Pensions
are not really that complicated, they are just a way for employees to carry on
getting paid after they stop working. However, lots of red tape (which the
Government is currently trying to simplify) can make them hard work. Sarah Ball
outlines what HR needs to be aware of and some easy ways to cut the
bureaucracy.
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Pension schemes cost employers lots of money, so you need to be very clear as
to why you operate one. Is it simply because you are paternalistic or because
your want to match or outdo your competitors?
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To keep paying someone after retirement requires a lot of money to be built up
while they are working. A 60-year-old retiring now could expect to live for 25
years, and each £1 of pension could cost nearly £20 to provide. So a pension of
£10,000 a year would need a fund at retirement of as much as £200,000.
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You will hear about defined contribution and defined benefit schemes (or their
other common names, money purchase and final salary). Whichever type of scheme
a company has, the cost of a decent pension at retirement is about 20 per cent
or more of pay, paid throughout the time the employee is at work. Many
employers have used the shift from DB to DC to reduce the company contribution.
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With defined benefit schemes (where the employee normally gets a pension based
on a fixed proportion of pay), the employer promises to meet any shortfall in
the fund at retirement. However, many of these schemes would not have enough in
their overall kitty at present to meet those promises. So if the employer gets
into financial trouble or pulls the plug, employees may not get their promises
paid in full. The cutback in pension could be very substantial in some cases.
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Enrolling employees automatically into your pension scheme (with their having
to opt out if they choose not to proceed) will lead to higher take up rates
than if employees have to take the initiative to join themselves, although they
may be less aware of the scheme as an employee benefit.
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As an employer you can adopt a hands on or a hands off approach to your pension
scheme. You can farm everything out to a third party (eg, an insurance company)
and do very little other than pay money across. Or you can set up a trust-based
scheme which gives you more control but requires more involvement and
management time.
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Much change is afoot in pensions. Some of these changes are going to affect
your most senior, important and long serving staff through a lifetime pension
savings limit of £1.4m. You need to be on top of this because they will be
seeking your help.
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Pensions are becoming sidelined slightly, as alternatives such as share plans
play an increasing role in providing finance for the retirement years.
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Employees are increasingly likely to want to work more flexibly and for longer,
and a forthcoming EU-driven law is likely to support them. Ensure you have a
policy for this.
