How to offer your employees a scheme, now that pensions provision is shifting focus onto employers and away from the Government…

Last year the levy for the Pension Protection Fund – designed to provide security for employees whose pension schemes are inadequately funded – was forecast to be £300 million. ‘However, the final figure amounted to £575 million,’ says Carolyn Mumby, managing director of Employment Law Essentials. Tellingly, this figure was reportedly greeted with relief, as an even higher one was feared.

Despite this shortfall, ‘if there are five or more people working at a company, the employer is normally required to offer the chance to join a pension scheme,’ says Mumby either directly or via a third party. Business owners are encouraged to show social responsibility when thinking about staff and their retirement options, so as an employer it is advisable to be aware of the plus points and the pitfalls.

Regulation fire-fighting

For many business owners, regulation is a hindrance and benefits don’t outweigh the costs. Adrian Waddingham is founder of actuarial and pension consultancy Barnett Waddingham. ‘Most of our work is done fighting fires, dealing with under-funded schemes, closing them and revising benefits – usually a downturn.’

As an employer and an expert on company pension schemes, he is well positioned to identify the effects of increased legislation relating to pensions. The ‘safety nets’ put in place in 2004, he says, have put the burden of over-regulation on pension schemes: ‘they have killed the goose which laid the golden egg.’

Following Lord Turner’s Pension Commission, the Department for Work and Pensions (DWP) is eager to ‘promote personal responsibility and encourage people to save for their future.’ This has been described as shifting the focus onto employers and employees and away from the Government.

The National Pension Savings Scheme (NPSS), a mandatory scheme which could be established as early as 2010, proposes that employer contributions would be set at three per cent, employee contributions at four per cent and a government contribution at one per cent. Employers can opt out of the scheme if they provide an equivalent. It’s designed to be popular, attracting many members and ‘will be wide,’ says Waddingham, ‘but only an inch deep.’ He believes that ‘employers would be willing to do more than Lord Turner’s NPSS scheme’ and hopes to see them adopting hybrid schemes that provide employees more than the standard offering.

Carolyn Mumby is less optimistic. ‘It is thought that it won’t replace the stakeholder pension,’ she says, ‘but the general worry is that employees will look for a rise in pay to cover the gap created by increased contributions; this will have a knock-on effect on the money available for things like staff training.’

Choosing the right pension option

Stakeholder pensions, usually run by external financial institutions, are one option and can be offered directly by the employer. By law, you don’t have to pay into stakeholder pensions on behalf of your employees, but socially conscious employers, concerned about staff welfare, will want to do so and, advises Mumby, ‘it should help towards establishing a loyal and long-standing workforce.’ The employee usually pays the charges paid to pension providers. However, be warned that these pensions are, she says, ‘unpopular with staff and generally perceived as giving a poor return on investment.’

An alternative is to establish an occupational or salary-related scheme. They are based on the length of your membership to the scheme and salary, so employees have a fair idea of how much the pension will be. Tax relief is available on contributions and charges are often shared. Employers are usually expected to contribute into the pension.