Section on Employer pension duties: auto-enrolment and NEST updated to reflect the repeal of the stakeholder designation requirements with effect from 1 October 2012.
Employers can provide:
Defined benefit (DB) schemes (www.practicallaw.com/0-107-7545) (also known as final salary schemes). These provide a guaranteed pension, usually calculated as a fraction of the employee's salary immediately before retirement or the employee's career average (www.practicallaw.com/8-235-6985) earnings. The employer and (usually) the employee pay contributions which are invested on behalf of the scheme. The employee's contributions are fixed and the employer pays the balance needed to provide the guaranteed benefits.
Defined contribution (DC) schemes (www.practicallaw.com/6-107-6072) (also known as money purchase schemes). The employer and employee pay fixed contributions. The employee receives a pension or annuity (www.practicallaw.com/1-107-6404) at retirement, the size of which depends on the contributions paid and the investment return on those contributions over the member's working life.
Hybrid schemes (www.practicallaw.com/7-206-1984). These contain elements of both DB and DC benefits.
Employers can provide benefits through either:
To encourage individual saving, the government introduced new employer pension duties from 1 October 2012. These will eventually require all employers in the United Kingdom to automatically enrol eligible workers in a pension scheme. Employers will be able to use their own qualifying occupational or personal pension scheme, provided it meets certain statutory requirements. Alternatively, they can enrol eligible jobholders in NEST (www.practicallaw.com/7-501-1896), a central scheme set up by the government.
A jobholder will be free to opt out of either type of scheme once he has been automatically enrolled. But while he remains an active member, his employer will be required to pay a minimum level of contributions (although this requirement will be phased in over several years).
Before the introduction of auto-enrolment, there was no requirement in UK law for employers to contribute to a pension scheme for employees. However, between October 2001 and October 2012, most employers were required to ensure that employees had access to a stakeholder pension and arrange for employees' contributions to be deducted and paid to the scheme. Stakeholder schemes were normally contract-based arrangements and had to satisfy a number of minimum standards.
The requirement to designate and facilitate access to a stakeholder pension was repealed on 1 October 2012 in the light of the introduction of employer auto-enrolment duties (see Legal update, Stakeholder pension designation requirements repealed on 1 October 2012 (www.practicallaw.com/1-521-6283)). However, an employer can continue to operate an existing stakeholder scheme for the time being.
A DB scheme is generally regarded as providing better and more secure benefits for employees, provided the employer funds the scheme properly. But there are greater costs and risks associated with a DB scheme:
The members' booklet will usually say whether the scheme is DB or DC. You should also be able to tell from the contribution rule and the benefit structure in the scheme's trust deed and rules if your scheme is DB or DC. The scheme's actuarial valuation (www.practicallaw.com/3-206-2061) and trustee report and accounts will also indicate this. Insurance companies providing personal pension schemes produce key features documents which should indicate whether the scheme is a GPP or a stakeholder pension scheme (although a stakeholder scheme can be an occupational pension scheme depending on whether it is set up under trust or contract and whether the employer contributes to it).
Personal pension plans are often overlooked as they are set up by the employee, with the employer agreeing to contribute. You should check the employee's contract of employment about this or consult payroll records.
The employer's staff handbook should also summarise the pension schemes on offer to employees.