For any company looking at setting up a pension scheme, the market appears confusing and complex. But provision of a pension scheme motivates and keeps staff. It's the second most valued benefit – after pay of course! And, with personal pension scandals still within memory, corporate provision of this core benefit is especially valued.
Because pension schemes don't have the instant, flash appeal of a material perk – a company car, say – it's crucial to communicate the high financial value of this benefit to staff once you have a system in place. It's important to make absolutely clear that employees get much more out of this benefit than they put into it. Generally speaking, if schemes are easy to understand, employees are more likely to value them.
There are two types of pension scheme - contributory, otherwise known as money purchase schemes, or non-contributory (final salary) schemes.
Contributory
Money purchase schemes are more common nowadays and are dependent upon investment returns, contributions and annuities. The final pension sum is dependent upon the contributions invested and the employer contribution is fixed. Hence the scheme member, rather than the employer, carries the financial risk. Under such a scheme, employees are not penalised for early departure, since their accounts remain invested within the scheme.
Non-contributory
In the latter category, the benefits are not dependent on investment returns but instead are defined as a percentage of final pensionable pay. Non-contributory schemes are set up so that the employer takes the financial risk, and is required to make the necessary contributions to meet the shortfall between employee contributions and the final pension sum. Under such a scheme, early leavers may lose out as benefits are linked to prices and not to earnings.
What type of scheme?
The option you choose will depend on your company profile and culture. If your organisation has flexible working arrangements, involving part time or contract work and career breaks, a money purchase scheme is easier to administrate and of greater benefit to employer and employee.
If your company chooses to reward long service, a final salary scheme would be more appropriate. On the other hand, if you want to attract mobile staff and encourage a high turnover rate, a money purchase arrangement is again more useful.
For small and medium sized companies, the easiest option is a Group Personal Pension - simple to set up and operate, with most of the admin carried out by the nominated insurance company. Group Personal Pensions can take a matter of weeks to set up, with costs starting at around £2,500. Effectively, all the company needs to worry about is getting the funds to the insurance party. If you are already set up with a BACS system, this is easy.
How much should you contribute?
Employer contributions can be made at a set rate - say 5% of salary. Or you could scale contributions according to seniority or length of service. Employers often choose to match employee contributions. This targets the people most interested in the pension as a benefit, hence maximising on the company's investment in the benefit.
If you do set up a scheme, you may wish to contract employees out. Employees cannot leave the State Pension scheme, but they can leave the State Second Pension, which used to be known as the State Earnings Related Pension Scheme (SERPS). If you contract an employee out of this scheme, you can save on National Insurance contributions - as long as you can show that the employee will be adequately provided for by the private scheme.
Individuals are also able to contact themselves out if they take out an appropriate alternative pension - private or personal.
How to structure the pension
A pension fund is typically managed and run by a trust. A nominated group of people – the trustees – look after the pensions funds on behalf of the beneficiaries, the contributing employees. Obviously, this is important in order to ensure objectivity and management in the best interests of the scheme members.
It's also a legal requirement that the assets of the pension fund are kept separate from the assets of the business – even if the employee is actually the sole trustee of the pension scheme. This ensures that if the company goes into liquidation, the pension fund assets can not claimed by the liquidators.
This separation also provides additional security for members because the welfare of the fund is not tied to the business. Funds are invested to produce the best return for the scheme. It would not be possible to do this if funds were for business purposes and returns made on the basis of business profit.
