An Employers Guide to Pension Schemes Employee Pensions The provision of a pensions savings scheme to which employers, as well as employees, contribute demonstrates a commitment to staff well-being by providing a valuable long-term benefit that helps attract and retain staff. Ordinarily, contributions from both employer and employee attract relief from tax and national insurance
The provision of a pensions savings scheme to which employers, as well as employees, contribute demonstrates a commitment to staff well-being by providing a valuable long-term benefit that helps attract and retain staff.
Ordinarily, contributions from both employer and employee attract relief from tax and national insurance and the saved funds grow in a tax-advantaged environment.
It should also be noted that there are presently proposals afoot to make employer contributions compulsory in the fairly near future.
Occupational schemes receive contributions from employers and employees alike, invest the funds on behalf of the employees as a whole and payout benefits in accordance with scheme rules. They may be salary-related or defined contribution schemes.
Salary related occupational schemes that link pension to service and salary are the preserve of the public sector and a few, typically large, public companies. They have very significant administrative & compliance burdens, require very substantial funding, have long time horizons and carry severe financial risks to the employer They are not appropriate for the great majority of businesses.
Defined contribution occupational schemes link pension to contributions; thus the sum receivable in retirement depends upon the investment performance of the pension fund as a whole. The financial risks to the employer of funding future liabilities are removed but substantial regulatory obligations remain.
An increasingly popular alternative is for the employee to set up his or her own personal pension either individually or in a ‘group’ scheme with other employees where the scheme is selected by the employer.
The scheme receives both the employer and employee contributions. Whether set up privately or within an employer’s group scheme, the pension is an individual fund held solely for the benefit of the employee concerned and is fully portable should he choose to leave his employment.
Such an arrangement has advantages for both parties (and a disadvantage). The selection of the pension fund and investment policy can be better suited to the individual circumstances and risk profile of the employee concerned and they are popular with employers as they remove any responsibility from them for the operation of the fund, including its administration, audit and reporting obligations to OPRA (Occupational Schemes Regulatory Authority). The disadvantage is that the benefit of scale on costs resulting from the pooling of funds in a single scheme for a number of employees is lost (it reduces the impact of charges on investment growth). It is not a significant issue for smaller employers and a substantial group personal pension scheme can often negotiate improved terms in any event.
The pension bought at retirement with a personal pension fund is in fact a pension annuity: an undertaking by the provider to pay a sum of money annually for life. At retirement the employee will not be bound by any occupational scheme rules, he may typically choose from a wider range of options and importantly, the employee is not obliged to take his pension from the scheme provider, he is at liberty to take advantage of an open-market option and place his fund with the highest bidder, that is the annuity provider who will give him the biggest pension.