, their only option is stakeholder.
Even then, they need to choose between available stakeholder schemes offered by financial services companies, unions and affinity groups.
All the signs are there will be a significant number to choose between and, while there will be differences in areas such as investment choice, default funds, technological support, helpline facilities and mechanisms for getting advice, these may not be obvious to the untrained eye. The IFA can give the employer confidence that he has designated the most appropriate scheme for his workforce.
Where an employer is prepared to make a contribution, his options – and hence his need for advice – widen substantially. The employer might consider setting up a new occupational money purchase scheme. Perhaps more likely, he may consider a GPP which among other things has the relative advantage of less onerous employer involvement and better contracting out terms than the occupational route.
Employers may, of course, ask why they should consider any alternative to stakeholder, which they may also contribute to if they wish.
There are a number of considerations. First, GPPs will continue to have wider investment choice, including with-profits (which has effectively been ruled out of stakeholder), a self-investment option and external fund links. It can include integral life cover and, for members who join before April 6, 2001, waiver of premium with contributions qualifying for tax relief.
Importantly, as there is no constraint on the charging structure, a GPP can also offer in-built advice, paid for by a slightly higher charge. This is particularly attractive where many of the work force would benefit from personalised advice as it is being paid for out of premiums which have received tax relief.
Under stakeholder, personalised advice will be paid for through a separate contract which will not attract tax relief.
Over the next 14 months, there are very few employers which can safely ignore pensions. For some of the very smallest, it may be relatively straightforward to confirm that due to having fewer than five employees, they are under no obligation to take further action. Of course, having raised the issue of pension provision, some may decide to introduce something voluntarily.
For many others, next October becomes the deadline for either improving existing provision or for choosing the most appropriate new pension arrangement for their workforce. Also, in many cases, the senior executives will want to consider whether they should join the main scheme or opt for an alternative tailored to their circumstances.
In all the above situations, there is a key role to play for pension specialist IFAs.