The Government is introducing a new raft of pension legislation under stakeholder. This will be effective from April 6, when the new stakeholder plans will be launched. All employers with more than five staff on their payroll including the directors must give access to stakeholder or a suitable alternative scheme.
The absolute latest date
for schemes to be in place will be October 8, 2001 and a regulatory system including fines will be introduced for those who do not comply.
A stakeholder plan is in many ways very similar to a personal pension except that the charges must be capped at 1 per cent in the form of an annual management charge.
Stakeholder also brings in some fundamental changes to existing pension law. Most notably, the link between earnings and pension contributions is to be broken. Whereas, currently, net relevant earnings are needed to justify a pension contribution, the new legislation will mean that people can fund a pension for up to five years based on earnings in any of the previous five tax years and up to £3,600 a year without any earnings at all.
An occupational pension scheme is classed as exempt from stakeholder if it meets certain eligibility criteria. A group personal pension can also be exempt provided the following criteria are met:
It it open to all staff aged over 18.
There is no exit penalty
The employer makes contributions of 3 per cent of gross basic salary or more (they can insist this is matched by the employee).
Eligibility for membership of the scheme to be three months from the date of joining the company.
Like many companies, you have more than one arrangement so let us look at each one to see how they are affected.
The directors have executive pension plans. These are occupational pensions and so are exempt from stakeholder. As they offer the opportunity for higher contributions than stakeholder and potentially high tax-free cash at retirement, they can be left unaltered. However, there are some tax-planning opportunities using stakeholder plans and dividends rather than bonuses that we can discuss later.
Your clerical employees are members of a group personal pension scheme and receive
a company contribution of
6 per cent of salary.
Once we get clarification from the insurance company that their charging structure does not contain any of the exit penalties defined in the legislation, we can be sure the scheme will be exempt.
The only change required will be to meet the eligibility requirements.
Currently, the staff join after 12 months of service but under the new regulations this has to be shortened to three months. Otherwise, a stakeholder plan has to be offered after three months and transferred after 12 months.
The last group is the one most affected – the blue-collar employees.
Currently, you offer them membership of the group personal pension but without any company contribution. To gain exemption for these members under the current scheme, you would need to introduce an employer contribution of 3 per cent or more, which you can make conditional on employees matching the contributions.
Alternatively, an occupational money-purchase scheme could be set up and, although an employer contribution must be made, it could be more modest, for example, 1 per cent of salary. The drawbacks would be that the scheme has to meet the requirements of the Pensions Act 1995, involving slightly more work and responsibility, and the existing mem-
bers cannot continue to pay into their personal pensions.
The final alternative would be to set up a stakeholder scheme for the works employees. This would obviously meet the requirements and would not require a contribution from you. Given the low-cost nature of stakeholder, the levels of commission available will be much reduced.
In the past, we have used the commission from the group personal pension to pay for our individual meetings with the employees and the ongoing scheme administration. With the reduced levels on stakeholder, we will either have to reduce our service to a more arms-length basis or you would need to pay us a fee.
Given the complexity and different permutations, it is important that we have a meeting to discuss this area further. In the meantime, you need to consider your budget and whether introducing an employer contribution for the works employees would be a viable option.