This Guide has been written to provide all employers with an overview of their options in this area. It is designed to be user friendly and to tackle the key areas that an employer will need to consider.
Of greatest importance at the moment is the impact of the Government's Stakeholder Pension proposals. Although there is currently no compulsion on any employer to pay into a pension arrangement for staff, the new stakeholder rules will still impact on employers.
There are a number of options open to employers to provide access to pension provision for staff. Effectively, the options divide into two main areas, each of which can be sub-divided. The main options are discussed in detail later in this guide. To start with, however, we need to look at the new stakeholder rules.
The new Stakeholder pension rules came in to force on Friday 6 April 2001. Because the rules require most employers to take action, the majority of businesses will be affected by the new rules.
The stakeholder rules will have little impact on those employers offering a full company pension scheme, but it will have a significant impact on those who offer Group Personal Pensions, or who currently offer nothing at all.
Essentially, the stakeholder rules will require employers to:
These rules will become legally binding on 8 October 2001. Although the stakeholder rules officially come into force on 6 April 2001, the Government is allowing employers 6 months to implement them.
There is no reason to assume that because access is provided to a stakeholder, that there will be a flood of applications from staff. However, it is clear that the Government's intention is for employers to become more involved in the promotion and administration of pension payments.
For those employers with an existing Group Personal Pension, or those who currently have no arrangement at all, the impact of stakeholder will be significant. The two areas are discussed below:
Group Personal Pension - provided the Group Personal Pension is open to all members of staff and the employer is paying a minimum of 3% of basic earnings, it is likely that the employer will be exempt from the stakeholder rules. However, if the scheme requires members to make a personal contribution of over 3%, or the existing plan has exit penalties, then the stakeholder rules will apply.
Even where the rules allow for an employer to continue with their existing Group Personal Pension, consideration needs to be given as to whether or not they should. Many Group Personal Pension schemes have high ongoing charges, very much higher than the equivalent charges under the stakeholder rules (see later under Charges).
Where the stakeholder arrangement is clearly better for staff, it will be possible for many employers to change. In some cases, it will be with the same company but for others, it will involve a change of company. Most of the administration involved in a change will be for the adviser and the individual members. The employer will only need to set-up a new Direct Debit Mandate to the new pension company.
As charges can reduce retirement funds by many thousands of pounds, it is critical that all employers review their existing arrangements. Ethical Investors is well placed to undertake such a review on behalf of ethical employers, providing independent advice on both the financial and ethical aspects of existing schemes.
No existing arrangement - unless the number of staff is less than five, the stakeholder rules will apply to all employers from October 2001. Therefore, it is advisable for employers in this position to at least investigate the options open to them. This will require an adviser to be appointed, assuming that the employer is not going to attempt to investigate the market.
The first consideration will be that relating to the employer contribution. Is there going to be one? The stakeholder rules only require an employer to provide access to a scheme, not to pay into it. If possible, employers should begin budgeting to make some contribution to staff pensions, provided funds are available. Employer pension contributions are now seen as an important aspect of the remuneration package. Increasingly, those employers not offering to contribute something to staff pensions will find that they are not attracting the best staff. Even in the NGO sector, pension contributions are becoming the norm.
For the first time, a government has decided to set the charging structure on a private pension arrangement. The charge level set is, according to many industry commentators, too low. The problem is that the Government believes that no advice is needed when buying a pension. Therefore, no account should be taken for paying for advice within the charge of the plan. In addition, many insurance companies have said that they cannot afford to offer individual stakeholder plans, thus reducing the amount of choice available.
Having said all of this, the charges levied on the stakeholder plan will be good news for investors. The charges will be a fraction of the average cost of a Personal Pension, leading to higher retirement funds. Because of these low charges, anyone with an existing Personal Pension, or employers currently offering a Group Personal Pension, should assess whether or not they will save money by moving to the new stakeholder arrangement. Many Personal Pension contracts, because setting up charges were levied at outset, will allow premiums to be stopped without a charge being imposed. In this case, many individuals could be better of by stopping payments to their Personal Pension and paying the money to a stakeholder pension instead. For others, high cessation charges may outweigh any cost savings within a stakeholder, in which case payments should continue to the existing Personal Pension. Any increases in payment, however, must be made to a stakeholder plan, to avoid yet more Personal Pension charges. Increasing an existing personal pension does not save you money just because you already have the plan. The fact is you pay full new charges as all increases are treated as a new policy.
Although each pension company will have its own charging structure on its Personal Pension, the charges can be averaged. Detailed below is a comparison between an average Personal Pension and the new stakeholder.
|Average Personal Pension||Stakeholder|
|Monthly policy fee||£2.50||Nil|
|Allocation rate (amount invested each payment)||98%||100%|
|Bid/Offer spread (on each payment)||5%||Nil|
|Charge on all first year payments||5%||Nil|
|Annual management charge||1%||1%|
By way of example, a £100 monthly contribution to a Personal Pension with an average pension company would, after all initial charges, be left with only £85 to be invested. By comparison, a stakeholder plan would have the whole £100 invested.
The above figures clearly demonstrate how much lower the stakeholder charges are compared to existing Personal Pension plans. Another advantage of the stakeholder rules will be the fact that all stakeholder plans will have to conform to this 1% Annual Management Charge - no company can charge more without losing the ability to call its plan a stakeholder pension.
What investors need to do is ascertain which company offers the best performance and which fund is the closest match to their own ethical views. Without a great deal of time and understanding of the financial markets, we believe that most investors will need advice at this stage.
In addition, we are offering our service to employers, regarding the establishment of group or individual stakeholder plans for staff. Unlike many other advisers, we will not be building-in additional commission to the plans we arrange, nor will we charge a fee. It is our intention to become the largest arranger of ethical stakeholder plans in the UK, by offering quality advice within the stakeholder charging structure. We are aware that many advisers are taking commisison on stakeholder plans AND charging fees. We believe this to be greedy and fundamentally wrong.
Ethical Investors has grown to be one of the most successful and stable financial advice firms in the UK. The stability of our income, always geared towards the long term, has enabled us to promote ethical stakeholder policies from 1 June 2000, rather than waiting for their formal introduction on 6 April 2001.
Whilst most advisers are reliant upon high up-front commissions, in recent years Ethical Investors has been arranging pensions on low level commissions. This has provided the stability in our long-term income that will allow us to offer stakeholder pensions without adding an additional layer of commission or fees.
This is where the employer establishes a full Retirement and Death Benefit Scheme for all staff. Individual members of staff can choose to join the scheme; membership cannot be compulsory. As the scheme is a separate legal entity, trustees will have to be appointed, often from senior management of the employing company. Staff who leave employment will have retained benefits within the scheme. These benefits can be transferred if it is in the ex-member's interests, otherwise the benefits will have to be retained within the scheme, and contact maintained with the member until their retirement. With insurance companies providing the administrative back-up in most areas, the employer should not be forced to employ a pensions administrator. However, the control of the scheme will need regular meetings of the trustees and reports to members on an annual basis.
July 2000 - on 3 July, a small but significant amendment to the SIP (Statement of Investment Principles) rules under the Pensions Act 1995 was introduced. This amendment forces all employer pension schemes to adopt an ethical statement. All schemes must declare..
"the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments;
the policy (if any) directing the exercise of the rights (including voting rights) attaching to investments"
Clearly, this statement places all responsibility for social and environmental considerations firmly in the laps of the trustees, and will ultimately reflect on the employer. To have no policy could lead to bad publicity, but if a policy is to be agreed, what areas should be covered? How far will the ethical criteria go? Will all views of scheme members be taken into account?
In our opinion, a full pension scheme may be wholly inappropriate for a small business. This type of scheme is more suitable for large business, where the employer is able to commit to a large annual payment, and where these payments will benefit from being treated as a tax-deductible item. There will be an administrative burden, even with the insurance company providing extensive back up. The prospect of keeping in touch with a fluid workforce will be the responsibility of the trustees. Since the implementation of the Pensions Act 1995, the legal duties imposed on scheme trustees have been increased significantly. Given the fact that a small organisation needs all staff to concentrate on the day to day work of the organisation, it is likely that administration of the pension scheme will occupy a considerable and increasing amount of management time.
This option provides the greatest flexibility for management and staff. Each individual member elects to effect their own Personal Pension, with the insurance company chosen by the company and the adviser.
The plan is effected by the individual, with the only responsibility of the employer being to pay the agreed employer contribution each month. As staff leave, they take their plan with them, and the employer merely needs to notify the adviser and the Direct Debit Mandate can be adjusted accordingly.
If staff join the company with an existing Personal Pension, this will not cause any difficulty as an individual can have as many pensions as they like, only subject to an overall maximum contribution limit set by the Inland Revenue, or the £3600 pa limit, whichever is higher.
Such a new member of staff can continue contributions to their own plan, and effect a stand alone Personal Pension to receive only the employer contributions. When this member leaves, they take the new plan with them, leaving no need for the employer to keep in contact.
Group Personal Pension arrangements are not subject to the new SIP rules. Social or environmental issues pass into the hands of each individual member. As such, each member can chose the plan or fund that best matches their ethical concerns. The employer can select, with advice from the adviser, the most appropriate ethical fund in line with the stated objectives of the organisation.
Increasingly, even large employers, some with as many as 500 staff, are selecting the Group Personal Pension option. In reality, however, it is the ideal vehicle for small to medium sized organisations who wish to offer a structured pension option for staff.
This is very much under the control of the organisation. Employers can express their contribution as a percentage of salary. In this case, the costs are easily quantifiable as a percentage of payroll. Alternatively, a fixed monetary contribution can be made per member of staff. Under this system, however, those on a higher income will receive a lower effective pension contribution. One way around this would be to link the pension contribution to a grade - the higher the grade the higher the fixed payment. One can see that the fixed amount route could lead to a very difficult situation with regard to internal politics, even within the most co-operative of organisations.
One important point to note is that making a pension contribution on behalf of staff is more effective for the employer than a payment of salary. Salary payments are subject to the Employer's National Insurance levy, thus increasing the real cost of each member of staff. Contributions to a pension arrangement for staff are tax deductible and not subject to National Insurance. Therefore, a £50 gross monthly payment to a Personal Pension will only cost £50. A £50 increase in salary will cost £50 + the Employer's National Insurance liability. Also, employees will suffer both Income Tax and National Insurance on this additional £50 pm to their pay. The individual members do not suffer any tax liability on the pension contributions made by the employer, i.e. it is not considered or treated as additional pay or a benefit in kind.
As pay structures are reviewed, the employer is able to combine a pay increase with a pension contribution. This will reduce the overall cost of the increased pay, and ensure that staff have at least some pension provision in place. Many employers now see pension provision as an integral part of the salary package, as well as a moral obligation.
It is important to establish that there is no right or wrong way of paying into an employee's pension. Some contribution, however, is always better than none at all.