Will all firms be affected?
All those with five or more employees must formally offer a stakeholder-compliant scheme to staff by 8 October. Employers who fall foul of the regulations could be fined up to £50,000 for non-compliance. As the rules currently stand, firms with less than five staff do not have to offer a scheme, but this may be reviewed in due course.
Will controls be tighter?
All stakeholder schemes will be strictly regulated to ensure that minimum standards are maintained. The charges that pension providers can levy on individuals are capped at 1% of the value of an individual's fund, which should make stakeholder plans cheaper than many existing personal pension schemes. No other charges can be made. Stakeholder schemes should also be "transparent", which means an individual should be able to understand and see what is happening to their savings.
What are an employer's obligations?
The first step is to discuss and explain any proposed stakeholder scheme with employees (and staff associations or trade unions, if appropriate). Employers will be expected to deal with any queries from their staff, either through a meeting or by issuing written information and requesting staff views. Professional advice may be particularly useful during staff consultation and scheme selection. The problems faced by Equitable Life schemeholders, following the insurer's inability to pay what it had promised, demonstrate the importance of this initial selection stage.
Once these processes are complete, employers must formally offer membership to staff in their employment contracts. Employers should make it as easy as possible for individuals to save for their retirement and must therefore offer a "default" investment strategy.
This default offer should include a standard level of contribution (the minimum payment is £20, net of basic rate tax, for regular and one-off contributions). Employers cannot insist that employees make regular or even occasional pension contributions, and must allow staff to stop, start and vary contributions. However, as it can be difficult for firms to manage varying contributions, employers can insist that staff do not change the amount of their contribution within six months of a previous change.
A chief responsibility facing employers is to deduct a net figure from each person's salary and ensure the contribution reaches the individual's scheme promptly. This transfer must be made by the 19th of the month, following the month in which the deduction was made. Employees should also be able to join the pension plan within three months of starting with the firm.
Employer contributions to staff pensions are treated as a business expense so corporation tax relief is available
What about an existing pension plan?
Those with a pension scheme already up and running may not have to set up a stakeholder compliant scheme. However, it is essential to compare your existing scheme with stakeholder requirements – and to start this now. This should give sufficient time to make any necessary adjustments by the 8 October deadline. Alternatively, it may be easier to set up a stakeholder scheme to run alongside an existing scheme. Generally, firms running an occupational pension scheme are exempt from having to run a stakeholder scheme as long as employees can join the existing scheme within one year of starting with the firm.
Those operating a group personal pension plan, or GPP, may also be exempt but several criteria must be met. First, the firm should contribute the equivalent of 3% (or more) of employees' basic pay; second, there should be no "exit charges" or penalties under the plan; and third, employees must be able to join the scheme within three months of joining the organisation. Even if individuals have in the past decided not to join the firm's scheme, the offer must remain open.
Currently, the 3% employer contribution can be conditional on employees making a matching contribution of up to 3% but this will be reviewed. Those firms running an occupational scheme or GPP are exempt from having to establish a new stakeholder scheme for staff under 18 years of age or those within five years of normal retirement age.
What's in it for employers?
Apart from the provision of stakeholder schemes becoming a legal obligation, it will bring benefits to the firm. In an increasingly competitive employment market, a comprehensive benefits package, including a good pension, is important and can help attract quality staff. Over the long term, a pension scheme can encourage existing employees to stay.
Besides, employer contributions to staff pensions are treated as a business expense and so corporation tax relief is available. This is usually granted in the year in which contributions are paid, at the highest rate payable by a business, and so can reduce the potential amount of taxable profits earned by the firm.
Can any of this be done online?
The internet is likely to facilitate the delivery of stakeholder pensions. Online links can be established between a business and pension providers or intermediaries and this can ease the administrative burden, increase efficiency and ensure that stakeholder requirements are met.
Stakeholder: The employer’s roleEmployers with five or more staff must offer a default pension strategy. They should:
- Discuss and explain any proposed scheme with employees
- Select a stakeholder provider and pension plan for staff
- Offer the pension formally to staff through employment contracts
- Enable employees to pay into the scheme direct from payroll
- Transfer payments to an individual’s scheme promptly
- Allow employees into the scheme within three months of joining the firm
- Offer a default investment contribution
- Monitor the scheme to ensure compliance with stakeholder rules
- Contribute to an individual’s scheme
- Employers can be fined up to £50,000 for non-compliance
- Individuals (for example, trustees) can be fined £5000 each
Chris Pomroy is a partner in accountant Smith & Williamson. He can be contacted on 020-8446 4371 or email email@example.com.