Requirements to provide pensions to employees

There are two main types of pension in the UK: money-purchase and final salary schemes.  

Money-purchase schemes include occupational money purchase, personal pensions, stakeholder pensions and executive pension plans. In a money-purchase scheme, the final pension amount will depend on factors like how much cash was paid in; the investment performance of the pension fund; the age at which the fund is used to purchase an annuity; and the level of annuity rates at the time.

Final-salary pension schemes (also known as salary-related or defined benefit schemes) are usually based on an individual's final earnings at or close to the time they leave the company – usually through retirement - and how long they were in the scheme.  

As an employer you are not obliged to set up a pension scheme for your employees but, apart from a few exceptions, if your company has five or more employers, you are required by law to provide your employees with access to a stakeholder pension scheme. If you do not want to contribute to your employees’ pension this is probably your best option as the scheme is administered by an outside provider.

Employers’ duties under a trust

Most pension schemes – apart from group personal pension or stakeholder arrangements – operate by way of a trust whereby the trust receives contributions from the employer and employees and pays out members' benefits. The trust's objectives will be outlined in the trust deed, but day to day decisions are taken by the trustees. An employer can be a trustee and at least a third of trustees must be nominated by the scheme members. There are various legal obligations which arise from the relationship between the employee, the trust and the employer. Employers’ duties include:

• Honouring any pensions-related duties outlined in an employee’s employment contract, such as paying a pension contribution.
• Ensuring that contributions are paid on time and that the money is handled properly. Employee contributions deducted from pay must reach the pension scheme within 19 days of the end of the month in which they were deducted. Your contribution, if any, must be paid by the date shown on the payment schedule.
• As a trustee, acting in the interests of the pension scheme members, Your decisions with regard to the pension scheme must not be made with business considerations in mind.
• Notifying the Pensions Regulator if you believe there are any problems or wrongdoing related to the pension scheme.
• Making sure the assets of the pension fund are kept completely separate from those of the business.
• Informing and consulting employees on developments that affect the pension fund.
• Assisting the trustees in the performance of their duties - employee trustees must be allowed paid time off to undertake their duties and any necessary training.
• Ensuring that trustees have sufficient information about your company to be able to provide up-to-date, accurate details to the regulator in their scheme return
• All registered pension schemes must pay a levy to fund the Pensions Regulator.
• Most schemes need to meet a statutory funding objective, which assesses the required levels of funding for a scheme. You and the trustees must ensure your scheme meets these funding requirements. You need to agree a statement of funding principles; and a schedule of contributions consistent with these principles.

Side agreements

Although through the scheme’s deed and rules, a formal relationship is formulated between the company and the trustees, it is advisable to have written agreement between the company and trustees which outline the duties of all parties, including service standards, the timetable for the provision of information and for paying contributions. 

Tax relief

Employees may contribute up to 100% of their earnings (or up to £3,600 a year if your annual salary is less than this) and get tax relief, although, there is a limit on the amount of tax relief that may be given on contributions and other increases in pension rights each year. This annual allowance has been set at £235,000 for 2008/09, £245,000 for 2009/10 and £255,000 for 2010/11 (the level it will stay at until 2015/16). Employer contributions also usually attract tax relief as they can be set off as business expenses. 

Forthcoming new employer duties

From 2012 employers will have to:

• Enrol employees automatically into a qualifying workplace pension scheme.
• Register with the regulator how they have fulfilled the enrolment duty.
• Allow a genuine opt-out procedure for jobholders and process any resulting refund of contributions correctly.
• Make a minimum contribution of 3% of pay to an employee's pension scheme.