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Decisions
decisions
Both
stakeholder pensions and GPPs exempt from stakeholder place several
requirements on the employer. Ian Naismith compares these requirements
From
8 October 2001, most employers will have a statutory duty to offer
pensions to their staff. There is no obligation for the employer
to pay into the pension (that may come later), but the government
hopes employee access will lead to a change in pension provision.
Employers are exempt from the new requirements if they have fewer
than five employees, or if no employee had earnings from that employer
above the lower earnings limit (currently £72 a week) every
week in the last 13. Otherwise pension access must be provided.
Some employers will set up occupational pension schemes, probably
on a money purchase basis. While this has some advantages, for example,
employees do not have to be offered membership until they have worked
with the company for a year, it normally involves considerable administration
by the employer.
The other options are a group personal pension (GPP) or a stakeholder
pension. With these, the employer normally does not set up a new
scheme, though that is now possible, but offers access to a pension
providers scheme.
Choosing a scheme
Employers who are not exempt must designate a stakeholder scheme
after consulting with employees and their representatives, for example,
trade unions. The employer must also ensure that the scheme chosen
is on the OPRA register of stakeholder schemes. No consultation
is needed for GPPs. However, the employer must ensure that the provider’s
contract has no penalties if members transfer or stop contributing.
This does not prevent deductions that effectively recover set-up
costs, and many plans with such deductions will satisfy the exemption
requirement.
Membership
With stakeholder, membership must be offered to all relevant employees,
which includes all employees under 75 who have worked for the employer
for at least 13 weeks, and have earned more than the lower earnings
limit every week of the last 13. There is no lower age limit.
The employer must advertise the stakeholder scheme to employees,
and allow the provider access to employees to market the scheme.
When employees request payroll deductions for contributions, the
employer must acknowledge receipt of the request within 14 days,
and provide certain information specified in the regulations.
The access requirement for exempt GPPs is the same as for stakeholder,
except that membership does not have to be offered to employees
younger than 18. For an exempt GPP the employer must also include
the membership and contribution entitlement in contracts of employment.
However, this is not required if the employer can demonstrate in
writing that contributions to an arrangement were paid continuously
since before 8 October 2001 as if they were in the contract of employment.
There has been some confusion over exactly what “arrangement”
means here, but we understand the policy intention is that it relates
to an individual employee’s arrangement, not to the GPP as
a whole. A strict reading of the regulations supports this, but
it is different from what some government bodies have stated. For
both stakeholder and GPP the employer must keep track of new employees
and offer them access to a pension when the regulations require
it.
Payment levels
An employer does not have to pay into an employee’s stakeholder
plan. The employee also cannot be required to contribute to a plan.
However, an employer may offer to match employee contributions for
example, by contributing the same amount as the employee up to a
maximum of 3 per cent of basic pay. This is common in the USA for
401K plans, which influenced government thinking on stakeholder.
For exempt GPPs standard employer contributions must be at least
3 per cent of basic pay. The employer can also insist on the employee
contributing. For arrangements started from 8 October 2001 onward,
the maximum compulsory contribution can be no more than 3 per cent
of basic pay. For earlier arrangements, the compulsory employee
contribution can be higher than this, but not more than the employer
is paying.
If an employee is not willing to pay a 3 per cent contribution but
is happy with, say, 2 per cent, it appears that the employer can
offer to match that lower amount without losing the exemption. However,
the employee retains the contractual right to the 3 per cent, and
the employer contribution must be increased if the employee subsequently
decides to pay the 3 per cent.
Payment
administration
For both GPP and stakeholder, the employer must offer to deduct
employee contributions from their pay and pass them on to the provider
with any company payments. The employer must maintain a payment
record showing contributions due and ensure that the provider has
an up-to-date copy. Payments must be made no later than the due
date, the 19th of the month for employee contributions after they
are deducted from pay. Normally the employer due date will be the
same as the employee one and employers should aim to pass on contributions
well before it.
With exempt GPPs, the employer must ensure that each contribution
meets the exemption requirements. This could be an issue if, for
example, the compulsory employee contribution was expressed as a
percentage of total pay and a large bonus was paid one month. Because
of this, most exempt GPPs will probably have contributions expressed
as a percentage of basic salary.
Both stakeholder and GPP contributions can change from time to time.
With stakeholder, employees have a statutory right to change their
contribution levels every six months. If a change is requested within
six months of a previous one, the employer can refuse it but must
tell the employee when the next change will be allowed. There are
no equivalent requirements for a GPP and for example, the company
could make a rule that employee contributions can only change on
the scheme anniversary.
Issues
for advisers
In guiding an employer, an adviser will cover the administrative
differences between stakeholder and GPP, and a strong employer preference
could determine which will be offered. Otherwise, the underlying
features of the two must be considered.
The FSA requires personal pension recommendation to be accompanied
by reasons why the adviser considers it at least as suitable as
stakeholder. The closer the personal pension is to the stake-holder
CAT standard, particularly on charges, the easier this will be.
A possible reason for recommending GPP is that the full cost of
advice can be included in the product. This could be used to justify
the recommendation, particularly if employees will receive individual
advice. However, the government expects that individuals will be
able to make judgements based on decision trees, so the need for
advice must itself be justified.
Many GPPs offer extensive investment choices which may be important
where employees are relatively sophisticated. Although stakeholder
options are wider than originally expected, some providers now including
with-profits and external funds, higher-charging specialist funds
and the possibility of self-investment may differentiate GPPs.
The range of allowable benefits for stakeholder and GPP is identical,
but term assurance and bolt-on waiver plans may be more commonly
offered with GPPs. They may also offer a more personalised service
from provider and adviser.
Summary
Neither stakeholder nor GPP is better in all situations. Where product
features and charges are similar, the choice may well depend on
which the employer is more comfortable administering. Where charges
are above the stakeholder limit, careful justification of a GPP
recommendation is essential.
Stakeholder may account for the majority of future sales, especially
if the banks are successful in marketing it to their small business
customers. The GPP market should remain healthy and IFAs are likely
to recommend both products, depending on the client company’s
individual circumstances.
Ian
Naismith is a pensions strategy manager at Scottish Widows
–
Pensions Age June 2001–
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