Stakeholder Pensions

The aim of this document is to provide employers with an overview of the Stakeholder Pension legislation.  It is important that employers are aware of the impact this has had and changes that are necessary to existing pension arrangements..

• The State will provide?  won’t it?
• Stakeholder Pensions
• Duties of an Employer
• What about existing schemes?
• Is Stakeholder suitable for everyone?
• The Need for a Pension Audit
• What should Employers be doing?

The State will provide? Won't it?

In the past, many individuals have relied on the State Pension Scheme for their income in retirement. For the vast majority, we now know that this will be insufficient for their needs.

Stakeholder Pensions

To achieve their objectives of encouraging private retirement provision and reduce reliance on the State, the Government introduced a new type of retirement scheme called the Stakeholder Pension. Its aim is to ensure that everyone has access to cost effective, flexible pensions where making contributions is as simple as possible, the principle being that the more straightforward it is to make private pension provision, the more likely it is that people will be encouraged to save. Stakeholder pensions will be approved and registered to ensure that anyone buying these plans can be confident that they meet government criteria. To further promote this provision, the Government introduced legislation that requires employers to fulfil a series of duties in relation to these plans.

Duties of an Employer

Under the legislation, the Government has placed a number of duties on employers relating to both the promotion and administration of Stakeholder pension provisions.

Exemptions

There are exemptions to Stakeholder based on number of employees and existing pension arrangements, as follows: -

• The requirement to provide access to Stakeholder schemes will be restricted to employers with five 'qualifying' staff or more.
• The employer currently offers an approved occupational pension scheme that meets set criteria.
• The employer currently offers an approved Group Personal Pension Scheme that meets set criteria.

Duties

The duties of an employer can be broken into:

• Selection and Designation
• Consultation
• Administration

Selection and Designation

An employer is required to select and designate a Stakeholder Pension Scheme for their employees. Designation means that an employer has to inform staff of their decision on the selection of a Stakeholder provider and make available information and access to the plan within three months of the employee starting work. It is the employer’s responsibility to ensure that the designated Stakeholder provider offers an approved plan and that the product continues to appear within the appropriate register. When selecting and designating a Stakeholder pension scheme, it is extremely important that the employer does not offer or imply, intentionally or otherwise, investment advice. To do so is not only illegal, but could result in a claim for compensation.

Consultation

The Government expects employers to consult with staff or their representatives as to the selection of a Stakeholder provider.

Administration

Employers will be obliged to collect contributions their employees wish to make direct from their staff’s pay. This will be achieved through payroll deduction. There is currently no requirement for either the employer or the employee to make contributions to a Stakeholder plan. Where payments are collected at source, they must be paid over the Stakeholder provider on the employee’s behalf within prescribed time limits. Failure to do so could result in fines or, in the worst cases, imprisonment.

What about existing schemes?

If an employer sponsors an existing pension scheme, it may be possible to apply for an exemption from having to designate a Stakeholder Pension Scheme as well. This will depend on the existing pension scheme design.

Occupational Money Purchase Pension Schemes

Where an occupational scheme is offered, exemption will require the current scheme to:

• Be open to all staff, including part-time (except new employees within five years of retirement, or those aged under 18)
• Have a qualification period of no more than twelve months

Group Personal Pension Plans (GPPs)

Where a GPP is offered,  exemption will require the scheme to:

• Be open to all staff (including part-time)
• Be immediately open to employee contributions
• Have a charging structure that meets the Government criteria set out for Stakeholder plans

Firms offering Final Salary Schemes are presently exempt from offering a stakeholder scheme. 

Where the exemption criteria are not met, the employer has the option of:

• Altering the terms of the existing scheme
• Selecting and designating a Stakeholder Pension Scheme

Is Stakeholder suitable for everyone?

Generally speaking, where individuals are seeking a cost effective, flexible method of saving for retirement, a Stakeholder Pension may well be the most appropriate route. It is important to be aware that, because of the likely restrictions on charges that can be levied on these contracts, the choice of investment funds and the level of advice offered may well be restricted.

Investment fund choices

There are a large number of pension funds open to investments in the UK, with the average pension provider offering a choice to suit its client’s needs. Within the Stakeholder Pension structure the investment choice may be limited. The Government requires the nomination of a suitable 'default fund' for any members who prefer not to exercise a choice between investments. It is likely that fund links to well known investment managers will not be as wide as other types of pensions scheme.

Alternatives to Pensions

Not all employees will have the same expectations and requirements for their savings. For example, not everyone will wish to 'lock away' his or her money until retirement. Individual Savings Accounts (ISAs), may offer a tax efficient alternative for this type of saving. Once again, this is a complex area and is something that you should consult HW Financial Services Limited about to see if they are able to help you.

Investment advice

Schemes must provide basic information and explanatory material, but will not be required to offer individual financial advice. A series of decision trees, which must be provided to employees, can be followed with the most appropriate route being selected. Where more complex advice is required, this can be offered, often on an individual basis. Any additional charge for this advice may be built into the maximum charging structure allowed, or charged by way of a separate fee. Alternatively, employers may choose to retain an Independent Financial Adviser to offer advice to all their staff.

Should members remain in the existing scheme?

Should members transfer to the Stakeholder scheme?

For those with existing provision

Stakeholder legislation is likely to have an impact on existing arrangements. Whether it is decided to run a Stakeholder plan alongside an existing scheme or switch to a Stakeholder arrangement, will depend on individual circumstances. Such decisions will need to take account of:

• Current staff pension arrangements
• The profile of staff
• The pension scheme contribution history and characteristics
• The investment risk profile adopted

For those with no existing provision

For employers looking to install a pension arrangement for the first time, they should consider the following:

• Which provider to choose?
• Payroll management and premium payment
• How to consult and inform staff
• How to handle staff with existing pensions

Offering additional employee benefit structures.

One of the simplest ways to ensure that all these areas are reviewed is to seek a pension scheme audit. This will review any current arrangements you and your staff may have.

What should employers be doing?

Well-structured employee benefit planning takes time, especially if existing arrangements have to be taken into consideration. Employers will find that they begin to receive questions from staff and representatives about their stakeholder strategy. By seeking independent advice at an early stage, employers will be able to plan these changes and offer the best possible solutions for both themselves and their staff.

HW Financial Services Limited are Independent Financial Advisers, authorised and regulated by the Financial Services Authority and owned by Bestinvest (Holdings) Ltd. This webpage has been produced for the general information of our clients. It is based on our understanding of current legislation and is intended to provide a brief summary thereof. It is not intended to give personalized investment advice and you should contact us or them before taking any action based on the information therein. You should be aware that where past performance is quoted for specific funds or asset class sectors (such as property funds) it is not a guide to future performance and that the value of unit-linked investments is not guaranteed. As unit prices can go down in value as well as up you may not get back the full amount of your investment. All statements concerning the tax treatment of products and their benefits are based on our understanding of the current law and HM Revenue and Customs practice and are for general guidance only. Whilst every effort has been made to ensure accuracy, no liability can be accepted for any errors or omissions. Levels and bases of, and reliefs from, taxation are subject to change.