Tim Sargisson highlights employer requirements for the stakeholder pension
What is a stakeholder pension?
A flexible, low cost, tax-efficient retirement savings plan, which should offer good value to everyone, especially those on low incomes. It should meet minimum standards on cost, access and terms (CAT) standard, namely:
• A maximum charge of 1 per cent of the fund per annum, calculated on a daily basis of 1/365th per day
• The minimum contribution cannot be set at a level above £20. This applies to regular and single contributions. There is no minimum frequency or payment term
How will stakeholder affect employers?
Organisations with fewer than five employees will not have to provide access to a stakeholder pension. This situation will be reviewed after three years. Those with five or more employees will need to provide access to a stakeholder pension scheme from October 2001. Those with an existing pension scheme may be exempt.
At present there is no requirement for employers to pay contributions to a designated stakeholder plan.
Firms needing to offer access to a stakeholder pension, must:
• Designate a stakeholder provider
• Provide information to employees
• Offer a payroll deduction facility for employee contributions
• Enable staff to join the scheme within three months of joining the organisation
• Offer a default investment choice so that staff do not have to consider investment options for their stakeholder payments
6 April 2001 Employee stakeholder pensions are introduced.
8 October 2001 Firms with five or more “relevant” employees must offer access to a stakeholder compliant pension scheme.
Those firms with five or more “relevant” employees that do not offer stakeholder pensions will be liable to fines of up to £50,000. Individuals (such as trustees) will be liable for fines up to £5,000 each.
The Occupational Pensions Regulatory Authority (OPRA) has powers under section 10 of the Pensions Act 1995 to fine employers for breaches of rules relating to occupational pensions. These powers were extended to stakeholder pensions under section 3 of the Welfare Reform and Pensions Act 1999.
Why is the Government launching stakeholder pensions?
People are living longer and tending to retire earlier, plus the older population is increasing faster than the young. By around 2040, there are likely to be just two people in work for every one pensioner – (currently the ratio is approximately 4:1) making it important for everyone to start saving for their retirement as early as possible.
What exemptions are available?
Employers running an occupation pension scheme This provides an exemption as long as all employees can join within 12 months of starting at the firm. Membership does not have to be extended to employees under 18 years of age, or those within five years of the normal pension age.
Employers running a group personal pension plan They may be exempt from establishing a stakeholder scheme, as long as:
• The firm contributes at least 3 per cent of employees’ basic pay
• There are no “exit charges” or penalties under the plan
• Employees must be able to join the scheme within three months of joining the organisation
Employers with group personal pension plans should also note:
• Staff under 18 years of age are excluded
• If the existing plan has matching employer/employee contributions of more than 3 per cent, the plan can continue and should be exempt
• The 3 per cent employer contribution can be conditional on employees making a matching contribution of up to 3 per cent. The situation for group personal pensions will be reviewed after three years
Is stakeholder my only option?
No. Any time before 8 October 2001 you can opt to set up a pension scheme which suits you and your business. You won’t have to provide a stakeholder pension as long as all relevant employees are given access to a pension which conforms to the stakeholder criteria detailed above.
Why should I have a pension scheme for employees?
Apart from it being a legal obligation from 8 October 2001, it will bring benefits to the firm:
• In an increasingly competitive employment market, a comprehensive benefits package, including a good pension scheme, is important
• It can help attract quality staff, and over the long-term a pension scheme can encourage existing employees to stay
• A pension is one of the most tax efficient ways of investing – for both you and your employees
• Your contributions to employees’ pensions are treated as a business expense
• Corporation tax relief is usually granted in the year contributions are paid, at the highest rate payable by your business. This can reduce the potential amount of taxable profits earned by your business
• Contributions paid by employees also receive tax relief at the highest rate of tax they pay, thereby reducing their personal tax liability
• Very little tax is paid on the actual growth in value of pension contributions, allowing more of the growth to remain in the pension
• Under stakeholder only a very small amount goes to administering an employees’ pension arrangement
Additionally, stakeholder is beneficial to employees as:
• They can stop and start contributions as they wish
• If they are unhappy with a stakeholder provider they can transfer to another provider without incurring financial loss or additional charges
Setting up a pension scheme sounds like a lot of work. Is it?
• It doesn’t have to be. An on-line link can be established connecting a business with pension providers which can simplify administration for the firm and ensure all stakeholder requirements are met. These links can be accommodated in the 1 per cent charging structure
• Using a payroll system, be it a simple spreadsheet or a top notch software package, a firm can provide the necessary information about employees to the pension company. More accurate data, means fewer queries, faster processing and lower costs
• Employees can also get on-line access to their personal pension data, thereby minimising pension enquiries to employers
• It is likely the Internet and e-commerce will play a growing role in pension provision under stakeholder
Stakeholder is not available until April 2001. Why do I need to think about it now?
• Use this time to research how you can be stakeholder compliant
• Allow three months to audit your existing pension arrangements to find out if they are stakeholder compliant and make necessary adjustments
• Allow another three months to select a stakeholder provider if necessary
• Allow an additional six months to implement changes to internal systems, for example, to payroll so that staff contributions can be made to the designated scheme
• People will hear much about stakeholder as the Government wants to raise public awareness about pensions. Employees, trade unions and other trade bodies may ask about your plans
• An independent financial adviser could help in choosing the right type of pension scheme for your employees and the business
• Employers have a key role to play in stakeholder pensions
• A pension for your employees will no longer be an optional extra
• The requirement for employers to choose and offer their employees access to a stakeholder scheme will become law and this will be closely regulated
• Doing nothing is not an option
Tim Sargisson is the sales and marketing director for the Smith & Williamson interactive pensions exchange Swipe, the on-line pension solution developed by Smith & Williamson. Tel: 020-7637 5377, [email protected]