The UK law on pensions is changing in an effort to get people to take planning for their own future more seriously. Auto-enrolment in workplace pensions is set to become compulsory, as is the amount employers have to pay into them each month.
Very large employers have been offering workplace pensions to their staff since October 2012. However, all employers, regardless of company size or headcount, will need to offer their own pension arrangements at some point between now and the 1st April 2017. You can find the specific date for your business using the form here.
Where to start?
So how do you go about implementing your first company pension? Here are a few things to consider that should make the process smoother.
What are we expected to offer?
There are two components your workplace pension scheme must have in order to be compliant: the pension itself and the ability to auto-enroll staff who meet specific criteria.
You have a choice of two main types of workplace pension to offer your staff. A ‘money purchase’ plan (also known as a ‘defined contribution pension scheme’), which pays out a pension according to the amount paid in and the value of the fund at retirement. Alternatively, you may choose a ‘defined benefit pension scheme’ (also known as a final salary pension), which promises to pay staff an on-going salary after retirement, regardless of contributions.
Most businesses choose to offer money purchase plans to their employees, simply because they can be easily outsourced to professional pension planners and the responsibility for the resulting pay-off lies mainly with the employee. Final salary schemes are much rarer, because it is difficult to quantify the ‘pot’ required to pay an on-going wage to retirees.
There are other workplace pension scheme variants available, but any you consider should be able to demonstrate:
- Value for money – will your staff get a good deal?
- Competent management, with a proven track record in pensions.
- Asset protection schemes.
- Flexible contribution levels.
- Accurate record keeping and sharing to keep your payroll and HR teams up-to-date.
You must also consider the auto-enrolment obligations of any potential pension scheme. Any staff member who meets each of the following criteria needs to be automatically enrolled:
- Staff who are aged between 22 and the State Pension age.
- Staff who earn £9,440 per year or more.
- Staff who work at any of your locations in the UK.
By understanding the very basic requirements, you can begin the process of choosing the right pension solution for your workforce.
Talk to your staff
Informing staff of the upcoming workplace pensions is essential, not least because auto-enrolment will see their pay packet reduced by 4% of their earnings in 2018. Helping staff understand that the scheme is designed to improve their quality of living after retirement is essential if they are to engage fully. You are legally obliged to write to staff informing them of the new scheme and the fact that they will be auto-enrolled when it goes live.
You should also explain the different types of pension scheme available and try and ascertain which is more popular with your team. This may help clarify which scheme is the best fit for your company and your employees.
Talk to your bank
Your bank is a good place to start talking specifics about the different pension schemes available. Even if you choose to offer a scheme from a different provider, your bank will be able to introduce you to the common pitfalls or benefits of each and give you an idea of the cost to your business.
Talk to pension specialists
You may find that your bank tries to push you towards schemes that are operated by their investment arm. In the event that you feel a better deal is available elsewhere, or you just want to investigate other options, you should also speak to a pension specialist.
To find a truly unbiased financial adviser, The Pension Regulator recommends Unbiased.co.uk. The finance professionals listed all offer impartial advice that will help you navigate the many options available for your company pension scheme.
Talk to your HR and finance teams
Your HR and finance teams will be responsible for the day-to-day administration of the workplace pension, so you need to engage them in the process of choosing and implementing the scheme. You will also need to train relevant staff and ensure that your existing systems are capable of supporting pension contribution payments from both employees and your company.
Your finance team will also need to take some responsibility for the new scheme, not least because employers are expected to make a contribution of up to 3% of each employee’s salary into the scheme. The more employees who remain enrolled in the scheme, the higher your employment costs will become.
In the event that your current payroll system cannot perform pension-related functions, you will need to arrange for an upgrade or source a replacement. This places additional responsibility on payroll staff, who will need to define what a new payroll system needs to do, plan for the deployment, and retrain on the new platform.
To make the new workplace pension scheme work properly, you will need to maintain accurate records of salaries to ensure that contributions adjust in line with salary changes (contributions are paid as a percentage of salary). You will also need to able to record new members of the scheme, changes to voluntary contributions, and details of anyone who has actually retired and begun drawing their pension.
A new payroll system also offers the possibility of creating new efficiencies for internal business processes by increasing automation of common tasks. These benefits provide an added incentive to staff to help with the smooth rollout of the new workforce pension.
Her Majesty’s Customs and Revenue offers some great advice to help you understand the new workplace pensions, much of which can be found in this guide. You may also find the employers’ section of The Pensions Regulator website helpful in understanding some of the other workplace pensions requirements.
Once a suitable pension scheme has been chosen and implemented, you will also need to consider the other administrative tasks associated with keeping it running. You will need to ensure that accurate records are kept regarding membership and payments to keep running costs low and prevent future disputes from unhappy staff.
You will also need to reconcile your employee data, held by HR, with the pension membership data. This means periodically synchronising details of payment deductions, when money is transferred from payroll to pension scheme, and information relating to how the money is handled by the pension fund manager. Again, for best results this information should be stored centrally in your own HR and payroll systems.
Your business still has a few years to implement a compliant workplace pension scheme, but the window of opportunity is narrowing. To ensure that you get the best scheme for your company and employees’ needs, you need to begin planning implementation sooner rather than later.
Image credit – piggy bank by Cut Them Coupons on Flickr