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Q: Stakeholder Pensions (UK) ( Answered 5 out of 5 stars,   1 Comment )
Question  
Subject: Stakeholder Pensions (UK)
Category: Business and Money > Employment
Asked by: probonopublico-ga
List Price: $20.00
Posted: 21 Jun 2003 04:42 PDT
Expires: 21 Jul 2003 04:42 PDT
Question ID: 219996
A couple of years ago, we set up such a scheme for our employees
because (so I understood) it was mandatory for companies with more
than 5 (?) employees.

The Insurance Company concerned sent us stacks of stuff but nobody
(including me) took a blind bit of interest in the scheme.

1st Question: Are they mandatory or not?

2nd Question:

We are now in the final stages of making an acquisition (using a newly
incorporated Limited Company) and it occurred to me 'Do I have to go
through all that crap again?'

The acquisition target is presently run by a man and wife as a family
business and, not having seen any mention of Stakeholder Pension, I
suspect that they have never bothered, even though they have 14
employees.

3rd Question:

But, supposing that they do have such a scheme, what we do next?

4th Question:
Are such schemes worthwhile, or not?


Oh, yes, I've already made some pathetic attempts to G****e in on
these issues but I am sure that there is a talented researcher out
there who can pull it all together for me and provide all the truly
vital links.

Bryan
Answer  
Subject: Re: Stakeholder Pensions (UK)
Answered By: tehuti-ga on 21 Jun 2003 08:27 PDT
Rated:5 out of 5 stars
 
Hello Bryan,

I must admit I don’t envy you!

The web site of OPRA, the Occupational Pensions Regulatory Authority,
has lots of information about employers’ duties with respect to
stakeholder pensions.  Much of the information below cites information
from this site.

I’m afraid that there is a legal obligation on you if you meet the
specified criteria for employers and if at least one of your employees
is eligible. The requirement for employers to provide access to a
stakeholder scheme is included in the Welfare Reform and Pensions Act
1999. The detailed regulations were laid in May 2000 and came into
force in October 2001.

The issue seems to be that if you have 5 or more employees, you MUST,
with one exception, provide the opportunity of a stakeholder pension
scheme for all those who are eligible. However, there is no compulsion
on your employees to join such a scheme if they are not interested. 
Also, there is no obligation for you to make any contributions into
the stakeholder scheme.

Employee eligibility depends on the salaries you are paying: “Unless
you are exempt, you must arrange access to a stakeholder pension
scheme for those of your employees who earn more than the National
Insurance lower earnings limit. Your employees can then decide whether
a stakeholder pension is right for them.”
And on employment status: “may include company directors but does not
include self-employed people.”
And will exclude people not counted as normally resident in the UK. 
http://www.thepensionservice.gov.uk/pdf/PME1_nov2002.pdf (Stakeholder
Pensions: A Guide for Employers, on the Pensions Service web site)

You have a period of 3 months grace in which to designate a scheme.
Therefore, you would have 3 months from the time of acquiring your new
company to go through the consultation and selection process (see
below for more on that part).

If your workforce fluctuates between less and more than 5, you become
liable each time the number reaches 5:
“You have to designate a scheme within three months of becoming liable
under the regulations to do so. Once you have designated a scheme you
must allow anyone who commenced payroll deductions into that scheme to
continue. Administratively you may find it easier to continue to
designate a scheme for all employees even at times when you are not
required to.”
http://stakeholder.opra.gov.uk/faqs/faq-21.shtml 
	
“The basic requirement is to choose a registered stakeholder scheme,
to put your employees in touch with the stakeholder scheme by
providing them with information about that scheme, to allow payroll
deductions for employees who contribute to that scheme and to maintain
records of employee deductions and payments to the provider of the
scheme.”
“Opra is unlikely to punish employers who have inadvertently failed in
their duty to provide employer access (by designating a stakeholder
scheme for their employees) as long as they put the matter right
promptly. We are more likely to punish people who deliberately avoid
their responsibility or who do not rectify the problem. Fines can be
up to 50,000.”
http://stakeholder.opra.gov.uk/faqs/faq-14.shtml 

“Employers are not being required to run stakeholder pension schemes.
You are not being forced to make employer contributions to a pension
and you are not responsible if your employees decide that they don’t
want to sign up with a stakeholder scheme.
 When an employer becomes liable they have 3 months in which to
designate a scheme. For example this will apply when an employer takes
on a fifth employee.”
http://stakeholder.opra.gov.uk/faqs/faq-16.shtml   

“Employees are not compelled to join stakeholder schemes”
http://stakeholder.opra.gov.uk/faqs/faq-02.shtml 
Therefore, if all your eligible employees say they are not interested,
you do not have to do anything more.  However, you will have to
provide the same information and the same opportunity to ask for
payroll deductions to every new employee you hire, as long as your
total number of employees remains at least 5.
You will have to show that you tried: “As a minimum, you will need to
be able to demonstrate that you have designated a stakeholder scheme
and passed on details of the scheme to your employees.”
http://stakeholder.opra.gov.uk/faqs/faq-17.shtml#01 

The exception to this obligation is if you contribute towards your
employees’ pensions through a group pension scheme, by making payments
to their individual personal schemes or through an occupational
pension scheme:
“Employers who arrange group personal pensions, which does not have
exit charges, and who make a contribution of at least 3 per cent of
the member's basic earnings will initially be exempt, subject to
review after three years. Employees must be offered membership of the
scheme within three months of starting work. The provider of the group
personal pension should be able to tell you whether it qualifies for
exemption.
The same provision applies to employers who make contributions to
individual personal pensions chosen by their employees.”
http://stakeholder.opra.gov.uk/faqs/faq-09.shtml 
“An employer is exempt if the occupational scheme allows all employees
to join within one year of commencing work (which allows for a limited
waiting period).
If some employees cannot join the occupational scheme the employer
will have to give them access to a stakeholder scheme unless their
earnings are below the National Insurance lower earnings limit.”
http://stakeholder.opra.gov.uk/faqs/faq-10.shtml 

Initially, your obligation is to consult with your employees and any
organizations representing their interests (unions, etc).
“You need only consult your ‘relevant employees’ - that is those who
would be eligible to join the scheme.”
http://stakeholder.opra.gov.uk/faqs/faq-05.shtml 
Consultation can be as simple as setting up a single meeting with your
employees, and with their union reps if applicable. Alternatively, you
can send them a letter and invite them to reply with their opinions,
if they so wish.
http://www.thepensionservice.gov.uk/pdf/PME1_nov2002.pdf (Stakeholder
Pensions: A Guide for Employers, on the Pensions Service web site)

After finishing the consultations, you choose a scheme from those
registered with OPRA, and provide your employees with the necessary
information about it.  The choice is scheme is entirely up to you,
despite all the consultations through which you have previously gone! 
Therefore, you can, for example, base your choice on criteria of
self-interest, for example, how much support you are offered by the
provider with respect to ways of making payments etc.

“The only criterion is that you must ensure the scheme is registered
with the Occupational Pensions Regulatory Authority (Opra) and
available to all your employees.”
http://stakeholder.opra.gov.uk/faqs/faq-02.shtml
The OPRA Register of stakeholder pension schemes can be accessed here:
http://stakeholder.opra.gov.uk/register/index.shtml
“You are not required to make any further judgement about the scheme.
Employers will not be liable if the stakeholder scheme they designate
does not perform as well as other stakeholder schemes.”
http://stakeholder.opra.gov.uk/faqs/faq-05.shtml#01 

You are also obliged to allow a representative of your chosen provider
to come and see your employees: “If representatives of the pension
scheme ask to visit your workplace to talk to your employees about the
benefits of joining the scheme, you should allow them to call. You can
set conditions about when the visit takes place and how it is carried
out, but the law states that you must allow the designated scheme
provider ‘reasonable access’ to your workforce.”
http://www.thepensionservice.gov.uk/pdf/PME1_nov2002.pdf (Stakeholder
Pensions: A Guide for Employers, on the Pensions Service web site)

If any of your employees are interested in joining the scheme you have
chosen, they can make their own arrangements to pay into the scheme. 
However, if any of them want you to make deductions from their pay and
send in payments on their behalf, you are obliged to do this for those
individuals.

“From October 2001, employers have to:
- make deductions from an employee’s salary for his or her pension
contributions to the designated scheme if he or she wants it.
Employers are not required to comply from the first day of employment
although they will be free to do so if they wish. The requirement
becomes mandatory after an employee has been working for an employer
for 3 months.”
http://stakeholder.opra.gov.uk/faqs/faq-02.shtml 

“Employees who are unhappy with the choice of scheme can choose their
own stakeholder scheme, but employers are not be obliged, at least
initially, to make payroll deductions in respect of other schemes.”
http://stakeholder.opra.gov.uk/faqs/faq-04.shtml 

If one or more employees has requested payroll deductions,

“you should deduct and record the amount requested from that
employee’s pay and pass that contribution on to the designated scheme
within a specified timescale.
The requirements to transfer funds for stakeholder pensions will
differ little from current transaction clearing, through the
commercial banks and BACS.”
Once this has been set up, it should proceed relatively smoothly,
because you are not obliged to make constant changes to the amounts
that are being paid:
“Regulations mean that you are only obliged to accept requests from
your employees to change contributions at six monthly intervals. Of
course you can allow changes more frequently if you wish.
Employers must give employees information about the operation of the
payroll deduction facility. You must inform your employees in writing
if you are not changing the deduction following an invalid request,
explaining why not and when a valid request can be made, and informing
them that they can cancel at any time.”
http://stakeholder.opra.gov.uk/faqs/faq-08.shtml 

OPRA provide a standard form you can use when dealing with requests to
change contributions:
http://stakeholder.opra.gov.uk/faqs/faq-20.shtml

The deductions are made after taking off tax and national insurance. 
http://stakeholder.opra.gov.uk/faqs/faq-15.shtml 

OPRA has the right to penalise you for making late contributions, and
it is your responsibility to ensure that they get to right place at
the right time:
“As the employer you must send the provider a record of the amount you
are sending them for pension contributions and the date they are due
to be paid. If the provider fails to collect the contributions, for
example by direct debit, you must contact the provider and find out
how they want the money paid. You must not hold on to money deducted
from employees' pay for pension contributions longer than the 19th of
the month that follows the month during which they were deducted.”
http://stakeholder.opra.gov.uk/faqs/faq-22.shtml 

However, even OPRA says that you can point out to your employees the
advantages of NOT having payroll deduction:
“It enables them to change the amount they pay more frequently than
every six months
They are in control and can see on their bank statement when the
payment is made
No-one else need know how much they are paying 
They could choose their own stakeholder not just accept the one you
designate”
http://stakeholder.opra.gov.uk/faqs/faq-19.shtml 

If you need assistance on providing a stakeholder pension, the Inland
Revenue invites you to call their Employer’s Helpline on 0845 7 143
143, Monday to Friday from 8am to 8pm, and Saturday and Sunday from
8am to 5pm.

As for whether such schemes are worthwhile…

Well, the government is worried about the fact that the UK state
pension is increasingly inadequate to support people through old age.

But….

The article “Are pensions tax efficient?” points out the following:
Pension contribution can be claimed off tax, but income from pension
funds is taxed.
An annuity MUST be purchased with at least two-thirds of the pension
fund when it is cashed in.
“So an ISA may be the better choice for you. At present with an ISA
you and your wife can each invest up to 7,000 a year. The income and
capital gain from the ISA investment will not be taxed. It is more
flexible than a pension. You can alter how you want to invest the
money each year, i.e. for capital growth or for income, or in bonds or
property. You can get at the money when ever you want and not wait
till you are 65 (which can be dangerous since you might blow it all on
riotous living). You don't have to buy an annuity and so can leave the
accumulated capital money to your heirs.”
http://www.soton.ac.uk/~gk/money/pension3.htm (Southampton University)

And the Pensionsorter web site has this to say:

First they mention the various pension-related scandals, with the
Equitable Life as the recent and worst example. (links provided to
reports on the scandals)

Then the problem that most of us are living longer and staying active
longer
“This is an issue because when you save for a pension it goes into a
pot (your pension fund). When you retire you use this to buy an
annuity - ie the regular payment you get - aka your pension.
… In the good old days you would have known your place, smoked your
fags and keeled over politely a couple of years after you retired. The
pension companies would make a tidy profit on you.
But now you're probably going to be windsurfing in Hawaii on your 80th
birthday. You could easily live to be over 100. That's good for you
but it's causing panic in the pensions world” (and the panic is
turning into smaller rates of return on annuities.”

And pension providers are not perhaps as nice as they try to make
themselves out to be:
“Basically, contrary to the friendly image they spend millions on
selling us, the pensions companies (aka the Insurance Industry) are
cold-blooded businesses.  They are also extremely powerful. For
example: the Labour government of 1945 used its huge parliamentary
majority to create the NHS, nationalise the railways and the mining
industry - all in the face of extremely powerful vested interests. But
the one business they decided to leave well alone was the insurance
companies. …
Bear in mind that these guys effectively own the country. They own
your local high street (as part of their investment portfolios). They
own your house (your mortgage). They're extremely wealthy and let's
face it money is power.”

And while basically Pensionsorter think stakeholder pensions could be
a good thing, they do say:
“However a problem is that Tony Blair seems to be completely in thrall
to big business, be it the dubious Private Finance Initiative, or
declaring Genetically Modified food to be safe - before anyone
actually knows it is. And you can't get much bigger business than the
insurance companies.  So whether he has the political courage to upset
the sharks in suits and say it's time to stop making a profit out of
people's need to save for old age remains to be seen.”
From Pensions in Crisis
http://www.pensionsorter.co.uk/pensions_in_crisis.html 

In the end, I guess it is an individual decision how much to invest in
a pension fund if at all.  A lot of my acquaintances are put off by
the restrictions placed on annuities, and also afraid of being forced
to cash in a pension fund at a time when annuity rates are especially
poor.  Therefore, they have lowered the amount they are placing in
pension funds, and diverting the rest to other forms of investment. 
However, this requires a certain degree of financial sophistication,
while the stakeholder pension was supposedly set up for people who do
not think about finances, and do not know how or do not wish to invest
or save their money.

Ironically, though, the people who are getting most enthusiastic about
stakeholder pensions are advisers to high earners, who see them as an
efficient way of saving tax for those who pay higher rates.  As in
many other areas of life, it’s those who have the money, who get more
money….

The rest of us become Google researchers etc  ;)

Clarification of Answer by tehuti-ga on 21 Jun 2003 08:30 PDT
Oops, forgot search strategy:

1. "stakeholder pensions"

2. "is it better to invest" pension 

3. pension tax advantage annuity problem

Clarification of Answer by tehuti-ga on 21 Jun 2003 08:41 PDT
Ok, I also realise I didn't answer your question about what to do if
the company you are acquiring already has a scheme.

You are able to change a designated scheme to another one, however:

"If you decide to cancel your designation of a stakeholder scheme, you
must designate a new scheme before you leave the first one. If you do
decide to change your designated stakeholder pension scheme, you will
have to continue
making payroll deductions to the first stakeholder pension scheme, if
any of your employees are members of that scheme and they want you to
continue making payroll deductions."
http://www.thepensionservice.gov.uk/pdf/PME1_nov2002.pdf (Stakeholder
Pensions: A Guide for Employers, on the Pensions Service web site)

Clarification of Answer by tehuti-ga on 21 Jun 2003 11:37 PDT
Leli has just pointed me to a web site which states that an existing
designated pension is no longer valid when the business is sold -
point which was not covered on the two government sites I evaluated!

"On a business acquisition if the Seller has designated a stakeholder
pension scheme in relation to some or all of the employees concerned
the employees will cease to be covered by the designation immediately
following the acquisition.  If these employees are not eligible to
join the Buyer’s occupational pension scheme (if any) or are not
covered by an existing designation by the Buyer steps will need to be
taken to comply with the stakeholder employer access requirements. 
The Buyer will need to designate a stakeholder pension scheme in
relation to these employees within 3 months of the acquisition or
start contributing 3% of basic pay to a qualifying personal pension
scheme or set up an occupational pension scheme."
http://www.apl.org.uk/FullText/LG003934150.htm  (Association of
Pension Lawyers)

Therefore, you would be able to suggest the scheme you are currently
using for your new employees as well, provided that all of them are
eligible for it.
probonopublico-ga rated this answer:5 out of 5 stars and gave an additional tip of: $10.00
Hi, Tehuti

Perfect!

Just what I wanted.

The most comforting thing is to know that I've got three months' grace.

THIS is what makes GA great!

Many thanks.

Bryan

Comments  
Subject: Re: Stakeholder Pensions (UK)
From: tehuti-ga on 22 Jun 2003 14:11 PDT
 
Thank you very much, Bryan, for your appreciative comments and also for the tip.

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