For many of us, stakeholder pensions have been a feature of our lives ever since the publication of the Green Paper over 18 months ago.
Most big companies which have regular contact with their professional advisers are well aware of the impact of stakeholder on their businesses. It is only now, however, that significant numbers of smaller employers are beginning to realise that they may be affected by “new pensions”.
We have conducted a number of stakeholder seminars for employers, primarily small to medium-sized owner-managed businesses, over recent weeks and one impression has emerged above all others.
The majority of these employers believed, before each session, that they would be exempt from the employer access requirements. The reality is that none of the employers represented would be exempt although one was close to having a prescribed alternative.
Now, it is true that the groups of employers were self- selected so, in statistical terms, it cannot be claimed that they were representative of employers as a whole. Equally, there was no carefully designed opinion-testing questionnaire so the results of this “survey” will not stand scientific scrutiny. However, the lessons learned do have value.
They considered that they would gain exemption for a variety of reasons, the most common being that they considered themselves to be too small to be “caught” by the regulations. Or their workforce consisted primarily of part-time and/or seasonal workers who did not have to be offered stakeholder access or they already had a scheme that would meet the requirements.
Part IV of The Stakeholder Pension Schemes Regulations 2000 (SI 2000 No.1403) looks at employer requirements and in particular the grounds for exemption from employer access. In most respects the regulations are pretty clear but despite this they do seem to have led to some “interesting” interpretation and some confusing messages being picked up by employers.
So how do we decide if an employer is exempt? First, you have to establish how many employees are considered “relevant”. An employer need not comply with the access requirements if there are fewer than five employees.
Please note this does not say fewer than five full-time employees, permanent employees or (to use the word in the regulations) “relevant” employees – it just says “employees”.
There are five categories of employee who do not fall into the class of relevant employees. The first group is those who would qualify for membership of an occupational pension scheme after 12 months of employment if aged over 18 and more than five years younger than the scheme's normal retirement date.
The second group consists of those who have been offered but have declined membership of such a scheme and are now excluded from membership as a result.
Group three consists of those who have been employed for a continuous period of less than three months while the fourth group comprises those whose earnings have fallen below the lower earnings limit in any one or more weeks in the last three months.
The final group is ineligible to make contributions to a stakeholder pension scheme such as those not resident in the UK and not on Crown duties.
Any employee who does not fall within one of these categories is a relevant employee. This could and often will include part-time employees and temporary employees such as seasonal workers.
Step three concerns the entitlement to join a “good-quality” personal pension scheme set up by the employer. If every relevant employee over the age of 18 can join a personal pension scheme to which the employer contributes at least 3 per cent of basic pay and which does not penalise or charge for ceasing contributions or transferring out of the scheme, then the employer is exempt from the need to facilitate access to a stakeholder scheme. The employer must also commit to deducting any member contributions from pay and paying these over to the scheme.
It does not take too much imagination to conjure up a picture of an employer who has to facilitate access to stakeholder for a single solitary employee.
An example may be where a qualifying personal pension is available to all staff aged 21 or more and there is a single 19-year-old. Similarly, seasonal workers may need to be offered access to stakeholder for just a month or two each year.
There are several key points to take on board. First, many employers have so far formed an incorrect opinion of the impact of stakeholder on them and their business. It is necessary to have a complete picture of the access requirements to fully assess the impact. Specialist IFAs are likely to have this knowledge while small and medium-sized employers are not.
Second, it may be possible to gain complete exemption by making relatively small adjustments to an existing pension scheme. An IFA can help a company to consider the business case (in the widest sense) of increasing its investment in employee pensions.
Third, the occupational pension scheme may provide an effective solution, particularly given the possibility of a 12-month waiting period, where staff turnover is high or where there are significant numbers of non-permanent employees.
Fourth, so what is wrong with stakeholder anyway? It could provide just the right solution for some employers and their staff.
Finally, never forget that the employer does not need to seek advice on these issues. The do-it-yourself route is perfectly viable. However, it is worth them remembering that there will be civil penalties for non-compliance. The majority of attendees stated that they would be prepared to pay “reasonable” fees for advice to ensure compliance.
It is probable that, for every employer who has attended a stakeholder seminar, there are a further 10 who are also affected but who have not yet made the effort to find out.
This says a lot about the scope for good-quality professional advice.