What kind of pension schemes are there?
Pension schemes can be set up in a number of different ways and have a range of confusing titles. However, most pensions these days will be some form of defined contribution scheme, where a pot of money is accumulated and used to buy a pension (i.e. an annuity) at retirement.
What does Defined Contribution mean?
Sometimes known as “Money Purchase”, the amount of contributions that will be made into the fund are known in advance. However, the amount of benefits that will be paid at retirement are not known in advance as they will be dependent upon the value of the investments at retirement and the cost of purchasing an annuity (i.e. a pension). In a defined contribution scheme, all of the risks sit with the individual.
What does Defined Benefit mean?
Sometimes known as a “Final Salary” or “Career Average”, the pension benefits at retirement are broadly known in advance and are related to an individual’s earning history and the length of service. Final benefits are not dependent on either the cost of purchasing a pension nor on investment performance. The risk broadly sits with the sponsoring employer.
What is Auto Enrolment?
Auto Enrolment is a new legal requirement for all employers to provide a pension that meets minimum standards by 2018 (it is phased in for different sizes of employers from 2012). All employees over age 22 and below State Pension Age, who work or ordinarily work in the UK, must be enrolled into a pension scheme as long as they earn over a certain amount per week or month.
Why did the government introduce Automatic Enrolment?
The government has stated that it is committed to improving pension saving in the UK to ensure that individuals have the best possible income in retirement from all sources.
What happens if my business does not comply with Automatic Enrolment?
Your company will deemed to be acting unlawfully and there are a number of actions that can be taken, including for more serious prolonged and repeated breaches a fine payable for each day that you are non-compliant.
My business already offers a workplace pension. Do I still have to automatically enrol my employees?
Unless every worker – including temporary staff – is a member of that scheme then you will almost certainly have to undertake some auto enrolment. Your current scheme may be sufficient if it meets certain qualifying criteria, but you need to check this with your provider. You will still need to undertake a communication exercise and will have additional payroll and reporting requirements to factor in.
As an employer, what’s the benefit of providing a pension scheme for my employees?
Many staff value an employer who helps them in ensuring that they have an income in retirement. While it will not always be the most important determinant, as workers get older and start looking towards retirement it can be a key HR issue. Conversely, now that employers are not able to forcibly retire workers solely on age grounds, you need to ask whether you are happy for your staff to continue working late into their 60s or even into their 70s? Staff are more likely to wish to retire at a point when they can afford it and a good workplace pension can assist in succession planning. Given that compliance with the legislation is required, the more positively you sell the benefits to your workers, the more value they will put on you providing those benefits. If you provide them begrudgingly, you will still have the cost of the providing the benefits.
As a self-employed person in my own company do I have to provide a pension scheme?
If you are the only person in your company then you do not need to provide a pension scheme for yourself. However, if you employ anyone then you will need to provide a pension scheme for all employees as well as yourself.
What is my Staging Date, and what exactly does it mean?
Your Staging Date is the first date that you must comply with the legislative requirements for auto enrolment. As a minimum you must issue communications from this date, even if you going to postpone the assessment of your workers until a later date.
Can I give my employees cash incentives to not use our pension scheme to reduce my own cost?
No. It is unlawful to either provide incentives to workers to induce them to opt out or to threaten them with any consequences of not opting out.
Do I have to provide the same pension scheme and contributions for all my employees?
No. You can provide different schemes and benefit structures to different groups of workers as long as you provide all workers with at least the minimum requirements.
How much is automatic enrolment going to cost my company?
This is partly up to the decisions you make in selecting a process, a scheme and the amount of contributions that you wish to make.
Auto enrolment can include some (or all) of the following costs:
- Payroll costs (additional processing/interface builds/assessment costs)
- Assessment costs (if not incorporated into the payroll costs)
- Pension contributions
- Communication costs
- Helpline costs
- Additional HR costs (managing the opt in/opt out processes)
- Any financial advice that you receive
- Internal project/implementation costs
These are difficult to generalise about as they will be specific to each company.
Can I get help to make sure my employees receive the communication required by the Department for Work and Pensions for auto enrolment?
Yes. Creative Wealth will undertake all of your statutory communication obligations for all workers for whom the Creative Wealth Plan is being used (i.e. including Entitled Workers and Non-eligible Jobholders who do not join the Plan).