 In
this article Mike Smith, Business Communication Manager
at Legal & General looks at the reasons behind the
change in the law and explains exactly what employers
have to do.
In the past, the state pension was a real comfort. People
could count on it to provide a basic standard of living
when they stopped work. But over the past 20 years or
so, its level as a percentage of earnings has been drastically
reduced.
The reason? Quite simply the population is getting older. In 1961 there were four working people to support every pensioner. By 2040 it is estimated there will be only two.
The Government’s solution is to stimulate more private saving for retirement. This is why they have introduced stakeholder pensions.
A stakeholder pension is a simple, low cost and flexible type of personal pension designed for people who are able to save for their
retirement but do not currently do so.
All stakeholder pensions will have to offer the same minimum standards. The main details are:
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Good value — a maximum charge of no more than 1%per year on the funds being managed.
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Attractive tax incentives — contributions will be eligible for tax relief, as will the investment returns on the fund.
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Flexible — members can stop and start payments if they need to and transfer to another scheme (if, for example, they change job) without penalty.
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Members will be able to continue contributions during periods of unemployment and the years spent raising a family. |
Which employers are exempt from having to offer stakeholder pensions?
Employers will not have to offer employees access to a stakeholder pension scheme if:
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They employ fewer than five employees
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they already offer a Group Personal Pension Plan:
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Which has no penalties on transfer out
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Which is open to all employees with earnings at or above the National Insurance lower earnings limit (except those under 18)
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Which allows employees to join after three months of starting work
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To which the employer makes contributions of at least 3% of the employees’ basic earnings
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For which employee contributions are deducted from pay and sent to the provider by the employer |
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They already offer an occupational scheme that allows all employees (excluding those aged less than 18 or within five years of normal retirement date) with earnings at or above the National Insurance lower earnings to join within 12 months of starting work for them. |
These exemptions will be reviewed after three years. Even if an employer is exempt they can still provide access to a stakeholder pension scheme if they wish.
What do employers have to do?
Employers will be required to designate a stakeholder pension provider for their staff and provide information to their employees about it. For those workers that decide to join the scheme, the employer must offer a payroll deduction facility for pension contributions if requested by staff. There will also be a small ongoing workload — informing new recruits about the scheme, handling alterations to contribution levels, and telling the pension provider about staff that have left employment. The key deadline is 8 October 2001 — the date by which all employers affected by the legislation must have designated their stakeholder pension supplier, informed their staff and set up a payroll deduction facility.
Even employers who are exempt from the regulations should still sit up and take notice. Their existing pension scheme may have served them well in the past, but is it the right one for the business or the staff in the future? And does their existing scheme offer value for money?
Stakeholder pensions will be a big challenge for all of us. But we will all gain, both as individuals and as a society, if we act now to provide comfort in retirement for all.
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