UK employers need to get clued up on pension obligations
Friday, July 19, 2013
Retiring to the Costa Blanca, becoming a golf pro, turning a small back lawn into a veritable Kew Gardens. All visions that have for most people of late, begun to seem rather distant and ambitious thanks to austerity economics and talk of capping the state pension.
In such a climate, now more than ever, there are few better ways an employer can endear itself to its workforce than by offering a company pension scheme.
Employees are becoming increasingly aware that they will struggle to survive on the state pension alone and that private pension provision represents the most tax-efficient method of retirement saving. And in fact some would argue that, seeing as companies will soon have to offer a scheme under the government’s new auto-enrolment programme, and that waiting until the last minute to set this up is ill-advised, there’s in fact no better time to start offering such a scheme.
Andy Seed, a pensions expert at KPMG, says: "Undoubtedly pensions are the most tried and tested recruitment and retention tool available and they are the most consistently offered employee benefit beyond cash. Employees have always understood that tax relief from the government as well as contributions from their employer put pensions in a unique place.
"It is also important to realise that pensions have become much more user-friendly during recent years and that the Financial Services Compensation Scheme now effectively protects scheme members from the majority of losses."
Most big printing businesses, and many medium-sized ones, do have a pension scheme, and – in line with the national trend – these are now virtually always defined contribution schemes, which require employees to take the investment risk. Old-style defined benefit schemes, which pay a proportion of final salary regardless of how underlying pension assets perform, have been mainly closed to new members or closed altogether.
But most printing firms with between two and 10 employees don’t have pension schemes at all, and this seems particularly short-sighted in view of the fact that their workforces often contain several family members. (In the past, owners have tended to view the sale of their business as their exit strategy and pension, but while businesses might previously have been able to sell for six or seven times annual profit, today an owner would lucky to sell for just twice annual profit.)
But this situation can’t continue for long because the government’s auto-enrolment programme is requiring firms with as few as one or more employees to offer pension plan. The key difference from previous pension requirements is that, unless employees choose to opt out of the scheme, the employer has to make a contribution – rising from 1% until September 2017 to 3% from October 2018 onwards.
To date, the auto-enrolment programme, which started in October 2012, has only affected the very largest companies. But those with between 350 and 499 staff will reach their staging dates next January and those with 61 employees and fewer will do so between 1 August 2014 and 1 April 2017. (Many firms can, however, auto-enrol slightly after their staging dates as they are entitled to take a waiting period of up to three months.)
Pensions experts stress that not allowing sufficient time for implementation is the single biggest potential pitfall and that most firms need to start thinking about auto-enrolment at least 12 months before their staging dates. Bear in mind also that in 2015/16 there will be tens of thousands of employers trying to set up a scheme, so provider choice and adviser time may be far more restricted. So there is a lot to be said for actually setting up a pension scheme now and benefiting from being viewed as a paternalistic employer to boot.
Jason Cannon, senior corporate pensions adviser at specialist intermediary Lorica Employee Benefits, says: "I’m working with a lot of small companies who are getting in before their staging dates and using this as a selling point. They may have had a scheme historically which had met with no interest but they are now putting in an auto-enrolment type scheme ahead of schedule and communicating it. Doing so can create goodwill, especially when employers make contributions that are higher than the minimum required."
Employers can either set up trust-based schemes, which will be run by trustees, or opt for contract-based schemes, which are set up by life assurance and pensions companies. Both approaches should be relatively straightforward.
Alasdair Buchanan, a pensions expert at Scottish Life, says: "Both trustees and life companies should be able to shield employers from the pitfalls. But if you are setting up a trust-based arrangement it is important that the appointed trustees are given time to be trained in their responsibilities.
"They need to understand trust law and have to make decisions that are in the best interests of their membership. So, if they are a lay trustee, they may need at least a week’s initial training together with on-going training."
Pensions experts tend to stress that group personal pensions, which are a form of contract-based scheme, represent the most attractive option for very small businesses. These are effectively a collection of personal pensions on which the employer has used its economies of scale to secure better terms on charges and better governance. They normally offer greater choice of funds and choice of contributions than trust-based schemes and are more portable if employees leave.
Nevertheless, low-cost and straightforward trust-based schemes offered by the likes of NEST, Now:Pensions, and the People’s Pension, can be worth considering. These providers, who can accommodate low levels of contributions, are willing to deal with employers directly, and NEST is the only provider in the market that actually has to take on any employer that applies.
But these providers may not be the best option for employers looking to introduce pensions before they are actually required to, as their advice tends to be based around auto-enrolment staging dates. So there is much to be said for employing a specialist intermediary to help select the most suitable scheme from the market as well as advise on complex issues such as whether it is best to have a single scheme for all workers, or a two-tiered structure that offers some more generous pension terms than others.
Richard Higginson, head of reward at specialist intermediary Towry, says: "The main features to consider when selecting a pension provider include value for money, protection of the pension assets, flexibility of contributions and good record-keeping. A good independent benefits adviser will steer you through the selection process and will be able to arrange visits to the provider’s own offices so you can meet people and see them in action.
"Most providers are well-established firms with good administration systems and good technology but their service usually depends on the people providing it. So you need to be comfortable that the people dealing with your business and your employees know what they are doing."
It can be possible to secure input from an intermediary free of charge if a company is already doing business with them but they will normally charge an hourly fee in a similar way to an accountant or solicitor. Alternatively, some intermediary-focused providers can be approached directly.
Jamie Jenkins, head of workplace strategy at Standard Life, says: "Most pension providers deal predominantly via intermediaries but will still consider direct approaches and this will become increasingly prevalent as smaller employers start to come up to auto-enrolment. We can help them set up a scheme without charging fees but we can’t give advice, although we can provide some guidance on what type of scheme might be suitable. You will get more support and advice from intermediaries but will pay for these services.
"We anticipate that a lot of smaller firms will look for self-service options direct with providers and the best way to go down this route is to select a single provider that has been recommended by business contacts. Alternatively, new services are likely to emerge to help with provider choice."
Printers are also fortunate in having an industry-specific option to consider. The Printing Industry Pension Scheme (PIPS) offers the chance to take out a low-cost group personal pension scheme with either Standard Life or Legal & General. In both cases those in the default fund – which the majority of scheme members opt for – pay a total charge of 0.43% a year, which is even lower than the 0.5% a year charged by NEST.
PIPS, which 140 printing firms have so far signed up to, also offers the attraction of being looked after by the industry, its governance committee consisting of four representatives from the print sector of the Unite union and four from the British Printing Industries Federation (BPIF). Dealing with people who understand the needs of printers saves time and cuts down on administration.
But recent developments mean that PIPS isn’t currently offering quite the same proposition that it used to. The 0.43% charge does not include any intermediary advice, yet prior to the introduction of new industry-wide rules this May banning consultancy charging without employee consent, PIPS was able to include face-to-face advice via one of two intermediaries for an total annual charge of 0.8%.
Barry Dixon, scheme secretary for PIPS, says: "There is going to be a meeting this September at which the two intermediaries intend to demonstrate an ability to offer a similar service to PIPS scheme members at a similar cost but modelled in a different way."
So print bosses will for now have to watch this space to see what other print-specific pension options emerge. In the meantime, they will need to assess whether a trust-based or contract-based scheme will be best for them, taking into consideration the size of their firm. They will also need to decide whether to deal direct with their provider or appoint a specialist intermediary to help with this decision. Whatever they decide, the consensus seems to be that offering a pension even before they’re required to by Whitehall, is an excellent shout. This should ensure both a smooth transition to auto-enrolment, and, crucially, that employees are happy and loyal.