Providing your employees with a pension

Employers play a fundamental role in work-based pensions, as they set them up. The decisions employers make about setting up a scheme, and what kind of scheme that is, can affect all their employees.

Once a scheme is set up employers can be an important source of information to help their employees to understand their options for saving for their retirement.

There are 3 main types of work-based pension scheme - your role depends on the type of scheme you run.

When you set up a defined benefit (DB) scheme you make a promise to pay a pension based on how long an employee is a member of your scheme and how much they earn. You decide on all the details of the scheme, including the level of benefits that members will receive.

It is your responsibility to stand financially behind the promises you make. You will need to work with the scheme trustees to make sure there is enough money in the scheme to pay members’ pensions as and when they become due.

One of your important tasks is to provide the trustees with the information they need to work out how much money must be kept in the scheme to pay benefits in the future. This figure is the funding target (also known as technical provisions).

This figure will be based on how many members there are, and how much their pension is valued at, as well as many other assumptions such as how long the members are likely to live and what the return on investment may be.

How strong your company finances are and how supportive you are of the scheme (which is known as the employer covenant) will both affect the assumptions that trustees make about the amount of money that the scheme needs. In most cases the trustees will need your agreement on this, and at the very least they will need to consult you.

Although the trustees of your scheme will make most of the decisions about how your scheme is run, there are many things you can and must do to help them to do their job better.

You must pay the right contributions at the right time, and must also let the trustees know:

•  when a new employee joins your company
•  if the structure of your company changes – for example if you are planning a merger or acquisition, or
•  if the financial strength of your company changes significantly

A trustee board may be made up of member-nominated trustees and employer-nominated trustees. There may also be an independent trustee on the board. It can be very useful for both the scheme and you as an employer to have senior company representatives on the board of trustees. However, conflicts are inherently likely to arise before and after appointing such individuals as trustees and it's vital that those conflicts are appropriately identified, monitored and managed. Often employer representatives will hold positions such as financial director or roles within human resources, although it is entirely up to the employer who to nominate.

Employer representatives provide important and useful insight to the trustee board. This increases the overall level of knowledge and understanding of the business.

Important:

Many DB schemes also have a defined contribution (DC) section. This may be, for example, an arrangement whereby members can make additional voluntary contributions (AVCs) or that the DB scheme is closed to new members or to members accruing any more pension saving. In this case new employees would have to join the DC scheme and existing members would pay their future contributions into the DC scheme. Employers who have a DB scheme should also read the information about DC schemes.

If you have a trust-based defined contribution (DC) scheme, your trustees will be responsible for the day-to-day decisions about the scheme.

However, you still have an important role to play.

Your first role in a DC scheme is to make sure the right contributions are paid to the scheme, at the right time.

This may be contributions from you and the member, or just the member.

At the moment you are not required by law to pay contributions to a DC scheme, but from 2012 onwards the law will change. All employers will eventually have a duty to pay a minimum of 3% into a pension scheme for their employees. This will be the case in both DB and DC schemes.

You must also make sure that you inform trustees about any changes that may affect the scheme, including when new employees join the company, when members leave, any changes in salary etc.

Find out more about the new duty on employers.

Helping your employees make the right decisions

Members in DC face a greater risk than those saving into DB.

This is because you do not make any promises about how much money a member will get when they retire. The final amount depends on how much is paid into the scheme and also the investment return on those savings.

To make good decisions about how they save, employees need to understand properly what risks they face and how their pension savings will be worked out.

We know your employees trust you and look to you for all sorts of advice and information. And while you cannot give financial advice to employees, you can help them to get access to useful information. This will help them to make informed decisions about how and where they save for their retirement, and how much they need to save.

If you choose to provide a contract-based scheme, you hand everyday responsibility for your scheme to the scheme provider.

Your main role is to make sure that the correct contributions are paid. This may be contributions from you and the member, or just the member.

Although in a contract-based scheme you hand over the main responsibilities to a professional pension provider, there are many simple things you can do voluntarily to help your scheme run better and to offer more value to the members.

These include:

•  providing access to information about saving for retirement
•  setting up a management committee to review the scheme
•  asking an adviser to help you assess whether the scheme is still the best choice for your employees
•  helping members get access to advice about saving for their retirement.