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Pension transfers

I have 30 employees and I am about to take on five new employees from another company where, under TUPE – Transfer of Undertakings (Protection of Employment) Regulations 1981 – it has been agreed that I will contribute into a pension for them. What are my options?

I am afraid the question raises many issues.

Due to the size of your company, you must not put in place a funded final-salary scheme because of the open-ended liability to your company in the future. This means you will have a money-purchase arrangement. Again, I advise against occupational trust-based schemes due to the responsibility and liabilities of the trustees.

This leaves you with personal pensions from the low-charge group stakeholder arrangements through to the group self-invested personal pension, which allows investment into all areas allowed by law.

The next problem is future legislation. We had all-political party agreement for the introduction of the new compulsory pensions, personal accounts, from 2012. That consensus is now weakening and we have some uncertainty over whether the Conservatives are going to continue with the introduction of personal accounts.

The core legislation is in place and this will mean that, from 2012, you will have to provide a pension scheme with automatic enrolment for virtually all of your employees into which they must pay 4 per cent of their earnings, you will eventually have to pay 3 per cent of their earnings on top of this and there will be tax relief added by the Government.

There is no doubt that the easiest option to you will be to use personal accounts but if this backfires, who is going to be left picking up the mess? You, as an employer, can opt out of personal accounts if you have a qualifying scheme of your own. The qualifying scheme must be a similar arrangement to the personal account, with similar access, compulsory automatic enrolment with-out consent and minimum contribution amounts.

However, we now move on to your biggest dilemma, which is discrimination.

Pension law will allow you to do whatever you want to do. However, good practice and discrimination legislation create a problem.

As a simple explanation, if one of the new employees that you have taken on does an identical job to one of your existing employees and, say, your existing employee is of a different sex and race, how are you going to justify under discrimination laws that you pay into a pension for your new employee but not your existing employee?

You need to discuss this matter very quickly with your solicitor as you might well end up with a very expensive exercise, with you having to provide pensions for a consider- able number of employees.

We are able to provide different levels of pension for different classifications of employees but as soon as that step is taken, you have to be extremely careful with regard to discrimination.

One final warning is that TUPE is not pension-specific. TUPE covers the conditions for the employee in all respects.

If it takes us a while to put in place a new pension arrangement, the cost of paying two to three months’ contributions is no real problem. However, please make sure that there are not other benefits, such as death insurance and/or private medical insurance, which your new employee is entitled to under TUPE, which you do not have in place. If there was an entitlement to such rights and the employee were to die, this could be a major issue.

Richard Jacobs is director of Richard Jacobs Pension and Trustee Services

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