Employer role in running a pension scheme

Good administration is key to a well-run pension scheme.

A good administration normally involves you, the employer, at all stages of the member lifecycle:

• joining
• during active membership
• leaving service
• retirement.

Without good administration your scheme could face difficulties, leading to unforeseen costs or the need for extra time and resource to put things right.

In turn, these things may impact on the reputation of your scheme within your workforce and could put members’ benefits at risk.

Your scheme trustees are responsible for the successful administration of your scheme regardless of whether they delegate the actual work.

Take a look at the following – all key to good administration. 

Contributions

As an employer, you must:

• pay employees' contributions to the scheme within 19 days from the end of the month in which they were deducted from pay
• pay your own contributions in line with the schedule of contributions (DB scheme) or payment schedule (DC scheme).

If you fail to pay contributions as above, and the failure is likely to be materially significant, The Pensions Regulator must receive a report from the trustees or scheme managers.

If overdue contributions have still not been paid within a reasonable period after the due date, trustees or managers will need to inform scheme members. 

Scheme money

Pension scheme money must be kept in a trustee bank account separate from the employer's account.

Money can also be held, by someone other than the employer, in a suitable account on behalf of the trustees.

Employers who pay pensions to members on behalf of the trustees must place the money in a separate bank account if it is not paid to the member within 2 working days of the employer receiving it. 

Record-keeping

If your employee and scheme member records are not up to date and accurate, you run the risk of additional costs in a number of areas:

• higher costs during wind-up
• more expensive administration
• claims from disgruntled members.

These costs may ultimately be borne by members, the employer, or both.

Trustees have a legal responsibility to maintain certain records for a period of 6 years. And current government proposals will put a similar duty on employers.

You also need to keep company records up to date. You’ll need to have a robust and efficient process to supply these to the person running your scheme so that scheme records are kept up to date. These include:

• salary - where an employee’s salary changes as this affects contributions
• changes to payment amounts
• leaving
• retirement
• death.

It’s more cost effective in the long run for employers to complete a few checks to ensure that the scheme administration is in order, rather than paying for ‘a fix’ somewhere down the line. 

Reconciliation

You should periodically reconcile your employee data with member data (held by the trustee). This reconciliation is essential to ensure the ongoing accuracy of member records. It’s another way you can prevent costly errors that can put a strain on resource.

Reconciliation should be carried out whenever money is moved by trustees. Trustees are also responsible for keeping full and accurate records of all the transactions, for example:

•  when money is deducted at payroll
•  when money passes from payroll to scheme
•  when money passes from scheme to fund manager
•  when money is switched between funds
•  when a member retires.

Up-to-date and accurate data from the employer is crucial to the effective running of a scheme. It’s therefore essential that the right information is exchanged at the right time.

You need to ensure that you have someone responsible – with the appropriate skills and training – to keep a regular and accurate flow of relevant information to the people who run your scheme.

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Good governance matters because pension scheme members entrust their savings into the hands of others.

If you run a trust-based scheme it’s important that you have a good working relationship with the trustees, as you’ll need to liaise with them in a number of areas. Some of the most important aspects of the employer/trustee relationship are described below. 

Training and support

Where scheme trustees are also your employees, you must give them sufficient paid time off during working hours to:

•  carry out their duties as trustees
•  undertake trustee training.

Trustees must be able to demonstrate that they have the knowledge and understanding required to carry out their role effectively. This may impact on the amount of support and training trustees will need. 

Member-nominated trustees

Trustees are required to ensure that arrangements are in place, and implemented, that provide for at least one-third of trustees (MNTs), or at least one-third of directors (MNDs) of the trustee company, to be member-nominated.

Employers are no longer able to 'opt out' of the requirements for MNTs and MNDs.

You must give your consent if the proportion of MNTs or MNDs is to be greater than one-third and the rules of the scheme do not provide for it. And you’ll also need to decide whether your consent is required for non-members to be selected as MNTs or MNDs. 

Monitoring charges in DC schemes

Pension schemes offered by employers should provide value for money – make sure you understand your scheme’s charges and that they are clear and cost effective.

Charges in a DC scheme can have a direct impact on how much retirement income members will receive. Charges that are applied to DC funds may include:

•  flat rate fees (eg a monthly policy fee unrelated to the fund size)
•  deductions from the fund (eg the annual management charge is usually expressed as a percentage of the fund value)
•  initial charges (eg set-up costs such as the bid-offer spread: the difference between the prices at which investments are bought and sold)
• exit charges (eg transfer fee if member transfers to a different scheme).

It’s also helpful for employers to be aware of the following:

•  It’s a good idea for charges to be taken into account, for example when investment managers are selected and when the range of fund choices is determined.
•  High charges can reduce the value of the pension fund:
  • If charges are high in the first couple of years, these may wipe out any investment return in the short term. You need to consider your retention policy (ie is it policy to have a high turnover of staff, or look to recruit and retain in the long term?) as the choices offered over fund type and the most appropriate way to pay costs at the right time and at the right value can have an impact on members’ benefits.
  • If a member’s annual statement shows the fund is smaller than the contributions paid, this can be discouraging for members. Charges need to be communicated to members in a way that they can understand.

In a well-run scheme, trustees, managers, providers and employers will consider charges at scheme setup and at regular periods to ensure they continue to provide value for money.

Trustees should ensure that members receive an explanation of charges and clear information about the impact of costs on the scheme and, where appropriate, a member’s return. These can be communicated to members (one-to-one or in literature) when they join the scheme, in their annual statement and may be mentioned throughout the year in newsletters. 

Investment choices in DC schemes

In a trust-based scheme, the scheme trustee will determine their investment strategy based on factors such as the membership profile and the scheme deed and rules.

Although DC members have the ultimate responsibility to choose from among the funds on offer, trustees have responsibility for determining the overall strategy and the funds to be offered.

The scheme deed and rules will outline any employer responsibilities and those of scheme trustees in relation to decisions about fund choices. Schemes vary, but this usually includes the appointment, review and removal of investment or fund managers and what responsibilities exist in terms of decisions on fund choices.

The design of the ‘default fund’ is very important because the majority of members are likely to use that fund to accrue their benefits.

Trustees are required to take professional advice and appoint an appropriately skilled person to invest contributions. The periodic review of both advisers and investment managers is important and is likely to reduce the potential for member dissatisfaction, as well as helping to ensure that the members’ benefits are protected.

In a well-designed scheme, the number and risk profile of funds on offer should reflect the nature of the membership – especially their level of financial capability. Other factors to consider are:

•  age
•  financial position (how dependent will they be on this particular pension, what is their future earning potential?)
•  access to financial advice.

Funding

If you run a DB scheme, you need to be aware that most schemes providing any defined benefits need to meet a statutory funding objective, which assesses the required levels of funding for a scheme.

As an employer, you’ll need to work closely with trustees to ensure that your scheme meets these funding requirements.

In particular, you’ll have to agree with the trustees:

• a statement of funding principles
• a schedule of contributions consistent with these principles.

Where the statutory funding objective is not met, you have to agree on a recovery plan setting out the steps that will be taken to put things right.

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Clear and simple communications are particularly important in DC schemes where many important decisions are made by the members themselves.

Yet many members don’t understand pensions. They may well make poor decisions, or take no action at all, relying on default options. And the consequences will be fully borne by the members themselves.

By supporting members with clear, simple and helpful information, you can help them get the best out of their scheme and better prepare for retirement. You can often achieve this without incurring increased costs.

While trustees are responsible for scheme communications to members (and must comply with the relevant disclosure regime), employers have recognised that it benefits them as well as members if there is improved member understanding.

For example:

•  greater appreciation of the benefits of the scheme
•  more members will have realistic expectations as to the level of income they will have in retirement
•  more members are prepared ahead of time for the decisions they will need to make at retirement.

Employers, trustees or managers have a shared interest in seeing that:

•  members are engaged and motivated to plan for their eventual retirement and do not become confused and discouraged
•  the scheme is effective in attracting, motivating and retaining employees
•  unnecessary time and resources are not taken up by ineffective or badly planned communications exercises
•  the requirements of legislation are complied with.

Trustees need to be aware that the disclosure regulations are legal requirements which set out the minimum information which a member must receive.

You can help trustees to offer the following support and information through the workplace:

•  online planners
•  workplace presentations
•  scheme newsletters.

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At retirement, members of DC schemes are entitled to an open market option. This enables members to shop around to find the most suitable retirement product available on the marketplace.

Many members will want to convert their fund into a retirement income (ie a pension) through buying an annuity – the most common method of taking retirement income.

An annuity is an income for life provided by an insurance company. The bigger the pension fund, the bigger the income will be. The income will also depend on factors such as life expectancy, and the interest rates prevailing at the time of retirement.

Individuals that have certain health conditions or who have made lifestyle choices such as smoking, may be able to obtain enhanced rates from some annuity providers.

The decisions made at the point of retirement are irreversible and will impact on the income received by individuals (and their dependents) for life.

You should understand that retirement decisions are complex, involving consideration of both the type of annuity and the choice of provider offering the best level of income and alternative retirement options.

You can help members – your employees – by providing them with access to financial advice, or help with the cost of seeking advice, that may help them with choosing a course of action that provides a good return from the proceeds of their pension fund.

There is no legal requirement to give access to financial advice. However, where members do get advice from an authorised adviser, they will be given an explanation of the options that apply to them. Also, if things go wrong, the member will have some protection under FSA rules.

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Sharing information with The Pensions Regulator

In order to identify and reduce the risk to members' benefits, The Pensions Regulator requires a range of information about pension schemes and employers.

You can share information with us about your work-based pension scheme easily and quickly using Exchange, our online system. You can register your scheme online, submit a scheme return and more – right through to telling us your scheme has wound up.

Find out more about Exchange.

The following are our main sources of information. 

Registration

Registering new schemes is important. It allows us to maintain up-to-date records of pension schemes and also helps us to accurately calculate the levy.

• It's the trustees' responsibility to register occupational schemes with us
• It's the trustees' or manager's responsibility to register personal pension schemes with

Once you've registered your scheme you'll be able to update your scheme details online at any time. 

The scheme return

All schemes are required to complete a regular scheme return.

This provides us with a wide range of information about schemes, including details of membership, sponsoring employers, trustees, advisers, administration, funding and investment.

As an employer, you need to ensure that trustees have sufficient information about your company to be able to provide up-to-date, accurate details to the regulator.

You must continue to provide the trustees and their advisers with any information they reasonably need to carry out their duties. 

Reporting

Where a breach of the law happens, and it is likely to be materially significant to the regulator, employers and others involved in running the scheme have a legal duty to report the breach to us. 

Notifiable events

If you run a DB scheme, you have to tell us without delay about certain 'notifiable' events.

These are specific events which are likely to have a major impact on the security of members' benefits. Employers must notify us of 'employer-related' events – for example, a decision to seek to compromise a debt owed to a scheme.

Trustees must notify us of 'scheme-related' events, such as a significant reduction in scheme membership. 

Paying levies

All registered pension schemes pay a levy to fund The Pensions Regulator.

Schemes that are eligible for the Fraud Compensation Fund must also pay a fraud compensation levy as and when necessary.

Most schemes that provide any defined benefit pension arrangements must pay a levy to a compensation scheme called the Pension Protection Fund. 

Amending or winding up your scheme

If you're considering making changes to the pension scheme, there are some factors that you must discuss with the trustees.

You'll need to:

•  take into account – in consultation with trustees – the requirements about altering pension rights already earned by members
•  consult scheme members if you're considering changes that might affect their future pension rights.

You’ll find more about this in our statement on the employer duty to consult on scheme changes (PDF).

If a pension scheme providing any defined benefits starts to wind up while an employer is still solvent, the value of members' benefits must be calculated using the cost of buying annuities to secure those benefits.

If the scheme's funds are insufficient to secure benefits on this basis, the shortfall is treated as a debt due from the employer to the trustees.

As an employer, you must ensure that you are aware of the measures introduced in the Pensions Act 2004 that prevent employers from taking action to avoid their liabilities in these circumstances. You might want to talk to your adviser for guidance on the clearance process. 

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