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GPP route to circumvent stakeholder

It is not often that comments I make on pension technical issues are greeted with open disbelief and disagreement, but that has been happening recently when I have been speaking about employer contributions to GPP in the context of not having to offer stakeholder pensions.

I have been saying that an employer can pay in less than 3 per cent to a GPP for an employee and yet not have to offer that employee stakeholder.

On the face of it, that does seem to contradict the regulations, but let us listen in to a workplace conversation:

Employer: “You are an employee to whom I am now obliged by law to offer some kind of private pension provision. I don&#39t want to get involved in stakeholder. I am offering you a better plan because if you join this group personal pension and contribute 3 per cent of your earnings I will make a matching contribution.”

(Note: if this conversation is happening before October 8 2001, an employee contribution higher than 3 per cent may be a condition of a matching employer contribution.)

Employee: “Thanks but no thanks. I can&#39t afford to lose 3 per cent of my pay packet at the moment.”

Employer: “I&#39m sorry to hear that, but I don&#39t like to think of you missing out on a private pension altogether. Why don&#39t you meet me halfway? If you are prepared to join this GPP and pay in 1.5 per cent of you earnings, I will match it.”

Employee: “OK, that&#39s a fair compromise and I can always increase my contributions later when I can afford more.”

The upshot is that the employer is paying less than 3 per cent into the GPP for this employee but does not have to offer stakeholder. The key word in all of this is “offer”. No employer can compel a UK employee to join any private pension scheme.

If the employer offers all relevant employees a GPP which meets the conditions exempting the employer from having to offer stakeholder, the employer has done all that is required by law – even if not one of the employees joins on those terms.

If the employer then makes a different offer to try to get employees into his GPP, the fact that the new offer involves an employer contribution of less than 3 per cent is neither here nor there as far as the exemption from having to offer stakeholder is concerned.

I have checked out with the Department of Social Security that this is also their interpretation of the regulation – it is. And moreover it is what they intended. After all, it must be better to get employees in a pension scheme to which the employer contributes than for them to be in no private pension scheme at all.

There is also a common misconception about GPP exit penalties. It is not correct to say that a GPP can&#39t levy exit charges and still exempt the employer from having to offer stakeholder. The requirement is simply that the GPP can&#39t levy an exit charge which would exceed what the member would have paid had the member carried on or left a paid-up pension.

It is worth noting a couple of differences between the treatment of GPP and occupational pension schemes in the DSS stakeholder regulations. If an employer is offering an occupational scheme instead of stakeholder, there is no quality test at all on the occupational scheme – the employer contribution might be the minimum required to obtain Inland Revenue approval.

Also, if the employer offers an occupational scheme to only a section of the eligible employees, stakeholder need only be offered to the other eligible employees.

If the employer offers an exempting GPP to only a section of the eligible employees, all the eligible employees – including the section offered GPP – must also be offered stakeholder.

An employee offered a GPP with a 3 per cent employer contribution, conditional on an employee contribution, and a stakeholder with no employer contribution does not have a difficult choice.

If the employee is prepared to make the conditional contribution it is highly likely to be better than paying the same money in to stakeholder but with no employer contribution.

Whatever route is taken, everything must be carefully documented. Otherwise, how can the employer prove compliance if challenged to do so?

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