Is your workplace pension scheme still fit for purpose?
Since the introduction of automatic enrolment legislation in October 2012,1.6 million employers have automatically enrolled over 10.2 million workers in qualifying workplace pension schemes.
With a growing population and increasing life expectancy, the initiative was to ease the reliance on the UK State Pension by imposing various obligations on employers. This included assessing the workforce into various categories of workers – all with different requirements regarding what has to be provided, or in some cases offered, the contents of statutory communications requiring issuing within set timescales. A suitable pension scheme would then require setting up, with one of several different ways of calculating contributions selected with differing minimum percentages of salary required, payments made within set timescales, followed by a declaration of compliance requiring completion with The Pensions Regulator within 5 months of the original staging date so to avoid the automatic issuing of an escalating penalty notice.
Inevitably, many businesses will have opted for a low-cost and simple solution to simply satisfy the requirements.
Now, up to nine years on, many employers have evolved and are not the same business they were when they initially set up the scheme. Many will have grown, or wish to grow – perhaps in terms of workforce size, or the calibre of their staff and recognise that simply having a workplace pension scheme is no longer the draw it once may have been before the legislation in assisting with seeking and retaining staff. Other employers may even feel a sense of responsibility in ensuring dedicated workers can enjoy a certain standard of retirement when the time comes.
So, what makes a good workplace pension scheme and how as an employer can you give more?
The most obvious answer could be to increase the employer contribution percentage. A variation of this however could be adopting a matching contribution structure so to encourage members to save more towards their own retirement too. Some companies already using these have however benefited from setting a maximum cap so to ensure costs do not run away.
With members of most workplace pension schemes benefiting from tax relief via the relief at source method – where the pension scheme itself claims back basic rate tax relief from HMRC and applies to employee contributions, with higher or additional rate relief then being reclaimed through the members own self-assessment tax return. An alternative consideration could be the introduction of salary exchange (formerly salary sacrifice), where pension contributions are deducted from gross pay prior to national insurance. This can result in the member receiving tax relief immediately at their highest marginal rate, and in some instances even a higher net pay figure. The employer also benefits from a national insurance saving. This saving can be retained by the employer, or passed back either partially or in its entirety to the member via a larger employer pension contribution. Although this can be a very tax-efficient method, financial advice should be taken before adopting, as it will likely involve a variation to the contract of employment and a change in salary which can affect the employee’s capacity to borrow and some state benefit entitlements.
Although all auto-enrolment qualifying pension schemes must comply with certain criteria to be qualifying, different providers do differ – in terms of available investment funds, annual management charges, and importantly for employers, ease of use of the platform used to administer the pension scheme and regular monthly submissions. Some of the larger pension providers also provide additional features to the members themselves, such as access to pension projection calculators, financial educational videos/podcasts, and in one example a member site where all other policies or investments held with them, from motor insurance to ISA’s are all accessible from one place. Rightfully, or wrongfully, there can also be a perception that the larger ‘household names’ are ‘better’ providers.
If considering reviewing the workplace pension scheme you provide to your workforce you will certainly wish to ensure any changes you make are valued by those receiving it. This can often come down to making sure any changes and their impact are understood, meaning how any changes are rolled out and communicated is key.
To discuss with a financial planner whether your workplace pension scheme is still fit for purpose, or how your pension scheme can be used for staff engagement, please complete our online enquiry form.
The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice.
You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.
Kreston Reeves Financial Planning Limited, Independent Financial Advisers. Authorised and regulated by the Financial Conduct Authority.
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