I run a small business and find that my continued expansion now requires me to consider putting in place a pension for my employees. What steps should I take?
At the core of all employee pensions we still have the two basic types of arrangement – final salary and money purchase.
Due to all the problems associated with final-salary schemes and funding liabilities, these must be excluded from your choice.
Money-purchase arrangements come in two forms. There are trust-based occupational-type schemes and contract-based personal pensions. Each have their merits but with ever increasing regulation and the onerous responsibilities placed on trustees, I find it difficult to recommend the trust-based scheme.
The major difference between personal pensions and trust-based arrangements is that with personal pensions you will be contributing to your employees’ own pensions while with the trust-based occupational scheme your employee will become a member of your own scheme.
The next important issue is to decide contribution levels. Current legislation only requires that you have a stakeholder arrangement in place for your employees to join without the need for any contribution. Many years of experience have led me to recommend that if you are considering making a contribution yourself, you should insist on a minimum employee contribution.
There is no pension legislation in place today concerning contributions but you must be very careful not to fall foul of any discrimination legislation.
On the basis that you have a basic stakeholder package available for employees at a nil contribution level, then you can impose whatever requirements you want on a new group arrangement.
Membership can be after whatever length of service you decide, with contributions being relative to status within the company and/or length of service. Your new arrangement could meet your stakeholder requirements. Only you will know what contribution is appropriate and affordable to your company. Pension legislation will allow you to vary this contribution in the future but you need to be aware that from a human resources position that once you commit yourself to a contribution, it is extremely difficult to vary that contribution downwards.
A simple approach is for you to pick an employer contribution, say, 10 per cent of earnings, and make that contribution on the basis that the employee also makes a contribution of, say, 5 per cent. This is simple and understandable so everyone knows where they are.
I would always suggest that pensionable earnings are total P60 earnings in the tax year. This way there can be no dispute as to the actual earnings and contributions.
Other schemes I look after have matching contributions whereby the employer will pay a minimum of, say, 3 per cent on the basis the employee pays a similar amount. The employer will then match any contribution that the employee wishes to make up to, say, 6 per cent.
Several schemes operate on the basis that the employer contribution will be one rate for the first two years service, moving up for two to five years service and then again for five years or more. Whether you have a similar increasing employee contribution is entirely under your control.
With personal pensions, you have to be aware that legally all that is happening is that you are offering a facility deducting contributions from pay which must be paid over to the pension provider by the 19th of the following month and that you are contributing to their pension policy.
At all times, they own the policy. If the employee leaves for whatever reason, he or she already has the pension in his or her name. It is not a question of whether they can transfer it away – it already belongs to them to be used as the pension legislation allows.
The types of personal pension are very wide ranging, from the low-cost but little choice stakeholder arrangements through to self-invested personal pensions which will allow your employees to invest in any way allowed by HM Revenue & Customs.
This last choice invariably carries higher costs but brings with it the maximum choice. In between these two arrangements there are many different types of arrangement with different charge structures and investment choices.
Finally, with the upcoming 2007 Pensions Bill, we should receive confirmation that the Government will be introducing new pension legislation to take effect from 2012. The legislation will make it compulsory for all employers to provide some form of provision.
It is introducing a new state-backed scheme for all employees not already in a company pension scheme. Companies will have to make contributions of around 3 per cent from the employer and 3 per cent from the employee. Employees will have the ability to opt out of this arrangement but employers will not unless they have some other suitable superior facility.
Richard Jacobs is managing director of Richard Jacobs Pensions & Trustee Services