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BeeHive  >  BeeLines  >  Stakeholder Pensions - relevant or not?

Stakeholder Pensions - relevant or not?

Hello again! In this latest issue of the ‘Bee Lines’ I’m intending to cover just one subject, that of the requirements on employers imposed by the advent of stakeholder pensions and the new responsibilities they will or will not have. I think the subject is so important it deserves one whole issue to be devoted to it.

You will probably be aware that the DSS recently issued a booklet entitled ‘stakeholder pensions - a guide for employers’. This guide was sent to over 400,000 employers just a few weeks ago. (Incidentally, if you want to download a copy from the internet you can do so from the Department for work and pensions). In my opinion it is not the easiest thing in the world to read, much less understand, and it seems just as likely to raise as many questions again among employers as those it will answer. This is not because the booklet is not well-written, it is - but pensions is a difficult and increasingly complex subject and not many people are up-to-date enough on it to be properly equipped to understand the new twists and turns that are about to be introduced. In particular, most employers, in my experience, do not have a great deal of knowledge on the subject of pensions, partly due I should think to the fact that the vast majority of them do not provide, and never have provided, pensions for their employees.

The opportunity this represents for our industry is, of course, enormous, but neither we nor the government can expect the average employer to have any real knowledge on which to base the actions they are now required to take by law. This in itself leads me to expect that IFAs will have a crucial role to play in helping employers meet these new legal requirements.

It seems to me that busy employers who have little enough time already to run their businesses will not really want to become pension experts; they are more likely to want to meet with someone who is and who can tell them quickly and simply just what it is they need to do. This is normal, it is the way it is in the real world. I would imagine they will all require the answers to the following two questions, although they may express them in different ways:

1. Am I affected by this legislation?

2. What do I have to do?

The first question ought to be easy to answer by simply reading the DSS guide, but I am not convinced it will be in practice. It is the further clarification of this that I intend to spend the rest of this issue going through. Hopefully you will then be able to have useful conversations with your employer clients on the subject.

The second question can only really be answered once the employer fully understands the options available and, once again, is made much easier in real life by employing the services of a qualified independent adviser. Indeed, having done so it seems more likely the question will be changed to “What do you recommend I do?”. Given the vast number of guides distributed, and the short timescales allowed for action to be taken, it is likely that hundreds of thousands of conversations between employers and financial advisers will soon take place. Those IFAs who are able to competently answer question number one will, I think, be highly likely to be asked by employers to recommend what they should do with respect to question two. I do hope this issue of the ‘Bee Lines’ helps you in this regard.

The basics

The way I intend to go through this is to establish the basic facts without falling into the all too easy trap of getting bogged-down in the detail, and then try to put the detail in place in a way that makes sense. I have the advantage, I know, of writing for an audience of IFAs who already are pensions experts and know the issues, but I hope the structure will be of help to you when speaking to employers yourself.

From October 2000, when the Stakeholder register was established, all employers - unless they are exempt - must offer access to a stakeholder pension scheme to all, or some, of their employees. This is a requirement imposed by the Welfare Reform and Pensions Act 1999.

So, the first job for any employer is to establish whether they are exempt from this requirement. If they are, then there is no action for them to take. If they are not, then they will have to take action.

Is the employer exempt?

For all employers there are only two ways they can be exempted from the stakeholder access requirements and these are:

1. They employ four or fewer employees. Or,

2. They already have available, or are prepared to establish, acceptable alternative pension arrangements for all their employees.

To deal with the second exemption first, the words ‘acceptable alternative’ are mine - they do not form part of the government’s new lexicon of pensions jargon. It is important to note, however, that there are only two ‘acceptable alternatives’ and there is the overriding proviso that such an alternative must apply to all employees if employers wish to be classed as ‘exempt’. If any ‘relevant’ employees are excluded from being able to join the ‘acceptable alternative’ pension arrangements then the employer is not exempt and must therefore provide access to a stakeholder pension scheme for such ‘relevant’ employees. (I will deal with who is relevant and who is not a little later on - I told you this wasn’t easy!)

The first exemption is slightly easier to understand. If an employer has only one, two, three or four employees - whether they are ‘relevant’ or not - then the employer is exempted from the stakeholder access requirements. In plain English, this new law doesn’t affect them and they are not required to take any action. However, it is worth noting here that they are not exempted forever, only until such time as they employ their fifth employee. At that time they will lose their exemption (three months after employing the fifth employee) and will be required by law to make a stakeholder pension available to their ‘relevant’ employees in the same way as other larger employers. (Again, don’t worry about who is or isn’t ‘relevant’ at this stage - I’ll come to it in a while.)

An important point to note here is that the term ‘number of employees’ means all of the employees at a particular company. A lot of small businesses tend to forget that the directors themselves are classed as employees. So, for a typical small firm with a managing director and a company secretary who is also a director, they only need three ‘real’ employees and they would have the five employees necessary to make them subject to the stakeholder access requirements.

What are ‘acceptable alternative’ pension arrangements?

There are two ‘acceptable alternative’ pension arrangements. These are:

1. An occupational pension scheme. Or

2. A grouped personal pension scheme (GPP) which meets certain standards.

As far as 1 is concerned, any occupational scheme providing pension or cash benefits is an acceptable alternative. This means any EPP, SSAS, COMP, CIMP or final salary pension scheme. Basically, if an employer provides an occupational pension scheme, whatever the level of the benefits provided, the government considers that scheme to be an ‘acceptable alternative’ to a stakeholder pension for those employees who are members of it. And, as I said a little earlier, if membership of that occupational pension scheme is available to all of the employer’s employees then the employer is not required to put a stakeholder pension scheme in place. He or she is exempt.

A GPP can be an ‘acceptable alternative’ to a stakeholder scheme, but here the government requires that certain levels of contribution are made for that to be so. (There are other criteria such GPPs must also meet, but I will cover those later.) GPPs meeting the required contribution (and other) criteria are classed as providing an ‘acceptable alternative’ whereas those that do not are not.

To make a GPP an ‘acceptable alternative’ as far as contribution levels are concerned an employer must contribute at least 3% of employees’ basic pay to the GPP. The employer can also require that employees match this contribution with a 3% payment of their own. (There are certain transitional arrangements that allow employers to insist on higher levels of matching contributions than 3% where GPPs are established before 8 October 2001, for employees who join the GPP before that date, but I will not be going into the details of that here either.)

Summary so far

  • Employers, unless they are exempt, must make stakeholder pensions available to their staff.
  • There are two ways an employer can be exempt:
    • They employ four or fewer employees, or
    • They provide acceptable alternative pension arrangements for all their employees.
  • There are two acceptable alternatives:
    • The provision of an occupational pension scheme, or
    • The provision of a certain type of GPP.

What are the timescales?

This is a relatively straightforward bit as far as understanding is concerned. There are three golden rules:

1. From October 2000 employers who are not exempt will be able to nominate a stakeholder pension scheme to be available to at least some of their employees.

2. If employers are not exempt, they must give their ‘relevant’ employees access to a stakeholder pension scheme by 8 October 2001.

3. Any breach of ‘golden rule’ 2 could lead to the employer being fined up to £50,000 by the regulator, OPRA.

Obviously there will be a bit of a ‘Gulp!’ factor attached to all this as it will all come as a bit of a shock for many employers I should think. They really do have to get their heads around all this stuff and act very quickly indeed.

So, who is ‘relevant’ and who is not?

Right, this is the biggy! Having established whether an employer is exempt or not is the first stage. Having done that, two outcomes are possible. Either the employer is ‘exempt’, which means no action need be taken, or the employer is ‘not exempt’, which means the new laws require action is taken by 8 October 2001.

Where employers are not exempt, two things have to be established:

1. How many of the employees are ‘relevant’, and,

2. How many of the employees are not ‘relevant’.

This is important because stakeholder pensions need only be made available to the ‘relevant’ employees - an employer can not get fined for not making a stakeholder scheme available to people who are not relevant. By the way, if at any time you think that going for a lie down in a darkened room will help stop your brain from hurting while you’re taking all this stuff in, please feel free - I will understand.

Employees are not relevant if:

  • they have worked for the employer for less than 3 months, or
  • they earn less than the ‘Lower Earnings Limit’, or
  • they are members of an ‘acceptable alternative’ pension arrangement provided by the employer, or
  • they could have been members of an occupational pension scheme provided by the employer, but chose not to join it, or
  • they are aged under 18 and can qualify for membership of an ‘acceptable alternative’ pension arrangement once they are 18, or
  • they are within 5 years of ‘normal retirement age’ and they have an occupational pension scheme provided by the employer but they are excluded from joining it because the rules of the scheme do not allow people to join if they are within 5 years of ‘normal retirement age’, or
  • they have not been working for the employer for long, but are eligible to join an ‘acceptable alternative’ pension arrangement within 12 months, where that ‘acceptable alternative’ is an occupational pension scheme, or
  • they have not been working for the employer for long, but are eligible to join an ‘acceptable alternative’ pension arrangement within 3 months, where that ‘acceptable alternative’ is a GPP, or
  • they cannot join a stakeholder pension scheme because the Inland Revenue won’t let them. This could apply, for instance, where an employee works abroad.
  • So, there are a number of ways that employees can be considered to be not relevant. Summing it up I guess I would say that where employees are very young or very old, or have very short service, or low earnings, or have acceptable alternatives available (even if they choose not to join, are not allowed to join or are waiting to become eligible to join, those acceptable alternatives) then employers do not need to count them as ‘relevant’ employees and do not have to make a stakeholder pension available to them. It’s as simple as that - really, it is! And by the way, if you do meet any employers who, having read the DSS booklet, fully understand all this stuff, please let me know - I’d happily swap places and run their garage or whatever for them and they can have my job here and have a stab at the pension guru thing - they would almost certainly be naturals!

But, for normal people, there may be a slightly different reaction when first coming up against the new pension realities, so it may be useful if we look a little more closely at each of the above points:

  • Employed for less than 3 months - Short-serving employees are not classed as being relevant , but it is worth noting that once such employees have been employed for 3 months then they will be relevant employees and will need to be offered membership of either a stakeholder pension scheme or an acceptable alternative.
  • Earning less than the Lower Earnings Limit - Employees earning less than the Lower Earnings Limit are not classed as being relevant. The Lower Earnings Limit is currently [2000 - 01] £3484 a year or £67 a week. To be classed as earning less than the Lower Earnings Limit in this context, people who for as short a period of even one week in any three month period earn below the weekly Lower Earnings Limit are not considered to be ‘relevant’.
  • Membership of an ‘acceptable alternative’ pension arrangement - This is quite straightforward. All employees who are members of occupational pension schemes run by the employer or ‘acceptable’ GPPs are not classed as relevant employees as far as stakeholder access is concerned. There has been some confusion on this in the past because originally the government was talking about employers who had any ‘relevant’ employees at all being required to make stakeholder pensions available to all their employees including those who were members of their occupational schemes or ‘acceptable’ GPPs. However, this was amended in the consultation process so that members of acceptable schemes are now not relevant
  • Aged under 18 and able to join an ‘acceptable’ scheme on attaining age 18 - Young employees who can not join an employer’s scheme until attaining age 18 (a common restriction) are treated in the same way as all other employees who are able to join an employer’s scheme and are therefore not classed as relevant employees as far as stakeholder access is concerned. The employer does not need to offer them a stakeholder scheme in the meantime.
  • Are within 5 years of ‘Normal Retirement Date’ - This is a funny one (funny strange, not funny hilarious). Most occupational pension schemes do not allow new entrants to join if they enter the employer’s service within 5 years of the Normal Retirement Date (NRD) of the scheme. (The Normal Retirement Date for an occupational scheme is defined in the scheme rules and the members’ booklet, and is often 65 or 60, but can be any age set by the employer and agreed by the Revenue at the inception of the scheme.) What this rule says is that people who start employment within 5 years of the scheme NRD are treated the same as all other employees and are not classed as being ‘relevant’ because they have an acceptable alternative available to them. The fact that they are precluded from joining the acceptable alternative doesn’t seem to matter - they are not relevant.
  • Employed for less than 12 months - If the employer operates an occupational pension scheme that new entrants to the company can join within 12 months of commencing employment then he does not have to offer a stakeholder pension to people who are waiting to join the scheme. This rule overwrites the earlier rule that says employees become ‘relevant employees’ once they have been with the employer for 3 months.
  • Employed for less than 3 months - If the employer operates a GPP, however, the 12 month rule that applies to occupational pension schemes does not apply and the 3 month rule remains. One of the conditions which a GPP must meet if it is to be classed as an ‘acceptable alternative’ is that it allows membership after 3 months service. More of that a little later.
  • Are not allowed to join a stakeholder scheme - Any employees who are not allowed to contribute to a stakeholder pension are not classed as being relevant. (ie the employer doesn’t have to make one available to them.) The DSS guide mentions employees working abroad as being in this category, but remember that some employees working abroad will be able to have stakeholder pensions - at least for a time.

Summary so far

  • Employers, unless they are exempt, must make stakeholder pensions available to their relevant employees no later than 8 October 2001. Failure to do so could result in the employer being fined by the regulator.
  • There are two ways an employer can be exempt:
    • They employ four or fewer employees, or
    • They provide acceptable alternative pension arrangements for all their employees.
  • There are two acceptable alternatives:
    • The provision of an occupational pension scheme, or
    • The provision of a certain type of GPP.
  • Employees can either be ‘relevant’ or ‘not relevant’ as far as the stakeholder access requirements are concerned.
  • If an employer is not exempt then all of their relevant employees must be offered access to a nominated stakeholder scheme.
  • To determine which employees are relevant it is necessary to first determine which are not relevant.
  • There are nine reasons why a particular employee could be classed as being not relevant.
  • These nine reasons are detailed in the DSS guide and have been explained in more detail in this document.

How do GPPs qualify to count as ‘acceptable alternative’ pension arrangements?

To qualify as an ‘acceptable alternative’ GPPs have to meet a number of requirements. We have already covered one of them - the employer must contribute at least 3% of basic salary for each employee. Basic salary excludes commission, overtime and bonuses. The employer can also make it a condition that employees match the 3% contribution, but he does not have to do so. The other conditions are as follows:

  • Employees’ contributions must be deducted from pay and remitted to the personal pension provider if the employee requests so. Note there is no requirement for the employer to automatically do this, but he must be able to, and be prepared to, if his employees request it.
  • The GPP can not make additional penalties for transfers to other pension arrangements above those levied because contributions have ceased. Some commentators have taken this ‘no penalty’ clause to mean front-end loaded contracts may not qualify as ‘acceptable alternatives’, but this is not the case. The DSS requirement is that the paid-up value should not be further reduced by the act of transferring out of the GPP. It is worth noting also that MVAs for With Profits investment are an allowable exit penalty under a GPP.
  • The last condition, and probably the least understood, is that for the GPP to be ‘acceptable’ it has to be available to all employees who would otherwise have access to a stakeholder scheme. In other words, it has to be available to all ‘relevant’ employees. This is a bit tricky, so an example may help. If an employer with 25 employees has an occupational scheme in place for 10 of them and offers a GPP to 10 others, but leaves 5 relevant people without any pension provision at all, then there will be 15 employees classed as being ‘relevant’ who must be offered a stakeholder scheme; these will be the 5 who were excluded plus the 10 who are in the GPP. This would be the case even if the GPP were to meet the 3% contribution requirements, the employer paid the contributions direct to the pension provider by making payroll deductions, and there were no penalties applicable on transfer to other arrangements. In this case the GPP would not be an ‘acceptable alternative’ as it was not made available to all employees who would otherwise have had access to a stakeholder scheme. This is another marked difference to occupational schemes where members remain not relevant whatever else applies to the rest of the workforce; GPP members will themselves be ‘relevant’ if the employer has any other ‘relevant’ employees who must be offered a stakeholder pension.

Summary

GPPs can be ‘acceptable alternatives’ but must comply with all four of the following rules:

  • The employer must contribute 3% of basic salary.
  • Membership of the GPP must be available to all employees who would otherwise qualify for access to stakeholder pensions.
  • The GPP can not impose any additional, specific charge for transferring to another arrangement.
  • It must be possible for employee contributions to be deducted from pay and remitted directly to the pension provider.

The opportunity for IFAs

This is all, of course, a little complex and to many employers will look just like so much red tape. However, it is worth standing back a little and examining what is going on. I read of a recent report last week which was undertaken with the assistance of the Federation of Small Businesses and which claims that two thirds of the employees of small to medium-sized companies are not covered by any pension scheme. Where companies with fewer than 25 employees were considered, this figure rose to a startling 90%. The report also found that only 28% of occupational pension schemes cover all employees. The scope for schemes to be improved or extended appears to be great, as does the scope for putting new schemes in place - and we have the benefit of a tight time limit backed by a legal requirement on employers to take action.

However, we know that it is not as clear-cut as all that. It is not simply a question of how many employees are not in occupational schemes, but how many ‘relevant’ employees there are. GPP members, if the GPPs are ‘acceptable’, would not show up in such data - there could be up to a million employees in this category alone. Also, many employees have taken advantage of the 1988 ruling allowing them to leave or not join occupational schemes - there could be a significant number (some say a million) of people in this category - again, such non-joiners would not count as relevant employees as far as the stakeholder access requirements are concerned. And there are, as we know, various other categories of employees who may not be classed as being relevant.

The top-level figures, whether from this latest survey or the many others that have been conducted recently, seem to indicate a massive opportunity for growth of employer-based pensions. In real life, we know it’s not as easy as that. Determining which employers are exempt or not, then assessing which of their employees are relevant or not is key to understanding the true nature of the opportunity and it seems this can only be done on a case by case, individual basis. All companies are different. All workforces will be made up differently. To me it is unlikely that it will be possible to give blanket advice on pensions to employers - each company will require an individual assessment first, and it is this fact alone that leaves me convinced that IFAs are needed now more than ever.

Steve Bee

November 2000


“This leaflet is based on Scottish Life’s understanding of the current and proposed tax laws. These may change in the future.”