There are two types of company pension schemes
Contributory scheme
Contributory schemes are generally Money purchase schemes and are more common nowadays and are dependent upon investment returns, contributions and annuities. The final pension is dependent upon the contributions invested and the investment return achieved. Hence the scheme member, rather than the employer, carries the financial risk. Under such a scheme, employees are not penalised for early departure, since their accounts remain invested within the scheme. The most usual kind of scheme to set up is a Group Personal Pension scheme.
Non-contributory
In the non-contributory scheme , usually a Final Salary scheme, the benefits are not dependent on investment returns but instead are defined as a percentage of final pensionable pay. Non-contributory schemes are set up so that the employer takes the financial risk, and is required to make the necessary contributions to meet the shortfall between employee contributions and the final pension sum. Under such a scheme, early leavers may lose out as benefits are linked to prices and not to earnings.
What type of scheme should you consider?
For small and medium sized companies, the easiest option is a Group Personal Pension - simple to set up and operate, with most of the administration will be carried out by your Independent Financial Adviser and the nominated insurance company. Group Personal Pensions can take a matter of weeks to set up and Reid Scott & Ross are on hand to assist employers throughout the process. Effectively, all the company needs to worry about is getting the monthly contributions paid over to the Insurance Company.
How much should you contribute?
Employer contributions can be made at a set rate - say 5% of salary. Or you could scale contributions according to seniority or length of service. Employers often choose to match employee contributions.
If you do set up a scheme, you may wish to contract employees out. Employees cannot leave the State Pension scheme, but they can leave the State Second Pension, which used to be known as the State Earnings Related Pension Scheme (SERPS). If you contract an employee out of this scheme, you can save on National Insurance contributions - as long as you can show that the employee will be adequately provided for by the private scheme.
Small businesses that only provide a non-contributory arrangement might want to consider the significant benefits of providing a pension arrangement as part of the package. National Insurance and tax breaks can also make pension payments an efficient way to reward employees.
Here are some things to consider when implementing a scheme
1. Look at all the options
- There are many options when looking at the type of scheme to consider but Reid Scott & Ross will look at all these options for you and prepare a report specific to your own company’s individual circumstances and needs.
2. Involve your employees
- Involving your employees in the design of a pension scheme helps them to be sure that the company is acting in their best interests rather than its own.
3. Make the decision on contribution levels
- Whatever type of scheme you choose, you will have to work out how the contributions will be split between you and your employees. Reid Scott & Ross will help you with the decision on the rates of employer and employee contributions.
4. Keep communications simple
- Communications about your pension scheme should clearly explain the benefits of membership and should be passed onto the employees as soon as possible.
5. Be open
- A pension scheme is a commitment shared by you and your employees. If you have pledged to keep your workforce up to date on developments, then communicate regularly, even if there have been no changes.
