A Quick Guide to Company Pension Schemes

Company pensions in the UK date back to the 1920s, when enlightened, paternalistic employers first set up schemes to help support long-serving employees once they had stopped working.

For many years and particularly at large, well-financed firms, company pensions have flourished and provided the means for a comfortable retirement for several generations of fortunate retirees.

However in recent years, stock market volatility and the government taxation of dividends has resulted in many companies finding final salary schemes too costly to maintain. The resultant closure of many final salary schemes is a national disgrace, and our elected leaders (who have their own generous scheme funded by the tax payer) should collectively hang their heads in shame.

As people are no enjoying longer life expectancy and have higher expectations of their retirement, a good company pension is a very valuable part of an employee benefits package. Employers know this, of course, and many still see company pensions as a useful tool to recruit and retain good employees.

Types of Group Scheme

Company schemes can be split into two main categories, Defined Benefit and Defined Contribution.

A Group Defined Benefit scheme – as its name implies, defines how much pension benefit you will receive for each year of membership at the start of the contract. The most common form of this type of pension contract is known as a Final Salary Scheme.

Other forms of defined benefit scheme include Career Average and Cash Balance Plans, though these are less commonly found than Final Salary.

A Group Defined Contribution scheme – defines the levels of contributions you or your employer are prepared to make to the scheme but does not guarantee the level of pension you will receive as this is dependent upon the performance of the pension funds into which you will invest.

Group Stakeholder and Group Personal Pensions are examples of Defined Contribution Schemes.

SSAS’s

Many company directors use Small self-administered schemes (SSASs) which are set up as very small occupational pension schemes, typically for small owner/managed businesses, or family businesses.

They can be useful as the pension fund can be used to purchase commercial property which is used by the business. This is tax-efficient and SSASs can also make loans to companies. SSAS’s are an area where specialised financial advice is necessary. We are happy to assist Company Directors who think that a SSAS might be suitable for them.

* Please note that some aspects of occupational schemes and SSAS's are regulated by the pensions regulator rather than the FSA.

Group Personal Pensions, Stakeholder Pension And Sipps

These three types of pension schemes are not technically group schemes but are often used by employers to provide pension savings for their employees and directors. I have included brief information about them on this page but more detailed information is to be found about these schemes in the menu bar on you left.

Group Personal Pensions (GPP)

Generally speaking, GPP schemes are a collection of individual personal pension policies set up by an employer and are seen as one of the simplest options for an employer looking to set up a group pension.

Personal pensions were introduced in 1988 in a bid to stimulate greater pension saving by individuals not eligible to join a company-sponsored scheme. They are set up on an individual basis and can be a relatively expensive type of pension.

GPP’s are usually provided by large insurance companies that are active in the pensions market. These companies frequently distribute products through financial advisers who are remunerated on a commission basis.

This means that the advisers can earn a large sum of money for recommending a particular product, which has led to accusations of bias over product selection.

The alternative to paying an adviser a commission from the provider is for an employer to pay an adviser a fixed fee for their work, but this incurs a cost on the employer. Personal pensions have improved over the years, from the inflexible and expensive plans first offered in the late 80s and 1990s.

Now, members can expect to pay around 1-2 per cent in annual management charges (typical rates) and should have access to a wide choice of investment funds. An employer setting up a GPP scheme for its employees may also be able to negotiate more favourable terms, if their business is attractive to the scheme provider.

Otherwise, in all other respects, if you have a group personal pension it is really just a personal pension contract between you and the insurer, with your employer making a contribution, which is typically likely to be  3-6 per cent of your salary.

Some employers will match the contributions made by the employee up to a certain level.

Group Stakeholder Pensions

Stakeholder pensions were launched by the government in April 2001 to give individuals and employees who are not eligible to join good company pension scheme, a low-cost pension option.

Stakeholder pension charges are capped at 1.5 per cent for the first 10 years and 1 per cent thereafter and members are not penalised for transferring between providers, for changing contribution levels or for stopping or suspending contributions.

Stakeholder pensions are usually sold by insurance companies and other pension providers and can be set up on an individual or group basis, with the latter being more common, as it is more cost effective.

Under regulations introduced with stakeholder pensions, employers with more than five relevant staff are required to offer access to a stakeholder pension, unless they have an existing scheme that meets certain standards.

But employers are under no obligation to make contributions on behalf of their employees. Hence, the relative failure of stakeholder pensions and plans for a new National Pension Savings Scheme (NPSS) as proposed by Lord Turner's Pensions Commission, to encourage mass participation in pension savings.

The NPSS which has recently been re-named NEST is planned to start in 2012 with a system of personal accounts for employees.

The details of this scheme are still being decided but the aim is for personal accounts to have a limited choice of funds and low annual charges of around 0.3-0.5 per cent a year.

Additional Voluntary Contributions

Since April 2006, it has been possible to contribute up to 100 per cent of earnings in total into any pension/s, up to a maximum of £255,000 for the tax year 2010-11.

Prior to April 2006, there were strict limits on how much could be saved into a pension and these rules varied according to the type of pension.

In order to permit employees to make up the difference between their normal pension contributions under scheme rules and their permitted maximum, additional voluntary contribution (AVC) plans were used and are still in existence.

An AVC plan allows a member to top-up their pension contributions into a scheme that is linked to their main company scheme. Since 1988 all employers with an occupational scheme have been required to offer employees an AVC scheme.

Group Self-Invested Personal Pensions (SIPPs)

Sipps are a new development in the self-invested personal pension market.

Sipps are a type of personal pension that offer a very wide choice of investments to members. In the past they have been used mainly by the wealthy for pension saving, but under the new rules allowing higher contributions group Sipps are being set up for highly paid employees or for those in financial services companies where the employees know about investment.

Charges on a self-invested personal pension can be higher than on other pensions, though this has been partially mitigated in recent years through the addition of online SIPPs, which reduce the charges involved.

Different providers of SIPPs will apply different rules and charges. There are also specialised companies who provide SIPPs focusing specifically on a certain type of investment or market, so it can be important knowing where and how you plan to invest your pension.  If you are in any doubt as to whether you think a SIPP might be a suitable investment for you, or you wish to receive a Free No Obligation Report on your SIPP please contact us.